Chapter 16

1. Audit sampling is the application of a compliance or substantive procedure to less than 100% of the
items within an account balance or class of transactions to enable the auditor to obtain and evaluate
evidence of some characteristic of the balance or class and to form or assist in forming a conclusion
concerning that characteristic. Furthermore, it establishes standards and provides guidance when the
auditor has decided to use audit sampling in performing audit procedures.

2. Auditors use audit sampling in order to draw conclusions about transactions or account balances
without sustaining the time and cost of examining all available data.

3. Sampling risk is the risk that the auditor’s conclusion based on a sample might be different from the
conclusion they would reach if they examined every item in the entire population. It is also the
probability that a material error will occur during the accounting process. On the other hand, non-
sampling risk is the probability that a material error will not be discovered by the auditor in the
performance of the substantive tests. It arises from factors that cause the auditor to reach an erroneous
conclusion for any reason not related to the size of the sample.

4. An audit sample must be a representative of the population from which it is drawn so that the auditor
will be able to provide a reasonable basis in which he would draw valid conclusions and ensuring that all
samples are representative of their population will avoid bias.

5. Attribute estimation procedures measure qualitative characteristics and is used by the auditor when
he is interested in measuring a qualitative feature, such as the presence of absence of internal control
procedure. On the other hand, variables estimation procedures measure quantitative characteristics and
is used by the auditor during substantive testing. Moreover, it provides an estimate of a peso range
within which the true audited value of the population lies.

6. The factors to be considered in designing an audit sample are audit objectives and population.

7. Stratification is the process of dividing a population into subpopulation. It enables the auditor to
direct his efforts towards the items he considers would potentially contain the greater monetary error. It
may also improve audit efficiency if the auditor stratifies a population by dividing it into discrete
subpopulation which has an identifying characteristic.

8. The advantages of using stratification are being able to reduce the variability of items within each
stratum and therefore allow sample size to be reduced without a proportional increase in sampling risk.
It also allows greater audit effort to be directed to the larger value items which may contain the greatest
potential monetary error in terms of overstatement.

9. The four commonly used sample selection method are random sampling, systematic sampling,
stratified sampling, and sampling with probability proportional to size. Random sampling is a simple
random sample that is selected in a way that every item in a population has an equal chance of being
selected. Systematic sampling, when using this method, allows the auditor to count through the
population and select items on the basis of a sampling interval which is determined by dividing the
number of physical items in the population by sample size. Stratified random sampling are samples that
are drawn from each stratum using one of the random selection methods. Sampling with probability
proportional to size is a method of sampling that emphasizes larger peso items within an account
balance and the probability of an item being selected in this method is directly proportional to its peso
amount.

10. Auditors can control and measure the sampling risk if the statistical sampling is used in
determining sample size and selecting the sample items. In this case, auditors can measure how much
the risk they face and control it by either increase or decrease sample size to have a reasonable low risk.

11. The different audit sampling plan the auditor can use are the following:

a. Attribute Sampling Plan – is used to test an entity’s rate of deviation from a prescribed control
procedure.

b. Variable Sampling Plan – is used to test whether recorded account balances are fairly stated.

c. Statistical Sampling Plan – a sampling technique in which an auditor uses the laws of probability to
select and evaluate a sample.

d. Non-statistical Sampling Plan – these plans rely exclusively on subjective judgment to determine
sample size and to evaluate sample results.

e. Regular or Classical Attributes Sampling – a sampling plan that enables the auditor to estimate the
rate of occurrence of certain characteristics in the population.

f. Discovery Sampling - a form of attributes sampling that is designed to locate at least one deviation in
the population.

g. Sequential (Stop or Go) Sampling – is 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.

h. Probability Proportional to Size (PPS) – a technique, also referred to as peso-unit sampling, which
applies attributes sampling theory to develop an estimate of the total peso amount of misstatement in a
population.

i. Classical Variables Sampling Models – uses normal distribution theory to evaluate selected
characteristics of a population on the basis of a sample of the items constituting the population.

j. Mean-per-unit Estimation – a classical variables sampling plan enabling the auditors to estimate the
average peso value of items in a population by determining the average value of items in a sample.

k. Difference Estimation – a sampling plan that uses the difference between the audited values and book
values of items in a sample to calculate the estimated total audited value of the population.

l. Ratio Estimation – a sampling plan that uses the ratio of audited values to book values of items in the
sample to calculate the estimated total audited value of the population.
m. Regression – is an approach similar to the difference and ratio approaches.

12. First step in evaluating sample result is the analysis of errors in the sample, which the auditor should
consider the sample results, the nature and cause of any errors identified, and their possible effect on
the particular test objective and on other areas of the audit. The second step is the projection of errors,
which the auditor projects the error results of the sample to the population from which the sample was
selected. Third and last step is assessing sampling risk, which 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.

Chapter 17

1. Tests of controls are based on the auditor’s understanding of the accounting and internal control
systems in which he/she identifies the characteristics or attributes that indicate performance of a
control, as well as possible deviation conditions which indicate departures from adequate performance.
Moreover, it is generally appropriate when application of the control leaves evidence of performance.

2.