CHAPTER 10

AUDIT
SAMPLING
Related PSA:

PSA 530: audit SAMPLING AND OTHER SELECTIVE TESTING

PROCEDURES
 Topic outline:
1. Definitions 7. Design of the sample
2. Audit Evidence 8. Sample size
3. Test of Controls 9. Selecting the sample
4. Procedures for 10. Performing the audit
obtaining evidence procedure
5. Selecting items for 11. Nature and cause of
testing to gather errors
audit evidence 12. Projecting errors
6. Statistical vs. non-
statistical sampling
approaches
 Definition of terms

Definition of terms:

1. AUDIT SAMPLING
Involves the application of 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.
 Definition of terms

Definition of terms:

2. ERROR
Means either control deviations, when
performing tests of control, or misstatements,
when performing substantive procedures.
Similarly, total error is used to mean either the
rate of deviation or total misstatement.
 Definition of terms

Definition of terms:

3. ANOMALOUS ERROR

Means 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
application.
 Definition of terms

Definition of terms:

4. POPULATION
Means the entire set of data from which a sample is
selected and about which the auditor wishes to
draw conclusions. This term is also used to include
the term stratum.

For example, all of the items in an account balance or a

class of transactions constitute a population. It maybe
divided into strata, or subpopulations, with each stratum
being examined separately.
 Definition of terms

Definition of terms:

5. 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.
 Definition of terms

Definition of terms:

6. CONFIDENCE LEVELS

Mathematical complements of sampling

risks.
 Definition of terms

Definition of terms:

7. NON-SAMPLING RISK

Arises from the factors that cause the auditor

to reach an erroneous conclusion for any
reason not related to the size of the sample.
For example, most audit evidence is
persuasive rather than conclusive, the auditor
might use an inappropriate procedures, or the
auditor might misinterpret evidence and fail to
recognize an error.
 Definition of terms

Definition of terms:

8. SAMPLING UNIT
Means the individual items constituting a
population, for example checks listed on
deposit slips, credit entries on bank
statements, sales invoices or debtors’
balances or a monetary unit.
 Definition of terms

Definition of terms:

9. 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.

*Non-statistical sampling—approach that does not

have characteristics (a) and (b).
 Definition of terms

Definition of terms:

10. STRATIFICATION
Is the process of dividing a population into
subpopulations, each of which is a group of
sampling units which have similar
characteristics (often monetary value).
 Definition of terms

Definition of terms:

11. TOLERABLE ERROR

Means the maximum error in a population
that the auditor is willing to accept.
 Definition of terms

Definition of terms:

12.
The portion of the population that will be
subjected to audit testing. It should be
representative of the population.
 Definition of terms

Definition of terms:

12. SAMPLE
The portion of the population that will be
subjected to audit testing. It should be
representative of the population.
 Definition of terms

Definition of terms:

13. SAMPLING FRAME

Means the documentary evidence which
physically represents the sampling units in
a given population.
 Introduction Introduction

• Audit Evidence
In accordance to PSA 500 “Audit
Evidence”, audit evidence is obtained from
an appropriate mix of tests of controls and
substantive procedures.
 Introduction

• Test of controls
In accordance with PSA 400 “Risk Assessments and
Internal Control”, test of controls are performed if the
auditor plans to assess control risk less than high for a
particular assertion.

Based on his understanding of the

accounting and internal control systems, auditor
identifies:
– characteristics or attributes that indicate performance
of a control
– Possible deviation conditions which indicate
departures from adequate performance
 Introduction

• Test of controls

*Audit Sampling for test of controls is

appropriate when application of control leaves
evidence of performance.
Example:
1. initials of the credit manager on a sales
invoice indicating credit approval
2. evidence of authorization of data input to
a micro computer based on data
processing system.
 Introduction

• Substantive procedures
concerned with the amounts and are of two types: analytical
procedures and test of details of transactions and balances.
purpose is to obtain audit evidence to detect a
material misstatements in the financial statements.
*Audit sampling and other means of selecting items
for testing and gathering audit evidence may be used to
verify one or more assertions about a financial statement.
Example:
1.existence of accounts receivable
2. make an independent estimate of some amount (value
of obsolete inventories)
 Introduction

Procedures for Obtaining Evidence

• PSA 530 par 21:

Procedures for obtaining evidence include
inspection, observation, inquiry and confirmation,
computation and analytical procedures.
The choice of appropriate procedures is a matter of
professional judgment in the circumstances.
 Introduction

Selecting items for testing to gather audit evidence

• PSA 530 par 22:
When designing audit procedures, the auditor
should determine appropriate means of selecting items
for testing. The means available to the auditor are:

1. Selecting all Items (100% examination)

2. Selecting Specific items, and
3. Audit Sampling
 Introduction

• Selecting all items (PSA 530 par 24)

--the auditor may decide that it will be most appropriate
to examine the entire population of items that make up an
account balance or class of transactions.
--unlikely in the case of test of controls but more common
for substantive procedures.
Examples of use:
a. Population constitutes small number of large value items
b. Both inherent and control risks are high and other means do
not provide sufficient appropriate evidence; or
c. Repetitive nature of a calculation or other process performed
by a computer information system makes a 100%
examination cost effective
 Introduction

• Selecting specific items (PSA 530 par 25)

auditor may decide may decide to select specific items from a population
based on such factors as:
• knowledge of the client’s business
• Preliminary assessment of inherent and control
risks
• Characteristics of the population being tested
*Judgmental selection of specific items is subject to non-
sampling risk. Specific items selected may include:
• high value or key items—include also items that are suspicious, unusual,
risk-prone or having history of error
• all items over a certain amount
• Items to obtain information
• Items to test procedures
 Introduction

Selecting specific items (PSA 530 par 25)

• The results of procedures applied to items

selected in this way cannot be projected to
the entire population.

• The auditor considers the need to obtain

appropriate evidence regarding the
remainder of the population when that
remainder is material.
 Audit Sampling

Audit sampling
• PSA 530:
“the application of audit procedures 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”

• Audit sampling is performed on the “assumption” that

the sample selected for testing is representative of
the population.
 Audit Sampling

Audit sampling is not involved in:

1. 100% examination
2. Selective testing; and
3. Audit procedures which either (1) have very limited
purpose and provide only a small portion of the
evidence needed to meet an audit objective or (2)
intentionally exclude a portion of the proportion
such as:
a. Performing a walkthrough test
b. Testing controls that leave no trail (such as observing the
client personnel as they perform internal control activities);
c. Perform analytical procedures
 Audit Sampling

Advantages of sampling over complete (100%) verification

1. Timeliness—sampling requires lesser time;

audit would be completed on a more timely
basis.
2. Efficiency—sampling an considerably audit
costs.
3. Effectiveness—sampling can provide valid
conclusions that the same characteristics as
the population.
 Risk considerations in obtaining evidence

Risk considerations in obtaining evidence

(PSA 530 par 18) In obtaining evidence, the

auditor should use professional judgment to assess
audit risk and design audit procedures to ensure this
risk is reduced to an acceptably low level.

• Audit risk
risk that the auditor gives an inappropriate audit opinion
when the financial statements are materially misstated.
contains inherent risk, control risk and detection risk

• Sampling and Non-sampling risk

 Risk considerations in obtaining evidence

SAMPLING RISKS

The risk that the auditor’s conclusion based on a sample

may be different from the conclusion if the entire population were
subjected to the same audit procedure.

Example:
When performing tests of control, auditor may find no
errors in a sample and conclude that risk is low, when the rate of error
in a population is in fact, unacceptably high.

• Two types of Sampling risks:

– Alpha risks
– Beta risks
 Risk considerations in obtaining evidence

Alpha Risk
--is the risks that the auditor will conclude:

• TEST OF CONTROLS:
– Internal Control is NOT reliable when in fact it is EFFECTIVE and
can be relied upon (risk of underreliance or risk of assessing
control risk too HIGH ); or

• SUBSTANTIVE TEST:
– Material misstatement EXISTS in an account balance or transaction
class when in fact such misstatement does NOT EXIST (Risk of
incorrect REJECTION)
 Risk considerations in obtaining evidence

Alpha Risk

– Result:
Auditor will perform audit procedures more
than what is necessary.

– Effect of sampling risk on audit:

Efficiency
 Risk considerations in obtaining evidence

Beta Risks
--is the risks that the auditor will conclude:

• TEST OF CONTROLS:
– Internal Control is reliable when in fact it is NOT EFFECTIVE and
can be relied upon (risk of overreliance – a.k.a risk of assessing
control risk too LOW ); or

• SUBSTANTIVE TEST:
– Material misstatement does NOT EXIST when in fact
misstatement does EXIST (Risk of incorrect ACCEPTANCE)
 Risk considerations in obtaining evidence

Beta Risk
– Result:
Auditor will perform audit procedures less
than what is necessary thereby affecting auditor’s
ability to detect material misstatements in the
financial misstatements.

– Effect of sampling risk on audit:

Effectiveness—likely to lead to an
inappropriate audit opinion.
 Risk considerations in obtaining evidence

NON-SAMPLING RISK
• PSA 530:
arises from factors that cause the auditor to
reach an erroneous conclusion for any reason not
related to the size of the sample, such as:

1) Failure to select appropriate analytical procedures

2) Failure to recognize errors in documents examined
3) Misinterpreting the results of audit tests
 Risk considerations in obtaining evidence

Controlling the Risks

• Auditors control SAMPLING RISK by

 INCREASING the sample size; and
 Using an appropriate sample selection method.

• NON-SAMPLING RISK can be MINIMIZED by

 Proper planning; and
 Adequate direction, review, and supervision of the audit
team.
 Risk considerations in obtaining evidence

• For both tests of control and substantive tests,

sampling risk can be reduced by increasing
sample size,

• while non-sampling risk can be reduced by

proper engagement planning, supervision, and
review.
 General Approaches to Audit Sampling

General Approaches to Audit

Sampling
• Statistical Sampling —approach to sampling that
has the characteristics of:
 Uses random based selection of sample; and
 Uses the law of probability to measure sampling
risk and evaluate sample results.

• Non-statistical sampling
Purely uses auditor’s judgment in estimating
sampling risks, determining sample size, and
evaluating sample results.
 General Approaches to Audit Sampling

Similarities:
1. Both methods are ACCEPTABLE.
2. Both approaches will require auditor’s
judgment in:
Designing
Selecting sample
Performing audit procedures
Evaluating the results
3. Both approaches CANNOT assure that the
sample will be representative of the
population.
 General Approaches to Audit Sampling
Differences:
 Statistical sampling allows the auditor to
measure or quantify the sampling risks by
using mathematical formula.
 Thus, it helps the auditor to:
Design an efficient sample;
Measure the sufficiency of evidence
obtained; and
Objectively evaluate the sample
results.
However, these benefits cannot be obtained without additional
costs of training audit staff, designing sampling plans, and
selecting items for examination.
 General Approaches to Audit Sampling

Choice of approach—what to
choose?
 The decision of whether to choose statistical or non-
statistical approach is a matter for the auditor’s
judgment.
Example:
In case of tests of control the auditor’s analysis of the nature
and cause of errors will often be more important than the
statistical analysis of the mere presence or absence of errors.

In such a situation, non-statistical sampling may be most

appropriate
• Test of controls —the characteristics of interest is
the deviation or occurrence rate, which is the
number of times a deviation from the prescribed
internal control occurs in the sample.

• Substantive testing —the characteristic of interest

is the monetary amount of misstatement in an
account balance.
 Types of Sampling Plans

Types of Sampling Plans

• Attributes sampling – a statistical sampling plan
used to estimate the frequency of occurrence of a
certain characteristic in a population (occurrence
rate)
--used in test of controls.
This is appropriate:
1) When the auditor wishes to estimate the
true but unknown population deviation rate;
2) If the expected deviation rate is high based
on prior experience.
 Types of Sampling Plans

Types of Sampling Plans

• Variables sampling – used to estimate a numerical
measurement of a population such as PESO VALUE.
• -a sampling plan used in substantive testing to
estimate the total peso amount (or possibly units) of
a population or the peso amount of an error in a
population.
• Simply stated, used in performing substantive test to
estimate the amount of misstatements in the
financial statements.
 Basic Steps in Audit Sampling

Basic Steps in Audit Sampling

1. Define the Objective

2. Determine the Procedure

3. Determine the Sample Size

4. Select the Sample

5. Apply the Procedure

6. Evaluate the Results

Performed whether the auditor uses audit sampling or not.
 Basic Steps in Audit Sampling

1. Define the objective of the test

The audit objective largely determines the
audit procedures to be supplied.
For example, when auditing accounts receivable, the auditor’s
objective could be to determine whether accounts receivable
balances exists as of the balance sheet date.

2. Determine the audit procedure

Determine the specific audit procedure that
will be performed to satisfy the objective. This
step also involves defining the population and
the characteristic to be tested
Using the existence of accounts receivable as an objective, the audit procedures may
invoke sending confirmation letter to customers. The population would be the
customers’ account balances as of the balance sheet date and the characteristic to be
tested would be the monetary amount of misstatement in an account balance.
 Basic Steps in Audit Sampling
3. Determine the sample size
The auditor must decide how many sampling units to include in
the sample.
The auditor may decide to examine only 100 out of the total 5,000
customers’ accounts in order to draw a conclusion whether the total
accounts receivable are actually existing as of the balance sheet date.
– When statistical sampling is used, the auditor determines the sample size
using statistically based formula.
– When non-statistical sampling is used, the sample size is determined by relying
primarily on the auditor’s professional judgment.
4. Select the sample
A sample selection technique must be designed in
such a way that all items in the population will have an
opportunity to be selected.
In selecting the customers to whom confirmation letters will be sent,
the auditor may use a computer software that produces random
numbers that match with the customer numbering system.
 Basic Steps in Audit Sampling
5. Apply the procedures
The auditor applies the planned audit procedure to the
sample.

The auditor sends confirmation letter to the customers selected to

determine the accuracy of the recorded account balances.

6. Evaluate the sample results

to determine whether sufficient evidence has
been obtained to satisfy the objective
The auditor will have to summarize the customers’ confirmation
replies and decide whether the account balance are materially
misstated or whether additional unit procedures need to be
performed.
 Up next…..

Sampling for tests of controls

Sampling for substantive tests
Determination of sample size
Sample selection method
Evaluation of results