Chapter 15

Audit Sampling for Tests of

Controls (TOC) and Substantive
Tests of Transactions (STOT)

15 - 1
Representative samples

 A representative sample is
one in which the attributes
in the sample of audit
interest (exception rate for
TOC or dollar
misstatement for STOT)
are approximately the
same as those of the
population.
15 - 2
 Sampling risk

 Sampling risk refers to the likelihood that an

auditor will reach an incorrect audit
conclusion because the sample tested is not
representative that of the population.
 Sampling risk is an inherent part of audit
sampling because auditors did not test all the
items in the entire population.
 In other words, auditors cannot eliminate the
sample risk entirely no matter how hard he/she
tries.
15 - 3
 Non-sampling risk
 Non-sampling risk is the likelihood that an auditor fails
to uncover exceptions when testing internal controls or
fails to find material monetary misstatements when
conducting substantive tests of transactions or tests of
detail balances.
 Non-sample risk occurs because
 Auditors choose a sampling plan that is improper to the
audit objective, and/or
 Auditors do not have proficiency to recognize exceptions
or monetary errors contained in the sample.
 With proper training and supervision, it is possible for
audit team to eliminate non-sample risk entirely.
15 - 4
 Audit objectives

Transaction-related Balance-related
1. Occurrence 1. Existence
2. Completeness 2. Completeness
3. Accuracy 3. Accuracy
4. Posting and 4. Classification
summarization 5. Cutoff
5. Classification 6. Detail tie-in
6. Timing 7. Realizable value
8. Rights and obligations
9. Presentation and
disclosure
15 - 5
 Direction of tests for sales

Duplicate Accounts
Customer Shipping Sales General
order document
sales
journal journal
= receivable
invoice master file

Completeness Occurrence
start start

15 - 6
Sampling Approaches

15 - 7
Sampling can be statistical or non-statistical (whether
it relies on statistical theory to make inference)

 Similarities: both  Differences:

statistical and non-  Statistical sampling
statistical sampling  Each item in the population has
follow a three-step a known probability to be
process: selected.
 Step 1: Plan the  Auditor can rely on central limit

sample (calculate theorem in which allows

sample size) auditors to quantify sampling
 Step 2: Select the risk in Step 1 (Plan the sample)
sample and and Step 3 (Evaluate the
perform the tests results).
 Step 3: Evaluate  Non-statistical sampling bases on
the results. auditor’s judgment in which auditor
believes items selected will provide
the most useful information.
15 - 8
 Probabilistic vs. Nonprobabilistic
Sample Selection
 Probabilistic  Non probabilistic sampling
sampling  A method of selecting a
 A method of sample such that each
selecting a sample population item does not
such that each have a known probability of
population item has being selected.
a known probability  Auditor uses professional
of being selected. judgment rather than
 For instance, 95% implementing probabilistic
confidence level methods.
with 5% sampling  Often terms as judgmental
risk sampling.
15 - 9
Examples of probabilistic and non-
probabilistic sample selection
 Probabilistic:  Non-probabilistic:
 Random sample  Directed sample
selection selection
 Systematic sample (judgmental)
selection  Block sample
 PPS (Probability selection
proportional to size)  Haphazard sample
sample selection selection (costs vs.
 Stratified sample benefits)
selection (chapter 17)
15 - 10
Non-probabilistic sample selection methods
 Directed sample selection: An sampling method that
the selection of sample item is based on auditor’s
judgments directed by the following criteria:
 Items most likely to contain misstatements (overdue
accounts, related-party transactions)
 Items containing selected population characteristics (e.g.,
cash disbursement-month, account, types of transaction)
 Large dollar amount
 It is clear that directed sample selection method is not
based on probability distribution

15 - 11
Non-probabilistic sample selection
methods
 Block sample selection: Samples are selected
according to auditor’s judgment using the
following steps:
1. Population is divided into blocks
2. Once the sample in the first block is selected, the
remainder of the block is chosen in sequence.
 More blocks are better than few blocks because it is
more likely that sample selected will be representative.
 Haphazard sample selection: samples are selected
without any conscious bias on the part of auditors
 Realistically, it is difficult for auditors to be completely
unbiased.
15 - 12
Probabilistic sample selection methods

 Random sampling: A sample method in which

every item in the population has an equal
probability to be selected.
 Auditors who adopt this sample selection method
can use either random number tables or computer
generated random numbers to select items from the
population.
 Random sampling is the most commonly-used
probabilistic sampling approach used by auditors
 Under the risk-based audit approach, however,
auditors often relies on professional judgments in
sample selection, instead of using random sampling.
15 - 13
Probabilistic sample selection methods

 Systematic sample selection:

 The interval is determined by dividing the
population size by the number of sample items
desired [(3,151-651)/125 = 20].
 Then selects the items (one out of every twenty)
for the sample (auditor need to first randomly
select a number between 0 and 19).
 Pro and con:
 Pro: easy to use
 Con: sample may not be fully representative
(bias leads to systematic errors)

15 - 14
Probabilistic sample selection methods

 Probability proportional to size (PPS)

sample selection method:
 A sample is taken in which the probability of
selecting any individual population item is
proportional to its recorded dollar amount.
 Sampling unit is per recorded dollar (also called
monetary unit sampling or MUS)
 MUS is a form of PPS which is a very common
method for substantive tests of transactions and
tests of detail balances.

15 - 15
Probabilistic sample selection methods

 Stratified sample
selection (part of PPS):
 The entire population is
divided into sub-
populations by size of
the recorded amount
 Larger sample sizes are
taken from the larger
sub-populations (strata).

15 - 16
Sampling for exception rates (TOC)

 The occurrence rate (exception rate or deviation

rate)
 Is the ratio of the items containing the specific attribute
(audit interest).
 Examples of specific attribute (audit interest).
 The credit approval was been done prior to issuing a
sales order
 The credit approval was done by someone with general
and special authorization.
 Sales invoices have been verified internally before
sending to customers.
 Sales invoices have shipping documents and/or sales
order attached.
15 - 17
Examples of possible exceptions (or
dollar misstatements)
 Following are types of exceptions may
contain in the population:
 Deviations from client’s established policy
and procedures (i.e., internal controls --
TOC)
 Monetary errors (misstatements) contained
in the transaction classes (STOT)
 Monetary errors (misstatements) contained
in account balances (TDB)
15 - 18
Terms used to plan audit sampling
(Table 5-1 on page 485)
 Characteristic or attribute (Table 15-2 on page 487
and Figure 15-2 on page 490)
 Acceptable risk of assessing control risk too low
(ARACR)
Auditors conclude that internal control is effective
but in fact, it is not effective.
The probability of over-reliance on internal controls
 Tolerable exception rate (TER)
The maximum exception rate contains in the sample
that auditors will conclude the internal controls in the
population are acceptable.
 Estimated population exception rate (EPER)
 Initial sample size
15 - 19
Terms used to evaluate sampling results

 Number of Exceptions (1)

 # of exception from internal control
policies and procedures found in
the sample
 Sample exception rate (SER)
 Total exception rate (%) found in
the sample = (1)/sample size
 Computed upper exception rate
(CUER)
 Highest possible estimated
exception rate in the population at a
given level of ARACR.
15 - 20
 I: Plan the sample
 Step 1: State the objectives of the audit test.
 Step 2: Decide whether audit sampling applies.
 Step 3: Define attributes and exception conditions.
 Step 4: Define the population.
 Step 5: Define the sampling unit.
 Step 6: Specify the tolerable exception rate.
 Step 7: Specify acceptable risk of assessing control risk too low
(ARACR).
 Step 8: Estimate the population exception rate.
 Step 9: Determine the initial sample size.
 Step 10: Select the sample.
 Step 11: Perform the audit procedures.
 Step 12: Generalize from the sample to the population.
 Step 13: Analyze exceptions.
 Step 14: Decide the acceptability of the population.
15 - 21
 Effect on sample size when the following
factors change
Effect on initial
Change in factor sample size
Increase acceptable risk of
assessing control risk too low (ARACR) Decrease

Increase tolerable exception rate (TER) Decrease

Increase estimated population

exception rate (EPER) Increase

Increase population size Increase (minor)

15 - 22
Application of attributes sampling
(effect of population size)

 Population size is a minor consideration in

determining sample size.
 The degree of representative is ensured by
the sample selection process more than by
sample size.
15 - 23
Perform Audit Procedures of Billing of
Customers and Recording the Sales in
the Records on Table 15-2

Table 15-2, Table 15-3, Figure 15-2,

Figure 15-3, Figure 15-4, Figure 15-5

15 - 24
Decide whether the population is
acceptable
 Revise TER or ARACR.
 Expand the sample size.
 Revise assessed control
risk.
 Communicate with the
audit committee or
management.

15 - 25
Any Questions?

15 - 26