Chapter ONE

SAMPLING IN AUDITING

The clarified audit standards define audit sampling as: “The selection and evaluation of less
than 100 percent of the population of audit relevance such that the auditor expects the
items selected to be representative of the population and, thus, likely to provide a
reasonable basis for conclusions about the population.”

Al;emayehu T. 1
 AWASA UNIVERSITY
COLLEGE OF BUSINESS AND ECONMICS
DEPARTMENT OF ACCOUNTING AND
FINANCE

AUDITING PRINCIPLES AND PRACTICE-

II(ACFN3162)
ALEMAYEHU T. 2
CHAPTER OVERVIEW
 SAMPLING IN AUDITING

SAS No. 39 defines audit sampling as “the application of an audit procedure to

less than 100percent of the items within an account balance or class of
transactions for the purpose of evaluating some characteristic of the balance or
class (AU 350.01).”
 When auditor decides to select less than 100percent of population for testing
to make inferences about population is called audit sampling
 Evaluating audit samples is an essential and often challenging part of auditing
 When is a sample size sufficiently large to evaluate a population? Does a
given sample accurately represent accounting information?

ALEMAYEHU T. 4
ADVANTAGES OF STATISTICAL SAMPLING

Design efficient samples

Measure sufficiency of evidence

Objectively evaluate sample results

ALEMAYEHU T. 5
 REPRESENTATIVE SAMPLES

 When selecting a sample from a population, auditor strives to

obtain a representative sample.

 A representative sample is one in which characteristics in sample

are approximately the same as those of population.

 In practice, auditors never know whether a sample is
representative, even after all testing is complete.
 However, auditors can increase likelihood of a sample being

representative by using care in designing sampling process,

sample selection, and evaluation of sample results.
ALEMAYEHU T. 6
 Cont’d

 A sample result can be non-representative due to non-sampling error

or sampling error.
Two types of risk of errors occurred as non-sampling risk and
sampling risk
1. Non-sampling risk is risk that audit tests do not uncover existing

exceptions in sample. Two causes for non-sampling risk are;

a. Auditor’s failure to recognize exceptions and inappropriate or

ineffective audit procedures.

b. Auditor might fail to recognize an exception because of exhaustion,

boredom, or lack of understanding of what to look for.

ALEMAYEHU T. 7
 Cont’d

2. Sampling risk is risk that an auditor reaches an

incorrect conclusion because sample is not
representative of population.
Sampling risk is an inherent part of sampling that
results from testing less than entire population
Auditors have two ways to control sampling risk:
i. Adjust sample size

ii.Use an appropriate method of selecting sample items

from population ALEMAYEHU T. 8

 Cont’d

 At one extreme, a sample of all items of a population

has a zero sampling risk and in another extreme, a

sample of one or two items has an extremely high
sampling risk.
 Using an appropriate sample selection method
increases the likelihood of representativeness. This
does not eliminate or even reduce sampling risk, but it
does allow the auditor to measure the risk associated
with a given sample ALEMAYEHU
size ifT. statistical methods of9
NON-STATISTICAL AND STATISTICAL
SAMPLING

ALEMAYEHU T. 10
NON-STATISTICAL AND STATISTICAL
SAMPLING

ALEMAYEHUT. 11
STATISTICAL VERSUS NONSTATISTICAL SAMPLING AND
PROBABILISTIC VERSUS NONPROBABILISTIC SAMPLE
SELECTION
Audit sampling methods can be divided into two broad categories:
statistical sampling and non-statistical sampling.
These categories are similar in both involve three phases:

1.Plan the sample

2.Select the sample and perform tests

3.Evaluate the results

Purpose of planning the sample is to make sure that audit tests are

performed in a manner that provides desired sampling risk and

minimizes likelihood of non-sampling error.
ALEMAYEHU T. 12
 Cont’d

Selecting the sample involves deciding how a sample is

selected from population and; auditor can perform audit tests only
after sample items are selected.
Evaluating the results and drawing of conclusions based on

audit tests.

Assume that an auditor selects a sample of 100 duplicate sales

invoices from a population, tests each to determine whether a
shipping document is attached, and determines that there are three
exceptions. Let’s look at those actions step-by-step:

ALEMAYEHU T. 13
Cont’d

ALEMAYEHU T. 14
 Cont’d
Statistical sampling differs from non-statistical sampling in

that, by applying mathematical rules, auditors can quantify

(measure) sampling risk in planning the sample (step1) and in
evaluating the results (step3).
Non-statistical sampling, auditors do not quantify sampling

risk. Instead auditors select sample items they believe will

provide most useful information, given circumstances, and
reach conclusions about populations on a judgmental basis.
Use of non-statistical sampling is often termed judgmental

sampling ALEMAYEHU T. 15
 PROBABILISTIC VERSUS NON-
PROBABILISTIC SAMPLE SELECTION
 Both probabilistic and non-probabilistic sample selection fall under selecting
sample step(step2)
 Probabilistic sample selection: when auditors' using probabilistic sample
selection auditor randomly selects items of each population known probability of
being included in sample. This process requires great care and uses one of several
methods discussed shortly.
 Non-probabilistic sample selection: In non-probabilistic sample selection auditor
selects sample items using professional judgment rather than probabilistic methods.
Auditors can use one of several non-probabilistic sample selection methods.

ALEMAYEHU T. 16
 Cont’d

 Probabilistic sample selection is a method of

selecting a sample such that each population item has

a known probability of being included in the sample
 Non-probabilistic sample selection is a method in

which the auditor uses professional judgment rather

than probabilistic methods.

ALEMAYEHU T. 17
 Applying Statistical and Non-statistical Sampling in
Practice and Sample Selection Methods

 Auditing standards permit auditors to use either statistical or non-

statistical sampling methods

 Statistical sampling is used the sample and must be a probabilistic

one and appropriate statistical evaluation methods must be used with

sample results to make sampling risk computations.
 Auditors may make non-statistical evaluations when using
probabilistic selection, but it is never acceptable to evaluate a non-
probabilistic sample using statistical methods.

ALEMAYEHUT. 18
 Applying Statistical and Non-statistical Sampling in
Practice and Sample Selection Methods

 Three types of sample selection methods are commonly

associated with non-statistical audit sampling.

 Four types of sample selection methods are commonly

associated with statistical audit sampling

Non-probabilistic(judgmental) sample selection
methods include the following:
1.Directed sample selection
2.Block sample selection
3.Haphazard sample selection
ALEMAYEHU T. 19
 Cont’d

Probabilistic sample selection methods include

the following:
1.Simple random sample selection
2.Systematic sample selection
3.Probability proportional to size sample
selection
4.Stratified sample selection
ALEMAYEHU T. 20
 NON-PROBABILISTIC SAMPLE
SELECTION METHODS

Non-probabilistic sample selection methods are those that do not

meet technical requirements for probabilistic sample selection.
Because these methods are not based on mathematical probabilities,
representativeness of sample may be difficult to determine.
1. Directed sample selection: auditors deliberately select each

item in sample based on their own judgmental criteria instead of

using random selection.

ALEMAYEHU T. 21
 NON-PROBABILISTIC SAMPLE
SELECTION METHODS

Commonly used approaches include:

 Items most likely to contain misstatements
 Items containing selected population characteristics
 Large dollar coverage

2. Block sample selection: In block sample selection auditors

select the first item in a block, and the remainder of the block
is chosen in sequence.
 It is ordinarily acceptable to use block samples only if a

reasonable number of blocks is used.

ALEMAYEHU T. 22
 NON-PROBABILISTIC SAMPLE
SELECTION METHODS

 Block sampling can also be used to supplement other

samples when there is a high likelihood of

misstatement for a known period.

3.Haphazard sample selection: selection of

items without any conscious bias on part of the
auditor.
 In such cases, auditor selects population items
ALEMAYEHU T. 23
NON-PROBABILISTIC SAMPLE SELECTION
METHODS

 Shortcoming of haphazard sample selection is

the difficulty of remaining completely

unbiased in the selection.
 Haphazard and block sample selection appear

to be less logical than directed sample

selection, they are often useful in situations
where the cost of more complex sample
ALEMAYEHU T. 24
PROBABILISTIC SAMPLE SELECTION METHODS

Statistical sampling requires a probabilistic sample to

measure sampling risk. For probabilistic samples, the
auditor uses no judgment about which sample items are
selected, except in choosing which of the four selection
methods to use.
1.Simple random sample is one in which every

possible combination of elements in the population

has an equal chance of constituting sample.
 Auditors use simpleALEMAYEHU
random T.
sampling to sample25
PROBABILISTIC SAMPLE SELECTION METHODS

 Random number tables

 Computer generation of random numbers
2. Systematic sample selection:
 The auditor calculates an interval and then selects

the items for the sample based on the size of the

interval.
 The interval is determined by dividing the
population size by the number of sample items
ALEMAYEHU T. 26
 PROBABILISTIC SAMPLE SELECTION METHODS

3. Probability proportional to size(PPS):

A sample is taken where the probability of selecting any individual
population item is proportional to its recorded amount (PPS).

There are two ways to obtain such samples:

i. Take a sample in which the probability of selecting any individual

population item is proportional to its recorded amount. This method is

called sampling with PPS, and it is evaluated using non-statistical
sampling or monetary unit statistical sampling.

ALEMAYEHU T. 27
PROBABILISTIC SAMPLE SELECTION METHODS

ii.Divide the population into subpopulations, usually by

dollar size, and take larger samples from the

subpopulations with larger sizes. This is called stratified
sampling, and it is evaluated using non-statistical sampling
or variables statistical sampling.

4. Stratified sample selection:

The population is divided into subpopulations by size and
larger samples are taken of the larger subpopulations.

ALEMAYEHU T. 28
 SAMPLING FOR EXCEPTION RATES

Define and describe audit sampling for

exception rates.
 Auditors use sampling for tests of controls and

substantive tests of transactions to estimate the

percent of items in a population containing a
characteristic or attribute of interest.
 Occurrence rate, or exception rate, is the

ratio of items containing specific attribute to

ALEMAYEHU T. 29
 SAMPLING FOR EXCEPTION RATES

Following are types of exceptions in populations of

accounting data:
1.Deviations from client’s established controls
2.Monetary misstatements in populations of transaction
data
3.Monetary misstatements in populations of account

balance details
Knowing the exception ALEMAYEHU
rate isT. particularly helpful for30
 SAMPLING FOR EXCEPTION RATES

 The first two types of exception rate helpful for auditors to

make extensive use of audit sampling and measures exception

rate in doing controls and substantive tests of transactions.
 The third type of exception, auditors usually need to estimate

total dollar amount of exceptions because they must decide

whether the misstatements are material.
 Exception rate in a sample is used to estimate the exception rate

in the entire population, meaning it is the auditor’s “best

estimate” of the populationALEMAYEHU
exceptionT.
rate. 31
 SAMPLING FOR EXCEPTION RATES
 The term exception should be understood to refer to both

deviations from the client’s control procedures and amounts

that are not monetarily correct, whether because of an
unintentional accounting error or any other cause. The term
deviation refers specifically to a departure from prescribed
controls.
 Exception rate is based on a sample, there is a significant

likelihood that the sample exception rate differs from the actual
population exception rate. This difference is called the
ALEMAYEHU T. 32
TESTS OF CONTROLS VERSUS
SUBSTANTIVE TESTS

ALEMAYEHU T. 33
 AUDIT SAMPLING FOR TESTS OF
CONTROLS
 Determine the Objectives of the Tests of Controls

 Determine the Procedures to Evaluate Internal Controls

 Make a Decision about the Audit Sampling Technique
 Define the Population and Sampling Unit
 Use Professional Judgment to Determine Sample Size

 Nature of Control
 Frequency of Operation
 Importance of the Control

ALEMAYEHU T. 34
 AUDIT SAMPLING FOR TESTS OF
CONTROLS
 Risk of Assessing Control Risk too Low
 Tolerable and Expected Deviation Rates
 Population Size
 Select a Representative Sample
 Apply Audit Procedure

 Evaluate the Sample Results

 Document Conclusions

ALEMAYEHU T. 35
 AUDIT SAMPLING FOR SUBSTANTIVE
TESTS - PROBABILITY PROPORTION TO
SIZE(PPS)
Determine the Objectives of the Substantive Test
 Estimating total amount of population

 Estimating amount of misstatement

Determine the Substantive Audit Procedures to Perform

 Tests of Details of Transactions

 Tests of Details of Balances

ALEMAYEHU T. 36
 AUDIT SAMPLING FOR SUBSTANTIVE
TESTS - PPS

Make a Decision About the Audit Sampling

Technique
PPS v. Classical Variables Sampling

Define the Population and Sampling Unit

Reciprocal Population

Logical Sampling Unit

ALEMAYEHU T. 37
 AUDIT SAMPLING FOR SUBSTANTIVE
TESTS - PPS

Use Professional Judgment and Statistical Methods to

Determine Sample Size
 Book Value of Population Tested

 Reliability Factor for Specified Risk of Incorrect

Acceptance
 Tolerable Misstatement

 Anticipated Misstatement and Expansion Factor

ALEMAYEHU T. 38
 AUDIT SAMPLING FOR SUBSTANTIVE
TESTS - PPS

Select a Representative Sample

 Sampling Risk

 Calculate Sampling Interval

 Select Random Sample

Apply Audit Procedures

ALEMAYEHU T. 39
 AUDIT SAMPLING FOR SUBSTANTIVE
TESTS - PPS

Evaluate Sample Results

 Upper Misstatement Limit

 No Misstatements Found in the Sample

 Some Misstatements Found in the Sample

 Qualitative Considerations

Document Conclusions

ALEMAYEHU T. 40
 APPLICATION OF NON-STATISTICAL
AUDIT SAMPLING

 Use non-statistical sampling in tests of controls and

substantive tests of transactions.

 Application of non-statistical audit sampling in testing

transactions for control deviations and monetary

misstatements
 Key terminology are defined and summarized before

doing this application

ALEMAYEHU T. 41
 TERMS USED IN AUDIT SAMPLING

Terms related to planning:

Characteristic or attribute
Acceptable Risk of Assessing Control Risk too

low (ARACR)
Tolerable Exception Rate (TER)
Estimated Population Exception Rate (EPER)
Initial sample size ALEMAYEHU T. 42
 TERMS USED IN AUDIT SAMPLING

Terms related to evaluating results:

 Exception
 Sample Exception Rate (SER)
 Computed Upper Exception Rate (CUER)

ALEMAYEHU T. 43
Cont’d

ALEMAYEHU T. 44
 STEPS OF TESTS OF CONTROL AND
SUBSTANTIVE TESTS IN AUDIT SAMPLING

 Auditors use 14 well-defined steps to apply audit

sampling to tests of controls and substantive tests of
transactions.
 These steps are divided into three phases described
earlier as plan the sample, select the sample and
perform the audit procedure; and evaluate the results.
 Auditors should follow those steps carefully to ensure
proper application of both the
ALEMAYEHU T. auditing and sampling
45
 STEPS OF TESTS OF CONTROL AND
SUBSTANTIVE TESTS IN AUDIT SAMPLING

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.

ALEMAYEHU T. 46
 STEPS OF TESTS OF CONTROL AND
SUBSTANTIVE TESTS IN AUDIT SAMPLING

Step 6: Specify the tolerable exception rate.

Step 7: Specify acceptable risk of assessing control risk too low.

Step 8: Estimate the population exception rate.

Step 9: Determine the initial sample size.

ALEMAYEHU T. 47
 STEPS OF TESTS OF CONTROL AND
SUBSTANTIVE TESTS IN AUDIT SAMPLING

ii. Select the Sample and Perform the Audit Procedures

Step 10: Select the sample.

Step 11: Perform the audit procedures.

iii. Evaluate the Results

Step 12: Generalize from the sample to the population.

Step 13: Analyze exceptions.

Step 14: Decide the acceptability of the population.

ALEMAYEHU T. 48
 STATE THE OBJECTIVES OF THE AUDIT
TEST
Objectives of test must be stated in terms of transaction
cycle being tested.

Auditors define objectives of tests of controls and

substantive tests of transactions as follows:
 Test operating effectiveness of controls
 Determine whether transactions contain monetary
misstatements
 Auditors normally define these objectives as a part of
ALEMAYEHU T. 49
 DECIDE WHETHER AUDIT SAMPLING
APPLIES
 Audit sampling applies whenever auditor plans
to reach conclusions about a population based
on a sample.
 Auditor should examine audit program and
select those audit procedures where audit
sampling applies.
To illustrate, assume the following partial audit
program:
1.Review sales transactions for large and unusual
amounts (analytical procedure).
2.Observe whether duties of accounts receivable
ALEMAYEHU T. 50
 Cont'd

3. Examine a sample of duplicate sales invoices for

a. Credit approval by credit manager (test of control).
b. Existence of an attached shipping document (test of
control).
c. Inclusion of a chart of accounts number (test of
control).
4. Select a sample of shipping documents and trace each
to related duplicate sales invoices
ALEMAYEHU T. (test of control). 51
 Cont'd

5. Compare quantity on each duplicate sales invoice with

quantity on related shipping documents (substantive
test of transactions).
 Audit sampling does not apply for first two procedures
in this audit program.
 The first is an analytical procedure for which sampling
is inappropriate.
 The second is an observation procedure for which no
documentation exists toALEMAYEHU
perform T.
audit sampling. 52
GUIDELINES FOR ARACR AND TER
TESTS OF CONTROL

ALEMAYEHU T. 53
GUIDELINES FOR ARACR AND TER
TESTS OF CONTROL

ALEMAYEHU T. 54
EFFECT ON SAMPLE SIZE OF
CHANGING FACTORS

ALEMAYEHU T.
55
 ACTIONS WHEN POPULATION IS NOT
ACCEPTABLE

Revise TER or ARACR

Expand the sample size

Revise assessed control risk

Communicate with the audit committee or

management

ALEMAYEHU T. 56
SUMMARY OF AUDIT SAMPLING STEPS

To/From Plan the sample

Step 6 (Steps 1-9)
Compare

Select the sample

(Step 10)
Computed Number of
upper exceptions
Perform the tests in sample
exception (Step 11) and actual
Step 12

rate
From

sample size
Evaluate the results
To Step 14 (Steps12-14) To Step 12

ALEMAYEHU T. 57
 STATISTICAL AUDIT SAMPLING

 Statistical sampling method most commonly used for tests of controls

and substantive tests of transactions is attributes sampling
 Application of attributes sampling for tests of controls and substantive
tests of transactions has far more similarities to non-statistical
sampling than differences
 Main differences are calculation of initial sample sizes using tables
developed from statistical probability distributions and calculation of
estimated upper exception rates using tables similar to those for
calculating sample sizes.

ALEMAYEHU T. 58
 SAMPLING DISTRIBUTION

 Auditors base their statistical inferences on sampling distributions

 Sampling distribution is a frequency distribution of results of all
possible samples of a specified size that could be obtained from a
population containing some specific parameters.
 Sampling distributions allow auditor to make probability statements
about likely representativeness of any sample i.e., in distribution.
 Attributes sampling is based on binomial distribution, in which each
possible sample in population has one of two possible values, such as
yes/no, black/white, or control deviation/no control deviation.

ALEMAYEHU T. 59
APPLICATION OF ATTRIBUTES SAMPLING

Use attributes sampling in tests of controls and substantive tests

of transactions.
Use of the tables: When auditors use tables to determine initial
sample size, they follow these four steps:

I. Select the table corresponding to ARACR

II. Locate the TER on top of the table
III.Locate the EPER in the far left column
IV.Read down appropriate TER column until it intersects
with appropriate EPER row in order to get the initial
sample size ALEMAYEHU T. 60
APPLICATION OF ATTRIBUTES SAMPLING

Effect of population size:

 Population size is a minor consideration in determining
sample size
 Representativeness is ensured by the sample selection process
more than by sample size
 Select the sample
 Perform the audit procedures
 Evaluate the results

ALEMAYEHU T. 61
END OF CHAPTER ONE

ALEMAYEHU T. 62