AUD 610

Audit Sampling

Definition
Audit sampling is the application of
an audit procedure to less than
100% of the items within an
account balance or class of
transactions such that all sampling
units have a chance of selection.

The Sampling Idea

Identification of the data population to
draw the sample.
An expression of an action taken to
produce relevant evidence.
Not all items must have an equal
chance of selection but all items must
have some probability of selection.

Definitions to remember
Audit procedures

Recalculations/reperformance
Observations
Confirmations
Inquiry
Checking
documentations
Tracing
Vouching
Scanning

Analytical reviews
Physical sighting
CAAT

of

Account balance
Class of transactions
Population population unit
Sampling sampling
unit

Sampling Risk
Sampling risk is the probability that an
auditors conclusion based on the sample
might be different from the conclusions based
on an audit of the entire population.
Test of control

Risk of over reliance

Risk of under reliance

Substantive test

Risk of incorrect acceptance

Risk of incorrect rejection

Methods of controlling
Sampling risks

Adjusting the sample size

Using an appropriate method of selecting
sample items from the population.

Non sampling risks

Careful design of audit procedures

Proper instructions
Supervision
Review

Non sampling risk

Non sampling risk is all other risk apart from
sampling risk
Factors that cause the auditor to reach an erroneous
conclusion for any reason not related to the size of
the sample.
Sources of non sampling risks are:
Human mistakes
Misapplication of audit procedures
Misinterpreting or audit results
Reliance on erroneous information received from
other party

Statistical vs Non Statistical

Sampling
Statistical sampling

Audit sampling that uses the laws of probability

Random selection of samples
Able to quantify sampling risks

Non statistical sampling

Audit sampling that do not use the laws of

probability
May either use random selection or pure
judgements in selecting sample.

Methods of selection
Random selection
Haphazard selection
Selecting all items
Selecting specific items
The last two methods do not constitute
audit sampling.

Selecting All Items

May be appropriate in the following
circumstances:

Small population with large value items.

When inherent controls risks are high.

Sampling risk is reduced to zero.

Unlikely in tests of controls.

Selecting Specific Items

High value or key items
All items over a certain amount
Items to obtain information
Items to test procedures
The results of verification of the selected
items provide no information as to the
probability of material misstatement in
items not tested.

Steps in Using Samples in

Audit Tests
Plan the sample
Selecting and testing the sample
Evaluating the results

Planning the Sample

Determining the objectives of the test
Defining what errors are being sought
Identifying the population and sampling
unit
Specifying tolerable error, expected
error and required confidence level
Deciding the size of the sample

Selecting and Testing the

Sample
Selecting the sample

Random computer generated and random tables

Systematic
Haphazard
Block (not considered a method of audit sampling)

Testing the sample using audit procedures

most appropriate to test the objective on
each item selected.

Evaluating Results
Each error or deviation discovered will need
to be examined for its implication.
Both statistical and non-statistical sampling
require the sample results to be projected on
the population.
Key difference between statistical and nonstatistical sampling is that sampling risk is not
mathematically quantified, but assessed on a
more qualitative basis.

Considering the Qualitative

Aspects of Errors
Consider whether error has an effect on
the whole population or is an isolated
occurrence.
An error due to posting a sales invoice
to the wrong customers account will
not affect the total balance of accounts
receivable but overstating the sales will
affect both sales figures and accounts
receivable.

Projecting the Error to the Population

and Concluding Audit Test
Sample must be representative of the
population
If the projected error is greater than the
tolerable error, then the auditor may decide
to do more testing.
If this is not satisfactory, then for

tests of control - the auditor should assess control

risk at a higher level;
Substantive testing auditor should ask mgt to
adjust the recorded amount.

Statistical Sampling
Techniques
Attribute Sampling Plans
Variable Sampling Plans
Probability Proportionate to size
Sampling (PPS)

Attribute Sampling Plans

Used to test operating effectiveness of
controls by estimating the rate of deviation.
Must assess tolerable deviation rate, the
expected error rate and the required
confidence level as well as statistically
determine the sample size and ensure that
the sample is randomly selected.
Include:

Attribute sampling
Sequential sampling
Discovery sampling

Variable Sampling Plans

Auditor estimates the error in terms of
quantity rather than occurrence rate.
Usually used in substantive testing to
estimate a monetary misstatement in an
account balance.
Include:

Unstratified mean-per-unit
Stratified mean-per-unit
Difference estimation

PPS Sampling
Also known as dollar unit sampling
Uses attribute sampling theory to
express a conclusion as a monetary
amount rather than rate of occurrence.

Choice of Statistical Sampling

Method
Test of control

attribute sampling plans

Substantive testing

PPS sampling
Variable sampling

Advantages of PPS Sampling

It is not affected by variability and therefore
is easy to determine sample size
It is mathematically simple and therefore
easy to apply, especially if computer
assistance is not available
It usually enables conclusions to be drawn on
the basis of small sample sizes where the
auditor expects no or few errors
Individually material items (where they are
greater than the dollar sampling interval) are
automatically selected for sampling.

Disadvantages of PPS
Sampling

It is unsuitable for detecting errors of

understatement because understated items,
being smaller than they ought to be, are less
likely to be selected for sampling.
If detected errors exceed those expected when
the sampling plan is developed, then the auditor
is likely to be forced to conclude that the
population is materially misstated and to have to
conduct further audit work.
As expected errors increases, sample size is likely
to exceed that required by variable sampling.
The required cumulative addition of the
population for the purposes of drawing the
sample may not be convenient.

PPS Sampling - continued

Audit situations in which PPS sampling
will produce sufficient evidence using
smaller sample sizes are:

Few errors are expected.

The auditor is mainly concerned with
overstatement
Understatement errors are unlikely
It is convenient to obtain a cumulatively
added listing of the population

Advantages of Variable
Sampling
Preferable when errors of understatement are
expected or are being sought
The population includes zero and negative
balances
Many errors are expected
It may be necessary to extend the sample to
estimate the population value more reliably

Non Statistical Sampling

Techniques
Advantages of non-statistical sampling

Lower training cost

Ease of implementation
The impracticality of random selection
Proposed adjustment based on qualitative
analysis

Non Statistical Sampling

Techniques - continued
Disadvantages of non-statistical
sampling

Training difficulties/Difficult to delegate

The absence of consistency and uniformity
Peer review exceptions and potential
litigation problems
Incorrect evaluation of sampling risk