Chapter 09

Audit Sampling

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 What is Audit Sampling?
 Applying a procedure to less than 100% of a
population
 To estimate some characteristic of the
population
 Qualitative
 Quantitative

©McGraw-Hill Education. 9-2

 Risk
 Sampling risk
 Risk that the auditors’ conclusion based on a sample may
be different from the conclusion they would reach if they
examined every item in the population
 Non-sampling risk
 Risk of erroneous conclusion due to any factor other than
the sample
 Can be reduced to low levels through effective planning
and supervisions of audit engagements

©McGraw-Hill Education. 9-3

 Types of Sampling
 Nonstatistical sampling—Using judgment to
plan, perform, and evaluate the sample
 Statistical sampling—Using mathematics and
statistics plan, perform, and evaluate the sample

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 Non-statistical Sampling
 The auditor estimates sampling risk by using
professional judgment rather than statistical
techniques
 Provides no means of quantifying sampling
risk
 Sample may be larger than necessary or
auditors may unknowingly accept a
higher-than-acceptable degree of sampling
risk

©McGraw-Hill Education. 9-5

 Advantages of Statistical Sampling

 Allows auditors to measure and control

sampling risk which helps:
 Design efficient samples
 Measure sufficiency of evidence
 Objectively evaluate sample results

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 Selection of Random Sample
 Random sample results in a statistically unbiased
sample that may or may not be a representative
sample
 Random sample techniques
 Computer selected
 Random number tables
 Random number generators
 Systematic selection

©McGraw-Hill Education. 9-7

Random Number Table Figure 9.1

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Other Methods of Sample Selection
 Other methods
 Haphazard selection
 Select items on an arbitrary basis, but without any conscious
bias
 Block selection
 Block sample consists of all items in a selected time period,
numerical sequence, or alphabetical sequence
 Stratification
 Technique of dividing population into relatively
homogeneous subgroups

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An Illustration of Stratification

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 Types of Statistical Sampling Plans
 Attributes sampling
 Discovery sampling
 Classical variables sampling
 Mean-per-unit estimation
 Ratio estimation
 Difference estimation
 Monetary unit sampling

©McGraw-Hill Education. 9-11

 Dual Purpose Test
 A test used both as a test of control and to
substantiate the dollar amount of an account
balance
 Example: Test to evaluate the effectiveness of a
control over recording sales transactions and to
estimate the total overstatement or understatement
of the sales account

©McGraw-Hill Education. 9-12

 Allowance for Sampling Risk
 Amount used to create a range, set by + or –
limits from the sample results, within which
the true value of the population characteristic
being measured is likely to lie
 Precision
 The wider the interval, the more confidence
but with less precise conclusion
 Can be used to construct a dollar interval

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 Sample Size
 Significant effect on allowance for sampling risk
and sampling risk
 Sample size increase -> sampling risk and allowance
for sampling risk decrease
 Sample size affected by characteristics of
population
 Generally as Population increases -> sample size
increase
 In tests of controls the sample size increases with an
increase in the expected deviation rate
 In substantive tests the sample size increases with an
increase in the variability of the items in the population

©McGraw-Hill Education. 9-14

 Requirements of Audit
Sampling Plans

 When planning the sample consider:

 The relationship of the sample to the relevant audit objective
 Materiality or the maximum tolerable misstatement or
deviation rate
 Allowable sampling risk
 Characteristics of the population
 Select sample items in such a manner that they can be
expected to be representative of the population
 Sample results should be projected to the population
 Items that cannot be audited should be treated as
misstatements or deviations in evaluating the sample
results
 Nature and cause of misstatements or deviations should
be evaluated

©McGraw-Hill Education. 9-15

 Sampling Risks—Tests of Controls

Actual Extent of Operating Effectiveness

of the Control Procedure is
Adequate Inadequate
The Test of Controls
Sample Indicates:
Incorrect
Extent of Operating Decision
Effectiveness is Correct
Adequate (Risk of Assessing
Decision
Control Risk
Too Low)
Extent of Operating Incorrect
Effectiveness
Inadequate Decision Correct
(Risk of Assessing
Decision
Control Risk
Too High)

©McGraw-Hill Education. 9-16

 Audit Sampling Steps for Tests of Controls
 Determine the objective of the test
 Define the attributes and deviation conditions
 Define the population to be sampled
 Specify:
 The risk of assessing control risk too low
 The tolerable deviation rate
 Estimate the population deviation rate
 Determine the sample size
 Select the sample
 Test the sample items
 Evaluate the sample results
 Document the sampling procedure

©McGraw-Hill Education. 9-17

 Attributes Sampling: Relationship Between the Planned
Assessed Level of Control Risk and the Tolerable Deviation Rate

Historically, the AICPA provided the following overlapping ranges to illustrate

the relationship between the planned assessed level of control risk and the
tolerable deviation rate:

Planned Assessed Level

of Control Risk Tolerable Deviation Rate

Low 2-7%
Moderate 6-12%
Slightly below the maximum 11-20%
Maximum Omit test

©McGraw-Hill Education. 9-18

 Illustration of Attributes Sampling—
Determining Sample Size
 Risk of Assessing Control Risk Too Low—5
percent
 Tolerable Deviation Rate—7 percent
 Expected Population Deviation Rate—1.5
percent

©McGraw-Hill Education. 9-19

 Statistical Sample Sizes for Tests of Controls at 5 Percent Risk
of Assessing Control Risk Too Low Figure 9.4

• The factor in the table is 66(1)

• This means the auditor should select a sample of 66 items, and the allowable
number of deviations is 1.
©McGraw-Hill Education. 9-20
Attributes Sampling Evaluation of Results

2 possible approaches:
1. Use the bracketed number from the table in
slide 20. If you find that number or less
deviations, conclude that you have
accomplished your audit objective.
2. Use an evaluation table for a more precise
conclusion.

©McGraw-Hill Education. 9-21

 Example A—No Deviations Identified (Evaluating
Attributes Sampling Results)
Approach 1—Based on the sample size table. You have
met your audit objective because you have identified 1
or less deviations. What can you say?

“I believe that the deviation rate in the population is

less than 7 percent.” You will be wrong 5 percent of
the time when the deviation is exactly 7 percent. If
the deviation rate is in excess of 7 percent you will
be wrong even less than 5 percent of the time. The
planned assessed level of control risk is achieved
(0 < 1).

©McGraw-Hill Education. 9-22

 Statistical Sampling Results Evaluation Table for Tests of Controls: Achieved Upper
Deviation Rate at
5 Percent Risk of Assessing Control Risk Too Low Figure 9.5

Approach 2—You have tested 66 items, a number not on Table 9-5

To be conservative go to next lowest number on table (65) and use it for your
conclusions.
The table above gives us an answer of 4.6 percent. What can you say?
"I believe that the deviation rate in the population is less than 4.6 percent.” You will be wrong
5 percent of the time when the deviation rate is exactly 4.6 percent. If the deviation rate is in
excess of 4.6 percent you will be wrong even less than 5 percent of the time. The planned
assessed level of control risk is achieved (4.6% < 7%).

©McGraw-Hill Education. 9-23

 Example B—3 Deviations Identified1/2
(Evaluating Attributes Sampling Results)
Approach 1—You have not met your audit objective. What can you
say?
“The achieved upper deviation rate is higher than 7 percent.”
The planned assessed level of control risk is not achieved. You
need to consider increasing the assessed level of control risk
above the planned assessed level.

Accordingly, the auditor may not “rely” on internal control to the

extent planned. Thus, the auditor will need to increase the scope
of substantive procedures (the nature, timing, and/or extent)
(3 > 1).

©McGraw-Hill Education. 9-24

 Example B—3 Deviations Identified 2/2
(Evaluating Attributes Sampling Results)

Approach 2—The evaluation table tells us that the achieved upper deviation rate is 11.5%. Since this is
greater than the 7% required, the results does not meet the auditors’ objective (11.5% > 7%).

An increase in the scope of substantive procedures is appropriate.

©McGraw-Hill Education. 9-25

 Other Statistical Attributes Sampling
Approaches
 Discovery sampling
 Purpose is to detect at least one deviation, with a
predetermined risk of assessing control risk too low
if the deviation rate in population is greater than
specified tolerable deviation rate
 Useful in suspected fraud
 Sequential (Stop-or-Go) Sampling
 Audit sample taken in several stages

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 Sampling Risks—Substantive Tests

The Population Actually is

Not Materially Materially
Misstated Misstated
The Substantive
Procedure Sample
Indicates
Incorrect
The population is Not Correct Decision
Materially Misstated
Decision (Risk of Incorrect
Acceptance)
The Population is Incorrect
Materially Misstated Decision Correct
(Risk of Incorrect Decision
Rejection)

©McGraw-Hill Education. 9-27

 Audit Sampling Steps for Substantive Tests
 Determine the objective of the test
 Define the population and sampling unit
 Choose an audit sampling technique
 Determine the sample size
 Select the sample
 Test the sample items
 Evaluate the sample results
 Document the sampling procedure

©McGraw-Hill Education. 9-28

Factors Affecting Sample Size for Mean-Per-Unit
Sampling Figure 9.9

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 Mean Per Unit (MPU) Illustration
Population Size = 100,000 sales invoices
Book value = $6,250,000
Other information:
Tolerable misstatement = $364,000
Sampling risk
Incorrect Acceptance = 5%
Incorrect Rejection = 4.6%

©McGraw-Hill Education. 9-30

 Determining Sample Size

Acceptable Incorrect Incorrect

Level of Acceptance Rejection
Risk (%) Coefficient Coefficient
1.0 2.33 2.58
SS = Sample Size 4.6 1.68 2.00
PS = Population Size = 100,000 5.0 1.64 1.96
IAC = Incorrect Acceptance Coefficient = 1.64
IRC = Incorrect Rejection Coefficient = 2.00 10.0 1.28 1.64
TM = Tolerable Misstatement = $364,000 15.0 1.04 1.44
ESD = Estimated Standard Deviation
20.0 .84 1.28
25.0 .67 1.15
30.0 .52 1.04
40.0 .25 .84
50.0 .00 .67
SS = 225
Risk of incorrect acceptance = 5.0%
Risk of incorrect rejection = 4.6%
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 Evaluating Sample Results: Calculate the
Projected Misstatement
 Results:
 Sample size = 225
 Mean audited value = $61.00
 Mean book value = $63.00

 Calculate estimated total audited value of the population and projected

misstatement.

Est. total aud. value = Mean aud. value * Number of items in pop.
= $61 * 100,000 items
= $6,100,000
 Calculate allowance for sampling risk and a confidence interval used to arrive at
a statistical decision.

Proj. Misstatement = Est. total aud. value – Book value of pop.

= $6,100,000 - $6,250,000
= $150,000 overstatement

©McGraw-Hill Education. 9-32

Evaluate Sample: Calculate Allowance for Sampling Risk
and a Confidence Interval
Using the text example with a standard deviation of audited values of $16

Allowance
for sampling risk =
Tolerable _ (Population size * Incorrect acceptance coef. * Sample stan. dev.)
misstatement √Sample size

= $364,000 _ ($100,000 * 1.64 * $16)

√225
Allowance for
sampling risk = $189,067

We can then calculate the confidence interval related to the potential misstatement as follows:
Confidence Interval (CI) = Projected misstatement ± Allowance for sampling risk
CI = $150,000 ± $189,067
CI = -$39,067 to $339,067
We accept the balance as materially correct because both ends of the confidence interval are less
than the amount of tolerable misstatement.

©McGraw-Hill Education. 9-33

 Difference Estimation
 Difference
 Use sample to estimate the avg. difference between
the audited value and book value of items in
population

Projected = Sample Net Misstatement * Num. Pop. Items

Misstatement Sample items
 Most appropriate when size of misstatements does
not vary significantly in comparison to book value

©McGraw-Hill Education. 9-34

 Ratio Estimation
 Use a sample to estimate the ratio of misstatement
in a sample to its book value and project it to
population

Projected = Sample Net Misstatement * Pop. Book Value

Misstatement Book Value of Sample

 Preferred when the size of misstatements is nearly

proportional to the book values of the items
 Large accounts have large misstatements

©McGraw-Hill Education. 9-35

 Nonstatistical Variables Sampling
Illustration
 Plan Sample:
 Population:
 Size = 2,000 items
 Book value = $3,000,000

 Tolerable misstatement = $100,000

 Risk assessments:
 Inherent and control risk = Slightly below maximum
 Other substantive tests risk = Moderate

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 Nonstatistical Sampling—Determination of
Sample Size
Combined
Assessment of
Maximum Moderate Low
Inherent and
Control Risk
Maximum 3.0 2.3 1.9
Slightly below
2.7 2.0 1.6
maximum
Moderate 2.3 1.6 1.2
Low 1.9 1.2 1.0

Sample size = Population book value X Reliability factor

Tolerable misstatement

= $3,000,000 X 2.0 = 60 items

$100,000
©McGraw-Hill Education. 9-37
Nonstatistical Sampling—Evaluation of
Sample Results
Sample results:
60 accounts in sample
$6,600 net overstatement
$1,100,000 book value of sample items

Projected misstatement:

= [Sample net misstatement] X Book value of population

[ Book value of sample ]

= [ $6,600 ] X $3,000,000
[$1,100,000]
= $18,000

Since the projected misstatement is only 18 percent ($18,000/$100,000) of

tolerable misstatement, it is likely that the auditors would conclude that
the account balance is materially correct.

©McGraw-Hill Education. 9-38