Acknowledgement and Reference

Auditing Standards and Other Auditing Literature

Auditing and Assurance Standards Council (AASC), PSA 315: Understanding the Entity and Its
Environment and Assessing the Risk of Material Misstatement

AASC, PSA 320: Audit Materiality

AASC, PSA 330: The Auditor’s Procedures in Response to Assessed Risks

AASC, PSA 500 (Revised): Audit Evidence

AASC, PSA 530: Audit Sampling and other Means of Testing

International Auditing and Assurance Standards Board, 2008 IAASB Handbook

International Auditing and Assurance Standards Board, 2014 IAASB Handbook

Books

Cabrera, Elenita B. Principles of Auditing 2001

Ricchiute, David N. Auditing and Assurance Services 7e, 2003

Santos, Petronilo S. Basic Auditing: Theory and Concepts, 2002

Taylor, Donald H. and G. William Glezen, Auditing: An assertion Approach, 7e, 1997

Whittington, O. Ray and Kurt Pany, Principles of Auditing 11e

Websites

Activity-based risk evaluation model (ABREMA)- by the Australian Educational Research Pty Ltd (AER)-
Official Website (www.abrema.net/abrema)

Discussion Questions

1. What is audit sampling?

2. Define the following terms:
a. Error in the context of tests of control
b. Error in the context of substantive tests.

3. What are the two components of detection risk? Explain each component briefly.
4. Can you eliminate sampling risk? Explain.
5. Describe the relationship between sampling risk and sample size.
 6. How is non is non-sampling risk reduced?
7. In tests of control, there are two types of sampling risk. For each type , give a short description
and identify whether it affects audit efficiency or audit effectiveness.
8. In substantive tests, there are two types of sampling risk. For each type, give a short description
and identify whether it affects audit efficiency or audit effectiveness.
9. Which one is of greater concern to the auditor: risk affecting audit effectiveness or risk affecting
audit efficiency? Explain.
10. What are the risk considerations in obtaining audit evidence?
11. Enumerate the different means of selecting items for testing.
12. What are the two general approaches to audit sampling? Explain briefly.
13. What are advantages and disadvantages of statistical sampling?
14. Explain the following sample selection methods:
a. Random number sampling
b. Systematic-sampling
c. Block Selection
d. Haphazard sampling
15. What is stratification?
16. What is value weighted-selection?
17. Give the steps involved in an attribute sampling plan.
18. Give at least three determinants of the sample size for tests of controls. Relate each
determinant to sample size.
19. Give the steps involved in a variable sampling plan.
20. Give at least three determinants of the sample size for substantive tests. Relate each
determinant to sample size.
21. What are other sampling considerations mentioned in PSA 530?
22. When is projection necessary?
23. Discuss the following projection techniques:
a. Difference estimation
b. Ratio estimation
c. Mean-per-unit-estimation
24. What is probability-proportional -to -size (PPS) sampling?

Objective Questions

E11-1 True or False

1) Tests performed on 100% or less than 100% of the items within a population involve
sampling.
2) When designing an audit sample, the auditor should consider the specific audit sample,
the auditor should consider the specific audit objectives, the population from which the
auditor wishes to sample and the sample size.
3) The auditor defines the sampling unit in order to obtain an efficient and effective
sample to achieve the particular audit objectives.
4) Sampling risk arises from the possibility that the auditor's conclusion, based on a
sample, may be different from the conclusion that would be reached if the entire
population were subjected to the same audit procedure.
5) When using either statistical or non-statistical sampling methods, the auditor should
design and select an audit sample, perform audit procedures thereon and evaluate
sample results so as to provide sufficient appropriate audit evidence.
6) The risk of under reliance and the risk of incorrect rejection affect audit efficiency as
they would ordinarily lead to additional work being performed by the auditor, or the
entity, which would establish that the initial conclusions were incorrect.
7) Sample size is affected by the level of sampling risk the auditor is willing to accept and
still conclude that the result form the sample has achieved the audit objective.
8) Tolerable error is the maximum error in the population that the auditor would be willing
to accept and still conclude that the result from the sample has achieved the audit
objective.
9) Smaller sample sizes are justified when the population is expected to be error free.
10) The lower the risk the auditor is willing to accept, the larger the sample size will need to
be.
11) The larger the tolerable error, the greater the sample size will need to be.
12) In substantive procedures, the tolerable error is the maximum rate of deviation from a
prescribed control procedure that the auditor would be willing to accept based on the
preliminary assessment of control risk.
13) If the auditor expects error to be present in the population, a larger sample than when
no error is expected ordinarily needs to be examined to conclude that the actual error in
the population is not greater than the planned error.
14) The auditor should select sample items in such a way that the sample can be expected
to be representative of the population.
15) Systematic selection ensures that all items in the population have an equal chance of
selection.
16) Stratification may be inappropriate to assist in the efficient and effective design of the
sample.
17) The risk of over reliance and the risk of incorrect rejection affect audit effectiveness and
are more likely to lead to an erroneous opinion on the financial statements.

18) Having carried out, on each sample item, those audit procedures that are appropriate to
the particular audit objective, the auditor should analyze any errors detected in the
sample and project the errors found in the sample to the population.

19) The auditor would also consider the qualitative aspects of the errors, these includes the
nature and cause of the error and the possible effect of the error on other phases of the
audit.

20) There is an inverse relationship between the sample size and tolerable rate.
 21) Non statistical sampling can also use statistical formulas and techniques aside from the
auditor’s judgment.

22) Sampling for attributes is generally used in substantive testing. It is designed to detect
misstatements in account balances.

23) Haphazard selection may be an alternative to random selection provided that the auditor
attempts to draw a representative sample from the entire population with no intention to
either include or exclude specific units.

24) One disadvantage of statistical sampling that cost may exceed the benefits derived.

25) The auditor will require a larger sample size if he expects an error in the population.

26) Zero sample size will be required if the population to be tested is expected to be error-
free.

E11-2 Multiple Choice.

1. This refers to applying audit procedures to less than 100% of items within an account balance or
class of transactions such that all sampling units have a chance of selection:
A. Audit evidence.
B. Audit sampling.
C. Selective testing.
D. Risk assessment procedures.
2. Which of the following involves audit sampling?
A. Risk assessment procedures.
B. Analytical Procedures
C. Testing controls that leave no audit trail.
D. None of these.
3. In certain situations, 100% testing is considered by the auditor. Which of the following situations
will most likely lead the auditor to use 100% testing?
A. When the population constitutes a small number of large value items.
B. When the repetitive nature of a calculation or other process performed by a computer
information system makes a 100% examination cost effective.
C. When both inherent and control risks are HIGH and other means do not provide sufficient
appropriate audit evidence.
D. All of these situations will most likely lead the auditor to use 100% testing.
4. Selecting specific items include selecting the following except:
A. Low value or non key items.
B. All items over a certain amount.
C. Items to obtain information.
D. Items to test control activities.
5. Which of the following explanations best describe the distinguishing feature of statistical
sampling?
A. It provides for measuring mathematically the degree of uncertainty that results from
examining only a part of the data.
B. It allows the auditor to have the same degree of confidence as with judgment sampling but
with substantially less work.
C. It allows the auditor to substitute sampling techniques for audit judgment.
D. It provides for measuring the actual misstatements in financial statements in terms of
reliability and precision.
6. Statistical sampling do not allow:
A. More efficient samples.
B. Measurement of sample reliability.
C. Replacement of the auditor’s professional judgment.
D. Measurement of sample risk.
7. There are many kinds of statistical estimates that an auditor may find useful, but basically every
accounting estimate is either of a quantity or of an error rate. The statistical terms that roughly
correspond to “quantities” and “error rate”, respectively are
A. Attributes and variables.
B. Variables and attributes.
C. Constants and attributes.
D. Constants and variables.
8. The sampling method that is most useful when testing for compliance is:
A. Judgment sampling.
B. Unrestricted random sampling with replacement.
C. Attribute sampling.
D. Stratified random sampling.
9. The entire set of data about which the auditor wishes to draw conclusions is called
A. Population
B. Sample
C. Sampling frame
D. Sampling unit
10. A sample in which the characteristics in the sample are the same as those of the population is
A. A random sample.
B. An attributes sample.
C. A variable sample.
D. A representative sample.
11. In sampling for tests of control, “error” refers to:
A. Deviations.
B. Misstatements.
C. Deviations and misstatement
D. Neither deviations nor misstatements.
12. An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of errors in the population is called:
A. Sampling error.
B. Non sampling error.
C. Anomalous error.
D. Projected error.
13. Which of the following comments best illustrates the concept of sampling risk?
A. A randomly chosen sample may not be representative of the population as the whole on the
characteristic of interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific object.
C. An auditor may fail to recognize errors in the documents examined for the chosen sample.
D. The documents related to the chosen sample may not be available for inspection.
14. One of the ways to reduce sampling risk is to
A. Increase the sample size.
B. Carefully design the audit procedures to be used.
C. Provide proper supervision and instruction of the audit team.
D. Use variable sampling rather than attribute sampling.
15. One of the causes of non-sampling error is
A. The use of inappropriate or ineffective audit procedures.
B. Failure to draw a random sample.
C. Failure to draw a representative sample .
D. The use of attributes sampling instead of variables sampling .
16. One of the ways to control non-sampling risk is through
A. Proper supervision and instruction of the clients employees.
B. Proper supervision and instruction of the audit team.
C. The use of attributes sampling rather than variables sampling.
D. Control which ensure the sample drawn is random and representative.
17. The likelihood of assessing control risk too high is that the sample selected to test controls
A. Does not support the auditors planned assessed level of control risk when the true
operating effectiveness of the control structure justifies such an assessments.
B. Contains misstatement that could be material to financial statements when aggregated with
misstatements in other account balance or transactions classes.
C. Contains proportionately fewer deviations from prescribed internal control structure
policies or procedures than exist in the balance or class as a whole.
D. Supports the auditors planned assessed level of control risk when the true operating
effectiveness of the control structure does not justify such an assessment.

18. The consequence of assessing control risk too low relates to the
A. Efficiency of the audit.
B. Effectiveness of the audit.
C. Preliminary estimates of materiality levels.
D. Allowable risk of tolerable error.
19. While performing a substantive test of details during an audit, the auditor determined that the
sample results supported the conclusion that the recorded amount balance was materially
misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
A. Incorrect rejection.
B. Incorrect acceptance .
C. Assessing control risk too low.
D. Assessing control risk too high.
20. The consequence of incorrect acceptance relates to the
A. Efficiency of audit.
B. Effectiveness of the audit
C. Preliminary estimates of materiality levels.
D. Allowable risk of tolerable error.
21. A sample in which every possible combination of items in the population has an equal chance of
constituting the sample is a
A. Representative sample.
B. Statistical sample.
C. Random sample.
D. Judgment sample.
22. The process which requires the calculations of an interval and then selects the items base on
the size of the interval is
A. Statistical sampling.
B. Random selection.
C. Systematic selection.
D. Computerize selection.
23. When performing a test of a control with respect to control over cash receipt, an auditor may
use a systematic sampling technique with a start at any randomly selected item. The biggest
disadvantage of this type of sampling is that the items in the population:
A. Must be systematically replaced in the population after sampling.
B. May systematically occur more than once in the sample.
C. Must be recorded in a systematic pattern before the sample can be drawn.
D. May occur in systematic pattern, thus destroying the sample randomness.
24. When the auditor goes through a population and selects items for the sample without regard to
their size, source, or other distinguishing characteristics, it is called:
A. Block (cluster) selection.
B. Random selection.
C. Systematic selection.
D. Haphazard selection.
25. When selecting a stratified sample, the sample size is
A. Determined for the unstratified population and then apportioned to each stratum.
B. Determine for each stratum and selected from that stratum.
C. Determined for each stratum and selected randomly form the entire unstratified
population.
 D. Always larger than if unstratified sampling has been used.
26. Statistical sampling may be applied to test controls when a client’s control procedures
A. Depend primarily on segregation of duties.
B. Are carefully reduced to writing and are included in client accounting manuals.
C. Leave an audit trail as evidence of compliance.
D. Enable the detection of fraud.
27. Which of the following best describes what the auditor means by the rate of occurrence in the
attribute sampling plan?
A. The number of errors that can be reasonably expected to be found in a population.
B. The frequency with which a certain characteristics occurs within a population.
C. The acceptable risk that the sample is not representative of the population.
D. The peso range within which the true population total can be expected to fall.
28. The deviation rate the auditor expects to find in population, before testing begins, is called the
A. Tolerable deviation rate.
B. Sample deviation rate.
C. Computed upper deviation rate.
D. Population deviation rate.
29. The deviation rate the auditor will permit in the population and still be willing to reduce the
assessed level of control risk is called the:
A. Tolerable deviation rate.
B. Estimated population rate.
C. Acceptable risk of over-reliance.
D. Sample deviation rate.
30. The tolerable rate of deviations for a compliance test is generally
A. Lower than the expected rate of errors in the related accounting records.
B. Higher than the expected rate of errors in the related accounting records.
C. Identical to the expected rate of errors in the related accounting records.
D. Unrelated to the expected rate of errors in the related accounting records.
31. (AICPA) The diagram below depicts the auditor’s estimated maximum deviation rate compared
with the tolerable rate, and also depicts the true population deviation rate compared with the
tolerable rate.
True State of Population
Auditor’s Estimate Based on Sample Deviation Rate Exceeds Deviation rate Less
Results tolerable rate Tolerable rate
Maximum Deviation Rate Exceeds I III
Tolerable rate
Maximum Deviation is Less than II IV
Tolerable Rate

As a result of testing controls, the auditor assesses control risk too high and thereby increases
testing. This is illustrated by situation:
 A. I
B. II
C. III
D. IV
32. Refer to the table in Number 31. The risk assessing control risk too low is illustrated by situation:
A. I
B. II
C. III
D. IV
33. Which of the following combinations results in a decrease in sample size for attributes?
A. Decrease in allowable risk of assessing control risk too low
B. Decrease in tolerable deviation rate
C. Decrease in expected population deviation rate
D. Cannot be determined without additional information
34. Which of the following statements is correct concerning statistical sampling in test of controls?
A. The expected population deviation rate has little or no effect on determining sample size
except for very small populations.
B. As the population size doubles, the sample size also should double.
C. For a given tolerable rate, a larger sample size should be selected as the expected
population deviation rate decreases.
D. The population size has little or no effect on determining sample size except for a very small
population.
35. An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by
matching random numbers with voucher numbers. If a random number matches the number of
avoided voucher, the voucher should ordinarily be replaced by another voucher in random
sample if the voucher
A. Constitutes deviation
B. Has been properly voided
C. Cannot be located
D. Represents an immaterial peso amount
36. The sample deviation rate equals
A. The number of deviation in the population divided by the sample size.
B. The number of items in the population multiplied by the number of deviations in the
sample.
C. The number of deviations in the sample divided by the sample size.
D. The number of deviations in the population divided by the sample size.
37. When assessing the tolerable rate, the auditor should consider that, while deviations from
control procedures increase the risk of material misstatements, such deviations do not
necessarily result in errors. This explains why
A. A recorded disbursement that does not show evidence of required approval may
nevertheless be a transaction that is properly authorized and recorded.
 B. Deviation would result in errors in the accounting records only if the deviations and the
errors occurred on different transactions.
C. Deviations from pertinent control procedures at a given rate ordinarily would be expected
to result in errors in a higher rate.
D. A recorded disbursement that is properly authorized may be nevertheless be a transaction
that contains a material error.
38. When using statistical sampling for tests of controls, an auditor’s evaluation would include a
statistical conclusion concerning whether:
A. Deviations in the population were within an acceptable range.
B. Monetary precision is in excess of a certain predetermined amount.
C. The population’s total monetary value is not in error by more than a fixed amount.
D. Population characteristics occur atleast once in the population.
39. What is an auditor’s evaluation of a statistical sample for attributes when a test of 100
documents results in 4 deviations if tolerable rate of 5%, the expected population deviation rate
is 3%, an the allowance for sampling risk is 2%?
A. Accept the sample results as support for planned reliance on the control because the
tolerable rate less the allowance for sampling risk equals the expected population deviation
rate.
B. Modify planned reliance on the control because the sample deviation plus the allowance for
sampling risk exceeds the tolerable rate.
C. Modify planned reliance on the control because the tolerable rate plus the allowance for
sampling risk exceeds the expected population deviation rate.
D. Accept the sample results as support for planned reliance on the control because the
sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
40. The final step in the evaluation of audit results in test of controls is the decision to:
A. Determine the error in each sample.
B. Determine sampling error and the total population error.
C. Project the point estimate.
D. Conclude whether the control tested is effective or not effective.
41. In applying variables sampling, an auditor attempts to:
A. Estimate qualitative characteristics of interest.
B. Determine various rates of occurrence for specified attributes.
C. Discover atleast one instance of critical deviation.
D. Predict a monetary population value within a range of precision.

42. Tolerate error is a measure of the maximum monetary error that may exist in an account
balance without causing the financial statements to be materially misstate, and is directly
related to:
A. Reliability of evidence.
B. Audit risk .
C. Materiality.
D. Cost-benefit analysis.
43. The risk which the auditor is willing to take of acceptance a balance as correct when the true
error in the balance is equal to or greater than the tolerable misstatements is
A. The upper bound.
B. The acceptable risk of incorrect acceptance.
C. The tolerable risk.
D. The lower bound.
44. Which of the following sample planning factors would influence the sample size for a
substantive test of details for a specific account?
A. Expected amount of misstatements.
B. Measure of tolerable misstatements.
C. Both a and b.
D. None of these.
45. A number of factors influences the sample size for a substantive test of details of an account
balance. All other factors being equal, which of the following would lead to a larger sample size?
A. Greater reliance on internal controls.
B. Greater reliance on analytical procedures.
C. Smaller expected frequency of errors.
D. Smaller measure of tolerable misstatements.
46. How would increases in tolerable misstatements and assessed level of control risk affect the
sample size in a substantive test of details?
A. Increase,increase,respectively.
B. Increase,decrease,respectively.
C. Decrease,increase,respectively.
D. Decrease,decrease,respectively.
47. In statistical sampling methods used in substantive testing, when would an auditor most likely
stratify a population into meaningful groups?
A. If the population has highly variable recorded amounts.
B. If probability proportional to size sampling is used.
C. If the auditor’s estimated tolerable misstatement is extremely small.
D. If the standard deviation of recorded amounts is relatively small.
48. An auditor wishes to sample 200 sales receipt from a population of 5000 receipts issued during
last year. The receipts have preprinted serial numbers and are arranged in chronological (and
thus serial number) order. The auditor randomly chooses a receipt form the first 25 receipts and
then selects ever 25th receipt thereafter. The sampling procedure described here is called
A. Random number sampling
B. Systematic selection
C. Judgment interval sampling
D. Variables sampling
49. Should errors in the sample be projected to the population?
A. Yes, because projection of errors is required by generally accepted accounting standards.
B. No, because the sample misstatement is equal to the total misstatement.
C. Yes, because the misstatement in the sample is not necessarily the total misstatement.
 D. No, because the sample misstatement is larger than the total misstatement.
50. The final step in the evaluation of the audit results in substantive tests is the decision to:
A. Accept the population as fairly stated or to require further action.
B. Determine sampling error and total population error.
C. Project the point estimate.
D. Determine the error in each sample.
51. When would difference estimation or ratio estimation sampling methods be inappropriate?
A. If the average difference between the audit value and book value of a population is large.
B. If the average difference between the audit value and book value of a population is small.
C. If differences between the book value and audit value of a population are numerous.
D. If differences between the book value and audit values of a population are rare.
52. The mean per unit estimation method calculates the estimated total audited value of a
population of accounts receivable as:
A. A summation of the total individual account values in the population.
B. The sample mean audited value multiplied by the number of the items in the population.
C. The estimated total audited of the population multiplied by the number of items in the
sample.
D. The summation of the sample multiplied by the number of discrete samples in the
population.
53. PPS sampling is most appropriate when the auditor
A. Anticipates understatement errors.
B. Anticipates overstatement errors.
C. Expects no errors.
D. Has assessed control risk is HIGH.

Discussion Cases

Case 1- Ratio Estimation

AICPA Using statistical sampling to assist in verifying the year-end accounts payable balance, an external
auditor has accumulated the following data:

Number of Accounts Book balance Balance determined by

the Auditor
Population 4100 50000000 ?
Sample 200 250000 300000
Case 2 (Adapted)- Comprehensive Case on Projection of Errors

An external auditor sent out positive confirmation requests to 8600 customers. The population size is
24000 accounts, with a total recorded value of 1900000. Presented below are the summary results of
the examination of confirmation replies received from customers:

Total book value of sample items examined 799800

Total audited value of sample items examined 756800

Requirements:

1. Using ratio estimation, compute the compute the following:

a. Estimated audited value
b. Projected misstatement
2. Using difference estimation, compute for the projected misstatement.
3. Using mean-per-unit estimation, determine the estimated population value. Assume an
allowance for sampling risk of 200000.