CHAPTER 2

ATTRIBUTES AND VARIABLES SAMPLING

QUESTION 1: What are the types of

sampling plan?
ANSWER 1
The two types of sampling plan are:
a. Attributes sampling. It is a statistical approach used
with test of controls. In testing for attributes, the auditor is
typically concerned with the qualitative characteristics or
attributes of the population, and is used to estimate the
proportion of deviations associated with a particular set of
controls. For example, purchase orders need to be
authorized, and attributes sampling are used to estimate the
proportion of times or percentage that such documents have
not been authorized. Based on the deviation or occurrence
rate computed in the sample, the auditor decides if control
risk can be assessed at below the maximum level.

QUESTION 1: What are the types of

sampling plan?
b. Variables sampling. It is a form of
sampling used to provide a numerical estimate
of a population, such as the true balance of an
account. It is used to determine whether
account balances in the entitys book are fairly
stated. Variables estimation sampling is used by
the auditor when performing substantive test of
details.

QUESTION 2: What are the steps involved

in attributes sampling?
Answer 2:
The steps involved in attributes sampling are:
1. Determining the objectives of the test. Test of controls are
designed to provide reasonable assurance that internal control
operating effectively. Attributes sampling is usually used when there is
a trail of documentary evidence.
2. Defining the attribute and deviation conditions. An auditor should
identify characteristics or attributes that would indicate operation of
the internal controls. The auditor then defines the possible deviation
conditions. For instance, a control procedure requires that each check
be signed by the treasurer before given to a payee. Hence, a released
check that was not signed or signed by an employee other than the
treasurer constitutes a deviation.

QUESTION 2: What are the steps involved

in attributes sampling?
Answer 2:
3. Defining the population. For test of controls, the population is the
class of transactions being tested. Conclusions based on sample results
can only be projected to the population from which the sample was
selected.
It is important for the auditor to ensure that the population is:
a. Appropriate to the objective of the sampling procedure. The direction
of testing must be considered. For example, if the auditors objective is to
test for overstatement of accounts payable, the population should be the
accounts payable listing. Conversely, when testing for understatement of
accounts payable, the population should be subsequent disbursements,
unpaid invoices, suppliers statements or unmatched receiving reports.
b. Complete. For example, if the auditor intends to select payment
vouchers from a file, conclusions cannot be drawn about all vouchers for
the period unless the auditor is satisfied that all vouchers have in fact been
filed.

QUESTION 2: What are the steps involved

in attributes sampling?
Answer 2:
4. Determining the method of selecting the sample. The
common methods for selecting samples are random sampling
and systematic sampling.
5. Determining the sample size. Determining the appropriate
sample size for attributes sampling is very important. If sample
items chosen to be examined are very few in relation to the
entire population, there is a high probability that existing
deviations in the clients internal control will not be detected
while performing test of controls. This is because deviations may
not be present in the relatively fewer samples examined but
rather in the other units of the population. If the sample size is
increased, the risk that an existing deviation will not be
discovered during tests of controls is considerably decreased.

QUESTION 2: What are the steps involved

in attributes sampling?
Answer 2:
6. Performing the sampling plan. The auditor should
apply appropriate audit procedures to all items in the
sample to determine if there are any deviations from
the prescribed control procedures.
7. Evaluating the sample results. The auditor should
interpret the sampling results carefully and make
conclusions with respect to the population from which
the samples are taken.
8. Documenting the sampling procedure. Each of the
prior 7 steps and the conclusions reached should be
documented in the working papers.

QUESTION 3: What are the factors that

affect sample size for test of controls?
Answer 3:
PSA 530 requires the auditor to determine a
sample size sufficient to reduce sampling risk to
an acceptably low level. The following table
presents the factors that affect sample size for
test of controls and their effects on the sample
size:

QUESTION 3: What are the factors that

affect sample size for test of controls?
ATTRIBUTES SAMPLING (TEST OF CONTROLS)
SUMMARY OF RELATIONSHIPS OF FACTORS TO SAMPLE SIZE
Increase in
Intended reliance of internal
control
Tolerable deviation rate
Expected population deviation
rate
Acceptable risk of assessing
control risk too low
Required confidence level
Number of sampling units

Effect on Sample Size

Increase
Decrease
Increase
Decrease
Increase
Negligible effect

QUESTION 4: Explain the relationship between

the auditors intended reliance on the clients
internal control and the sample size for test of
controls.
Answer 4:
The more the auditor intends to rely on the
operating effectiveness of the clients internal controls,
the lower the auditors assessed level of control risk,
and the larger the sample size for test of controls will
need to be. Simply stated, when the auditor expects
that the internal control is effective, the auditor is
required to perform test of controls to support such
expectation. Hence, the greater the reliance the
auditor places on the operating effectiveness of the
controls, the greater is the extent of test of controls
needed (sample size is increased).

QUESTION 5: Explain the relationship between the

tolerable deviation rate and the sample size for tests of
controls.
Answer 5:
Tolerable deviation rate refers to a rate of deviation from
prescribed internal control procedures set by the auditor in
respect of which the auditor seeks to obtain an appropriate
level of assurance that the rate of deviation set by the auditor is
not exceeded by the actual rate of deviation in the population.
Simply stated, the tolerable rate of deviation represents the
maximum deviation rate from the prescribed control procedure
that the auditor could accept and still conclude that the design
and operation of an internal control is effective.
The higher the rate of deviation that the auditor can tolerate,
the lower the sample size for test of controls needs to be.

QUESTION 6: Explain the relationship between

the expected population deviation rate and the
sample size for test of controls.
Answer 6:
Expected population deviation rate is the rate of
deviation from the prescribed control procedure the
auditor expects to find in the population. The higher
the expected rate of deviation of the population to be
tested, the larger the sample size needs to be so that
the auditor will be able to make a reasonable estimate
of the actual or true rate of deviation.

QUESTION 7: Explain the relationship between

the allowable risk of assessing control risk too
low and the sample size for test of controls.

Answer 7:
The greater the allowable risk of assessing
control risk too low, the lower the sample size
for test of controls needs to be:

QUESTION 8: Explain the relationship between

the auditors required confidence level with the
sample size for test of controls.

Answer 8:
The auditors required confidence level is the
mathematical complement of sampling risk (the
risk in assessing control risk too low in the case
of test of controls). The greater the level of
confidence that the auditor desires that the
results of the sample are in fact indicative of
the actual incidence of deviation in the
population, the larger the sample size for test of
controls needs to be.

QUESTION 9: Explain the relationship between

the number of sampling units in the population
and the sample size for test of controls.

Answer 9:
For large populations, the actual size of the
population has little or minimal effect on
sample size for test of controls.

Question 10: Explain the audit procedures to

be applied on the samples chosen.
Answer 10:
The auditor should apply audit procedures to examine the samples
chosen. If the audit procedure is not applicable to the selected item,
the auditor shall perform the procedure on a replacement item. For
instance, when a voided check is selected while testing for evidence
of payment authorization and check has been properly voided to the
auditors satisfaction, such is not considered a deviation.
Consequently, the auditor should perform the procedure on an
appropriately chosen replacement item.
If the auditor is unable to perform the planned audit procedures to
a selected item because documentation relating to that item has
been lost or apparently destroyed, the auditor shall treat such item
as a deviation from the prescribed control in the case of test of
controls, or a misstatement, in the case of details, provided that
alternative procedure are not available.

QUESTION 11: Explain the procedures in

evaluating sample results for test of controls.
Answer 11:
The procedures to evaluate sample results for test of controls
include:
a. Calculating the sample deviation rate (the auditors estimate of
the true but unknown population deviation rate).
Sample Deviation Rate = Number of deviations observed
Sample size
b. Determining the maximum population deviation rate (upper deviation
limit, upper occurrence limit, achieved upper precision limit).
Maximum
= Sample Deviation Rate
Risk
Population Rate

Allowance for Sampling

c. Comparing the maximum population deviation rate to the tolerable rate.

QUESTION 11: Explain the procedures in

evaluating sample results for test of controls.
Answer 11:
d. Considering the qualitative aspects of the deviations
discovered.
The auditor should investigate the nature (whether intentional
or unintentional) and causes of any deviations identified, and
evaluate their possible effects (s) on the purpose of the audit
procedure and on other areas of the audit. In extremely rare
circumstances when the auditors considers a deviation discovered
in a sample to be an anomaly, the auditor shall obtain a high
degree of certainty that such deviation is not representative of the
population. The auditor should consider performing additional
audit procedures to obtain sufficient appropriate audit evidence
that the deviation does not affect the remainder of the population.

QUESTION 11: Explain the procedures in

evaluating sample results for test of controls.
Answer 11:
e. Reach a conclusion.
The auditor should evaluate the sample results to determine
whether the preliminary assessment of the relevant characteristic of
the population is confirmed or needs to be revised.
In the case of a test of controls,
If

the maximum population deviation rate is greater than the tolerable

deviation rate, this may indicate a higher risk of material misstatement
than originally planned. The auditor should, therefore, increase the
planned assessed level of control risk and consequently increase the
scope of his substantive procedures.
If the maximum population deviation rate is lower than the tolerable
deviation rate, this may indicate a lower risk of material misstatement
than originally planned. The auditor should accept the sample results as
support to the planned assessed level of control risk and the scope of his
substantive procedures need to be modified.

QUESTION 12: Illustrate the procedure to

evaluate sample result for tests of controls given
the following information:
Allowable risk of assessing control risk too low
5.0%
Tolerable deviation rate
6.0%
Expected Population Deviation rate
2.5%
The auditor discovered 8 deviations while examining
the samples.

Answer 12:
By referencing to the sample table shown below:

Sample size must consist of 150 units.

Since the auditor discovered 8 deviations, then sample
deviation rate must be 8/150 or 5.3%.
Based on a 5% risk of assessing control risk too low and 8
deviations found, the maximum population deviation rate can
be computed using the following table.

Answer 12:
The maximum population deviation rate is equal to
9.5%. The allowance for sampling risk can be
computed as 9.5% - 5.3% or 4.2%.
Based on the sample results, there is a 5% chance of
the true population deviation rate being greater than
or equal to 9.5%.
Since the maximum population deviation rate (9.5%)
exceeds the tolerable rate (6%), the sample results
indicate that control risk for the control procedure
being tested is higher than planned and therefore, the
scope of resulting substantive procedures must be
increased.

QUESTION 13: What are the other forms of

sampling techniques used for attributes
sampling?
Answer 13:
Audit samples are usually designed a fixed-size approach. However, other
techniques such as sequential and discovery sampling, which do not used
fixed sample size, may also be used.
Sequential or stop-or-go sampling is a sampling technique wherein the
auditor chooses a single or a group of items in a given time interval, conducts
his examination, analyzes the results then audits another group of items if
needed and so on. Simply stated, it involves a sampling plan for which the
sample is selected in several steps, with the need to perform each step
conditional on the results of the previous steps.
Discovery sampling, on the other hand, is a sampling plan which selects a
sample of a given size, accepts the population if the sample is free of error,
and rejects the population if it contains at least one error. With discovery
sampling, the auditor may not be interested in determining how many error
there are in the population. It is often used in situations where the expected
population deviation rate is near zero, and hence a single error is very critical.

QUESTION 14: What are the steps

involved in variables sampling?
Answer 14:
The steps involved in variables sampling are:
1. Determine the objectives of the test. Variables sampling is used
primarily for substantive testing and that its conclusion is generally
stated in peso terms and in quantities.
2. Define the population. The population should consist of the items
constituting the account balances or class of transaction of interest.
Items that are individually significant for which sampling risk is not
justified should be tested separately and not be subjected to sampling.
3. Select an audit sampling technique. The auditor may select either
the:
a. Valued weighted selection or probability proportional to size
sampling; or
b. Classical variables sampling.

QUESTION 14: What are the steps

involved in variables sampling?
Answer 14:
4. Determine the sample size (n). The auditor should consider
the factors that affect the sample size for substantive procedures.
5. Determine the method of selecting the sample. Usually,
random number or systematic sampling is used.
6. Perform the sampling plan. The auditor should perform
appropriate audit procedures to determine an audit value for
each sample size.
7. Evaluate the sample results. The auditor should project the
results of the sample to the population.
8. Document the sampling procedure. Each of the prior 7 steps
and the conclusions reached should be documented in the
working papers.

QUESTION 15: What are the factors that affect

sample size for substantive tests of details?

Answer 15:
The following table presents the factors that affect sample size
for substantive tests of details and their effects on sample size.
VARIABLES SAMPLING (SUBSTANTIVE TESTS OF DETAILS)
SUMMARY OF RELATIONSHIPS OF FACTORS TO SAMPLE SIZE
Increase in
Assessed level of risks of
material misstatement
Used of other substantive
procedures directed at the
same financial statement
assertion
Required confidence level
Tolerable misstatement
Expected amount of
misstatement
Stratification
Number of sampling units

Effect on Sample Size

Increase
Decrease
Increase
Decrease
Increase
Decrease
Negligible effect

QUESTION 16: Explain the relationship between the

auditors assessment of risks of material misstatement
and the sample size for substantive tests of details.

Answer 16:
The higher the auditors assessment of the
risk of material misstatement, the lower the
level of detection risk that the auditor can
accept. Hence, the auditor should increase the
extent (sample size) of his substantive
procedures.

QUESTION 17: Explain the relationship between the use

of other substantive procedures which are directed at
the same financial statement assertion and the sample
size for another substantive test of details.

Answer 17:
The more the auditor relies on other
substantive procedures (such as analytical
procedures) to reduce the detection risk to an
acceptable level, the less assurance the auditor
will require from sampling and, therefore, the
sample size can be reduced.

QUESTION 18: Explain the relationship

between the auditors required confidence
level and the sample size for substantive
tests of details.
Answer 18:
The greater the degree of confidence that
the auditor requires that the results of the
sample are in face indicative of the actual
amount of misstatement in the population, the
larger the sample size needs to be.

QUESTION 19: Explain the

relationship between the tolerable
misstatement and the sample size for
substantive tests of details.
Answer 19:
Tolerable misstatement refers to a monetary
amount set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of
assurance that the monetary amount set by the
auditor is not exceeded by the actual
misstatement in the population. The lower the
tolerable misstatement, the larger the sample
size for substantive tests of details need to be.

QUESTION 20: Explain the

relationship between the expected
amount of misstatement and the
sample size for substantive test of
details.
Answer 20:
The expected amount of misstatement is the
amount of misstatement the auditor expects to
find in the population. The greater the expected
amount of misstatement, the larger the sample
size needs to be in order to make a reasonable
estimate of the actual amount of error in the
population.

QUESTION 21: Explain the effect of

stratification on the sample size for substantive
tests of details.

Answer 21:
When there is variability in the monetary size
of items in the population, it may be
appropriate to stratify the population. When a
population can be stratified, the aggregate of
the sample sizes from the strata generally will
be less than the sample size that would have
been required had one sample been drawn from
the whole population.

QUESTION 22: Explain the

relationship between the number of
sampling units in the population and
the sample size for substantive test
of details.
Answer 22:
For large populations, the actual size of the
population has little, if any, effect on sample
size. However, when using monetary unit
sampling, an increase in the monetary value of
the population increases sample size.

QUESTION 23: Explain the procedures in

evaluating sample results for substantive tests
of details.
Answer 23:
For substantive procedures, the auditor should
project monetary errors found in the sample to the
population, and should consider the effect of the
projected error on the particular test objective and on
the other areas of the audit. The auditor projects the
total error for the population to obtain a broad view of
the scale of errors, and to compare this to the tolerable
error. For substantive procedures, the tolerable
misstatement will be an amount less than or equal to
the auditors preliminary estimates of materiality used
for the individual account balances being audited.

QUESTION 23: Explain the procedures in evaluating

sample results for substantive tests of details.
Answer 23:
When an error has been established as an anomaly, it may be
excluded when projecting sample errors to the population. The effect of
any such error, if uncorrected, still needs to be considered in addition to
the projection of the non-anomalous errors. If an account balance or
class of transactions has been divided into strata, the error is projected
for each stratum separately. Projected error plus anomalous errors for
each stratum are then combined when considering the possible effect
of errors on the total account balance or class of transactions.
If the total amount of projected error plus anomalous error is less
than but close to that which the auditor deems tolerable, the auditor:
a. Consider the persuasiveness of the sample results in the light of
other audit procedures.
b. May consider it appreciate to obtain additional audit evidence.

QUESTION 23: Explain the procedures in

evaluating sample results for substantive tests
of details.
The total projected error plus anomalous error is the auditors
best estimate of error in the population.
However, sampling results are affected by sampling risk.
Thus when the best estimate of error is close to the tolerable
error, the auditor recognizes the risk that a different sample
would result in a different best estimate that could exceed the
tolerable error. Considering the results of other audit procedures
helps the auditor to assess this risk, while the risk is reduced if
additional audit evidence is obtained.
Qualitative factors should also be considered. For instance, if
fraud has been discovered, a simple projection of them will not
in general be sufficient as an auditor will need to obtain a
thorough understanding of their causes and their likely effects
on the financial statements.

QUESTION 24: What are the audit sampling

techniques used in variable sampling?

Answer 24:
Variable sampling may use either:
a. Value-weighted selection approach; or
b. Classical sampling techniques
Difference estimation
Ratio Estimation
Mean-Per-Unit (MPU) estimation

QUESTION 25: Explain the value weighted selection

approach.
Answer 25:
Value weighted selection identifies the sampling unit as the individual monetary
units that make up the population. This approach to defining the sampling unit
ensures that audit effort is directed to the larger value items because they have a
greater chance of selection, and can result in smaller sample sizes.
A common type of value weighted selection approach is the monetary or peso
unit sampling. Monetary unit sampling views the population, not as a population of
accounts of different sizes, but as population of monetary units. The size of the
population is taken to be the total number of monetary units in all the accounts and
each monetary unit is selected with equal probability. Simply stated, each peso in
the population has an equal chance of being selected, but the likelihood of selecting
any one logical unit for testing is directly proportional to its size, thus monetary unit
sampling is also known as probability-probability-to-size sampling or PPS sampling.
Monetary unit sampling is most often used when one or a few population errors
are expected but it is more appropriate when no errors are expected. This method is
more likely to detect overstatements (normally for assets and income) rather than
understatements.

QUESTION 26: Explain the classical

variables sampling approach.
Answer 26:
When using classical variables sampling, auditors treat
each individual item in the population as a sampling unit. It
uses normal distribution theory to evaluate audit samples.
This method is appropriate when the auditors objective is to
estimate the true but unknown monetary balance.
The three common types of classical variables sampling are:
a. Ratio estimation
b. Difference estimation
c. Mean-per-unit (MPU) sampling

QUESTION 27: What do you understand by

the ratio estimation technique?
Answer 27:
Ratio estimation is a classical variables sampling technique that
uses the ratio of audited amounts to recorded amounts in the
sample to estimate the total peso amount of the population and
an allowance for sampling risk. Ratio estimation is most
appropriate when the size of misstatements is directly
proportional to the book values of the items.
Ratio estimation involves the following steps:
a. Determining the audited values for each sample item.
b. Calculating the ratio between the sum of sample audited
values and sample book values.
c. Determining the estimated population value by multiplying
the total population book value by the ratio computed.

QUESTION 28: What do you

understand by the difference
estimation technique?
Answer 28:
Difference estimation is a classical variables sampling technique that uses
the average difference between audited amounts and individual recorded
amounts to estimate the total audited amount of a population and an
allowance for sampling risk. Difference estimation is a most appropriate
when the size of the misstatements does not vary significantly in comparison
to book value.
Difference estimation involves the following steps:
a. Determining the audited values for each sample item.
b. Calculating the difference between the audited value and book value for
each sample item.
c. Calculating the average difference
d. Determining the estimated population value by multiplying the average
difference by the total population units and adding or subtracting this value
from the recorded book value.

QUESTION 29: What do you understand by

the mean-per-unit (MPU) technique?
Answer 29:
Mean-per-unit (MPU) estimation is a classical variables sampling
technique that projects the sample average (mean) to the total
population by multiplying the sample average by the number of items
in the population. MPU estimation is appropriate when the underlying
documents that support the account balance are not accessible. For
instance, the statement of financial position shows a total for accounts
receivable, but the individual invoices supporting the balance are not
available.
MPU estimation involves the following steps:
a. Determining the audited values for each sample item
b. Calculating the average audited amount.
c. Multiplying this average audited amount by the number of units in
the population to obtain the estimation population value.

QUESTION 30: What are the similarities

between ratio estimation and
difference estimation technique?
Answer 30:
Both the difference and ratio estimation
techniques can only be used under the following
instances:
a. Each population item must have a recorded
bool value.
b. Total population book value must be known
and must correspond to the sum of all individual
population items.
c. Differences between audited and recorded
book values are frequent.

QUESTION 31: The following information

pertains to an entitys account receivable.
Sample

Population

Number of accounts

100

10,000

Book values

P 1,000

P 120,000

Audited Values

P 1,200

Compute the estimated total audited value (ETAV) of the population

and the projected misstatement using (a) ration estimation, (b)
difference estimation, and (c) mean-per-unit estimation techniques.

Answer 31:

QUESTION 32: What are the

advantages and disadvantages of
value weighted selection (PPS
sampling) over classical variables
sampling?
Answer 32:
Value weighted selection or PPS sampling has the following advantages:
a. It is generally easier to use.
b. It results in a stratified sampling, that is, the probability of selection of
an item is directly proportional to the size or value of the item.
c. It requires smaller samples if only few or no misstatements are
expected.
On the other hand, the use of such method has the following
disadvantages:
a. It requires more samples if many differences between the book and
audited values are expected.
b. It requires special sample design considerations when zero and
negative balances are selected.

QUESTION 33: What are the

disadvantages and disadvantages of
classical variables sampling over
value weighted-selection (PPS
sampling)?
Answer 33:
Classical variables sampling has the following advantages:
a. It requires smaller samples if many differences between
the book and audited values are expected.
b. It does not require special sample design considerations
when zero and negative balances are selected.
On the other hand, the use of such method has the following
disadvantages:
a. It is generally considered more complex than value
weighted selection.
b. The population standard deviation must be computed in
determining sample size.