AUDIT SAMPLING

• “Audit sampling” (sampling) is the application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of selection in order to provide the
auditor with a reasonable basis on which to draw conclusions about the entire population.
• Audit sampling can use either a statistical or a nonstatistical approach.
When to use audit sampling
• Auditors use audit sampling when:
• The nature and materiality of the balance or class does not demand a 100% audit
• A decision must be made about the balance or class
• The time and cost to audit 100% of the population would be too great.
Testing procedures which do not involve sampling
• Tests performed on 100% of the items within a population
• Audit of all “large” accounts
• All items over a certain amount
• Inquiry and observation
• Segregation of duties
• No documentary evidence
• Understanding the entity and its environment
• Analytical procedure

STATISTICAL SAMPLING VS. NON-STATISTICAL SAMPLING

• Statistical sampling is a mathematically derived tool which provides the auditor with an objective basis for
expressing conclusions about population characteristic based upon a sample of items from the population.
• “Statistical sampling” means any approach to sampling that has the following characteristics:
• (a) random selection of a sample; and
• (b) use of probability theory to evaluate sample results, including measurement of sampling risk.
• A sampling approach that does not have characteristics (a) and (b) is considered non-statistical sampling.

Statistical sampling
• Auditors can use statistical sampling when performing test of controls and substantive tests for which
documentary evidence exists that a procedure was performed.
• Example for which documentary evidence exists:
• Those that are related to approving transactions such as sales order that bears the credit manager’s
signature indicating approval of credit
• Keeping adequate documents and records
• Making independent checks on perfomrance
Non-statistical sampling
• Non-statistical or judgment auditor’sampling procedures – are designed and executed on the basis of the
auditor’s sound objective reasoning judgement.
• Although judgment sampling can involve arithmetic concepts. Subjective influence and probabilities
reasoning, they are not formally derived from mathematical sampling proofs and theorems.
• Findings from judgment sampling must always be interpreted subjectively in the professional judgment of the
auditor.
• Although sampling risk exists with nonstatistical sampling, no method for objectively measuring it is
available.

Three common techniques in non-statistical sampling

• Haphazard Sampling
• A haphazard sample consists of sampling units without any conscious bias that is without any
special reason for including or omitting items from the sample.
• For example, a haphazard sample of vouchers contained in a file drawer might be selected by pulling
vouchers from the drawer without regard for the voucher’s size, shape or location of the drawer.
• For example, avoiding difficult to locate items, or always choosing or avoiding the first or last entries
on a page)
• Block Selection
• Block selection involves selection of a block(s) of contiguous items from within the population.
 • Block Sample
• Consists of all items in a selected time period, numerical sequence or alphabetical sequence.
• Example:
• All cash disbursement transactions in the first week of June
• Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it
would rarely be an appropriate sample selection technique when the auditor intends to draw valid
inferences about the entire population based on the sample.
• It cannot generally be relied upon to efficiently produce a representative sample.
• Judgmental Sampling
• Under this selection method, the auditor selects a large or unusual items from the population and uses
some other judgmental criterion for selection.
• This method has a conscious bias and cannot be considered a representative selection method.
•
STATISTICAL SAMPLING VS. NON-STATISTICAL SAMPLING
• The choice between statistical and non-statistical sampling techniques depends on the purpose of the
procedures and other factors.
• Auditor’s must take into account many of the same factors when performing statistical and non-statistical
sampling.
• The primary difference is that some aspects of the procedures are quantified if statistical sampling is used.
Non-statistical sampling does not provide quantified measures of risk.

SAMPLING RISK VS. NON-SAMPLING RISK

SAMPLING RISK
• “Sampling risk” arises from the possibility that the auditor’s conclusion, based on a sample may be different
from the conclusion reached if the entire population were subjected to the same audit procedure.
• Two types of sampling risk:
• the risk the auditor will conclude, in the case of a test of control, that control risk is lower than it
actually is, or in the case of a substantive test, that a material error does not exist when in fact it
does. (Risk of assessing control risk too low (Risk of overreliance)/Beta Risk (incorrect acceptance)/
Type II risk)
• Affect audit effectiveness and is more likely to lead to an inappropriate conclusion
• the risk the auditor will conclude, in the case of a test of control, that control risk is higher than it
actually is, or in the case of a substantive test, that a material error exists when in fact it does not.
(Risk of assessing control risk too high (Risk of underreliance)/Alpha Risk (incorrect rejection)/ Type
I Risk)
• This type of risk affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
NON-SAMPLING RISK
• Non-sampling risk” arises from factors that cause the auditor to reach an erroneous conclusion for any reason
not related to the size of the sample
• most audit evidence is persuasive rather than conclusive,
• the auditor might use inappropriate procedures, or
• the auditor might misinterpret evidence and fail to recognize an error

Selecting Items for Testing to Gather Audit Evidence

• When designing audit procedures, the auditor should determine appropriate means of selecting items for
testing. The means available to the auditor are:
• (a) Selecting all items (100% examination);
• (b) Selecting specific items, and
• (c) Audit sampling.
Selecting all items (100% examination)
• 100% examination may be appropriate;
• when the population constitutes a small number of large value items,
• when both inherent and control risks are high and
• other procedures do not provide sufficient appropriate audit evidence, or
 • when the repetitive nature of a calculation or other process performed by a computer information
system makes a 100% examination cost effective.
• 100% examination is unlikely in the case of tests of control; however, it is more common for substantive
procedures.
Selecting Specific Items
• The auditor may decide to select specific items from a population based on such factors as knowledge of the
client’s business, preliminary assessments of inherent and control risks, and the characteristics of the
population being tested.
• The judgmental selection of specific items is subject to non-sampling risk.
• Specific items selected may include:
• High value or key items
• All items over certain amount
• Items to obtain information
• Items to test procedures
• Note: The auditor considers the need to obtain appropriate evidence regarding the remainder of the population
when that remainder is material.
High value or key items
• The auditor may decide to select specific items within a population because they are of high value, or exhibit
some other characteristic, for example items that are suspicious, unusual, particularly risk-prone or that have a
history of error.
All items over a certain amount.
• The auditor may decide to examine items whose values exceed a certain amount so as to verify a large
proportion of the total amount of an account balance or class of transactions.
Items to obtain information
• The auditor may examine items to obtain information about matters such as the client’s business, the nature of
transactions, accounting and internal control systems.
Items to test procedures.
• The auditor may use judgment to select and examine specific items to determine whether or not a particular
procedure is being performed.

ATTRIBUTE SAMPLING VS. VARIABLE SAMPLING TECHNIQUE

ATTRIBUTE SAMPLING TECHNIQUE

• The auditor uses attribute estimation sampling when he or she is interested in measuring a qualitative feature,
such as the presence or absence of internal control procedure.
• When conducting tests of controls, the auditor must consider both the risk of overreliance and the risk of
underreliance
• In compliance testing of an attribute, the auditor is interested in determining whether the population rate of
occurrence exceeds a tolerable error.
• Rate of deviation > Tolerable error = No attribute examined in internal control
• Rate of deviation < Tolerable error = Internal control possess attribute
• However, to rely on that attribute tested, the auditor should compare the upper precision limit ( rate of
occurrence which statistically exceeds the actual population error rate)
• Upper precision limit > Tolerable error = Do not rely on the internal control related to attribute
examined
• Upper precision limit < Tolerable error = Rely on the internal control related to attribute examined
VARIABLES SAMPLING TECHNIQUE
• It is used by the auditor during substantive testing. This provides an estimate of a peso range within which the
true audited value of the population lies.
• The auditor also considers two aspects of sampling risks:
• Alpha risk or risk of incorrect rejection
• Beta risk or risk of incorrect acceptance

DESIGN OF THE AUDIT

• When designing an audit sample, the auditor should consider the objectives of the test and the attributes of
the population from which the sample will be drawn.
• Objectives
• The auditor first considers the specific objectives to be achieved and the combination of audit
procedures which is likely to best achieve those objectives. Consideration of the nature of the audit
evidence sought and possible error conditions or other characteristics relating to that audit evidence
will assist the auditor in defining what constitutes an error and what population to use for sampling.
• For example
• Test for understatement of accounts payable
• Population
• The entire set of data from which the auditor desires to sample in order to reach a conclusion.
• Appropriate to the objective of the sampling procedure, which will include consideration of the direction of
testing.
• For example, if the auditor’s objective is to test for overstatement of accounts payable, the population
could be defined as the accounts payable listing. On the other hand, when testing for understatement
of accounts payable, the population is not the accounts payable listing but rather subsequent
disbursements, unpaid invoices, suppliers’ statements, unmatched receiving report.
• 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.

Risk and assurance

• In planning the audit, the auditor uses professional judgment to assess the level of audit risk that is
appropriate. This audit risk includes:
• Inherent Risk
• Control Risk
• Detection Risk
• Sample size is affected by the level of sampling risk the auditors is willing to accept from the sample results
and also affected by audit risk.

Tolerable error
• This 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 his audit objectives.
• There is an inverse relationship between the tolerable error and the sample size required.
• In test of control, tolerable error is the maximum rate of deviation from a prescribed control procedure that the
auditor would be willing to accept without altering his planning reliance on the control being tested.
• In substantive procedures, the tolerable error is the maximum monetary error in an account balance or class of
transactions that the auditor would be willing to accept.

Expected error in the population

• In performing test of control, it is rate of error the auditor expects to find in the population to be tested and the
level of control risk.
• In substantive tests, the auditor generally makes a preliminary assessment of the amount of error in the
population.
• There is direct relationship between expected error and sample size.
 • If errors are expected to be present, the auditor would normally examine a large sample. Smaller sample sizes
are justified when the population is expected to be error free.
• Factors to be considered in determining the expected error in the population:
• Error levels identified in previous audits
• Changes in client procedures
• Evidence available from his evaluation of the system of internal control and from results of analytical
review procedures.
Stratification
• Stratification is the process dividing a population into subpopulation, that is, a group of sampling units which
have a similar characteristics.
• The reduction in variability within each stratum results in a smaller overall sample size.
• Stratification enables the auditor to direct his efforts towards the items he considers would potentially contain
the greater monetary error.
• Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-
populations which have an identifying characteristic.
• The objective of stratification is to reduce the variability of items within each stratum and therefore allow
sample size to be reduced without a proportional increase in sampling risk
• When performing substantive procedures, an account balance or class of transactions is often stratified by
monetary value.
• This allows greater audit effort to be directed to the larger value items which may contain the greatest
potential monetary error in terms of overstatement.
• Similarly, a population may be stratified according to a particular characteristic that indicates a higher risk of
error. For example, when testing the valuation of accounts receivable, balances may be stratified by age.
• The results of procedures applied to a sample of items within a stratum can only be projected to the items that
make up that stratum.
• To draw a conclusion on the entire population, the auditor will need to consider risk and materiality in relation
to whatever other strata make up the entire population.
• For example, 20% of the items in a population may make up 90% of the value of an account balance. The
auditor may decide to examine a sample of these items. The auditor evaluates the results of this sample and
reaches a conclusion on the 90% of value separately from the remaining 10% (on which a further sample or
other means of gathering evidence will be used, or which may be considered immaterial).
Value weighted selection
• It will often be efficient in substantive testing, particularly when testing for overstatements, to identify the
sampling unit as the individual monetary units (e.g. pesos) that make up an account balance or class of
transactions.
• Having selected specific monetary units from within the population, for example, the accounts receivable
balance, the auditor then examines the particular items, for example, individual balances, that contain those
monetary units.
• 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.

SAMPLE SELECTION METHODS

• Random Sampling
• A simple random sample is a sample that is selected in such a way that every item in a population has
an equal chance of being selected.
• To use this method, it is necessary to establish correspondence between the population and the
random numbers.
• For example: Sales Invoice
• Correspondence has to be established between the invoice numbers and the digits in the
random number table.
• Systematic Sampling
 • In using this method, the auditor counts through the population and selects items on the basis of a
sampling interval which is determined by dividing the number of physical items by sample size (e.g.
every 25th voucher number or every P1,500)
• Stratified Random Sampling
• Dividing the population into subpopulation, or strata that are similar in amount.
• Sampling with Probability Proportional to Size
• This method of sampling emphasizes larger peso items within an account balance.
• The probability of an item being selected in this method is directly proportional to its peso amount.
• For example:
• P10,000 item has twice the chance being selected as a P5,000 item and ten time the chance of
a P1,000 item
• Each individual peso in the account balance has an equal chance of selection, but each physical unit
does not.
FACTORS INFLUENCING SAMPLE SIZE FOR TEST OF CONTROLS

FACTORS INFLUENCING SAMPLE SIZE FOR SUBSTANSIVE TEST

Performing the Audit Procedure

• The auditor should perform audit procedures appropriate to the particular test objective on each item selected.
• If a selected item is not appropriate for the application of the procedure, the procedure is ordinarily performed
on a replacement item. For example, a voided check may be selected when testing for evidence of payment
authorization.
• If the auditor is satisfied that the check had been properly voided such that it does not constitute an error, an
appropriately chosen replacement is examined
• Sometimes however, the auditor is unable to apply the planned audit procedures to a selected item because,
for instance, documentation relating to that item has been lost.
• If suitable alternative procedures cannot be performed on that item, the auditor ordinarily considers that item
to be in error.
• An example of a suitable alternative procedure might be the examination of subsequent receipts when no reply
has been received in response to a positive confirmation request.
Nature and Cause of Errors
• 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.
• When conducting tests of control, the auditor is primarily concerned with the design and operation of the
controls themselves and the assessment of control risk. However, when errors are identified, the auditor also
needs to consider matters such as:
• (a) the direct effect of identified errors on the financial statements; and
• (b) the effectiveness of the accounting and internal control systems and their effect on the audit
approach when, for example, the errors result from management override of an internal control.
• In analyzing the errors discovered, the auditor may observe that many have a common feature, for example,
type of transaction, location, product line or period of time.
• In such circumstances, the auditor may decide to identify all items in the population that possess the common
feature, and extend audit procedures in that stratum.
• In addition, such errors may be intentional, and may indicate the possibility of fraud.
• Sometimes, the auditor may be able to establish that an error arises from an isolated event that has not
recurred other than on specifically identifiable occasions and is therefore not representative of similar errors in
the population (an anomalous error).
• To be considered an anomalous error, the auditor has to have a high degree of certainty that such error is not
representative of the population.
• The auditor obtains this certainty by performing additional work.
• The additional work depends on the situation, but is adequate to provide the auditor with sufficient
appropriate evidence that the error does not affect the remaining part of the population.
• One example is an error caused by a computer breakdown that is known to have occurred on only one day
during the period.
• In that case, the auditor assesses the effect of the breakdown, for example by examining specific transactions
processed on that day, and considers the effect of the cause of the breakdown on audit procedures and
conclusions.
• Another example is an error that is found to be caused by use of an incorrect formula in calculating all
inventory values at one particular branch.
• To establish that this is an anomalous error, the auditor needs to ensure the correct formula has been used at
other branches.
Projecting Errors
• 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 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, tolerable error is the tolerable misstatement, and will be an amount less than or
equal to the auditor’s preliminary estimate of materiality used for the individual account balances being
audited
• When an error has been established as an anomalous error, 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
nonanomalous errors.
• If an account balance or class of transactions has been divided into strata, the error is projected for each
stratum separately.
• Projected errors 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.
• For tests of control, no explicit projection of errors is necessary since the sample error rate is also the
projected rate of error for the population as a whole.
Evaluating the Sample Results
• 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, an unexpectedly high sample error rate may lead to an increase in the
assessed level of control risk, unless further evidence substantiating the initial assessment is obtained.
 • In the case of a substantive procedure, an unexpectedly high error amount in a sample may cause the
auditor to believe that an account balance or class of transactions is materially misstated, in the absence
of further evidence that no material misstatement exists.
• If the total amount of projected error plus anomalous error is less than but close to that which the
auditor deems tolerable, the auditor considers the persuasiveness of the sample results in the light of other
audit procedures, and may consider it appropriate to obtain additional audit evidence.
• The total of projected error plus anomalous error is the auditor’s 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.
• If the evaluation of sample results indicates that the preliminary assessment of the relevant characteristic of
the population needs to be revised, the auditor may:
• (a) request management to investigate identified errors and the potential for further errors, and to
make any necessary adjustments; and/or
• (b) modify planned audit procedures. For example, in the case of a test of control, the auditor might
increase the sample size, test an alternative control or modify related substantive procedures; and/or
• (c) consider the effect on the audit report.
• The auditor should consider whether errors in the population might exceed the tolerable error.
• To accomplish this, the auditor should compare the projected population error to the tolerable error and also
then compare the sample results to the evidence obtained from other relevant audit procedures when forming
his conclusion about an account balances, class of transactions or specific control.
• The projected population error used for this comparison should be net of adjustments made by the client.
• As projected error approaches tolerable error, the risk of incorrect acceptance or over-reliance increases.
• The auditor should therefore reconsider the sampling risk if he determines that the risk is unacceptable, he
should consider extending his audit procedures or performing alternative audit procedures.
• In compliance procedures, the evaluation of the errors may result in the auditor concluding that the sample
results do not support his planned degree of reliance on a control procedure.
• In this case, he may ascertain that there is another appropriate control on which. he might rely after applying
appropriate compliance procedures.
• Alternatively, he may modify the nature, timing and extent of his substantive procedures.
Conclusion
• Having evaluated the sampling result, the auditor should conclude as to the extent to which he has obtained
sufficient appropriate audit evidence in support of the particular characteristic of the account balance or class
of transaction which he is concerned.