Sampling

I Definition of sampling
Para 3 of IAS 19, 'Audit sampling and other selective procedures' states that: "Audit sampling sampling!
involves the application of audit procedures to less than 1""# of items $ithin an account %alance or class
of transactions such that all sampling units have a chance of selection& 'his $ill ena%le the auditor to
o%tain and evaluate audit evidence a%out some characteristic of the items selected in order to form or
assist in forming a conclusion concerning the population from $hich the sample is dra$n& Audit sampling
can use either a statistical or a non(statistical approach&"
II Importance of sampling
)ul*s of %usiness transactions do not +ustif, a revie$ or audit of the entire account %alances and class of
transactions& An auditor must appl, various methods and techni-ues in selection of a limited si.e of
population to verif, or revie$& Selected sample helps the auditor in forecasting conclusion on the entire
population %ased on the selected sample&
)ased on sample si.e ma, %e varied %ased on the conclusion& Appendi/ 1 of AS 19, 'Audit sampling and
other selective procedures' depicts the follo$ing e/amples of factors in framing sample si.e for 'est of
controls&
Factors Effect on
sample size
An increase in the auditor's assessment of inherent ris* Increase
An increase in the auditor's assessment of control ris* Increase
An increase in the use of other su%stantive procedures directed at the
same financial statement assertion
Decrease
An increase in the auditor's re-uired confidence level or conversel,, a
decrease in the ris* that the auditor $ill conclude that a material error
does not e/ist, $hen in fact it does e/ist!
Increase
An increase in total error that the auditor is $illing to accept tolera%le
error!
Decrease
An increase in the amount of error the auditor e/pects to find in the
population
Increase
III 0is*s
'he ris* associated $ith the sampling is the fact that the incorrect fa*e 1 fraudulent transaction or
procedure ma, not %e selected in sampling& 'his ma, result in dra$ing incorrect conclusions 1 opinion
%ased on the result of the samples %eing selected&
'he -uestion is ho$ to encounter these ris*s associated $ith sampling2 'he auditor has to consider the
follo$ing factors and sampling methodolog, in selection of a sample:
(a) Appropriateness of sample to the objective
Sampling procedures applied shan %e consistent $ith the o%+ectives of the auditor&
(b) Completeness of sample population
In order to achieve the o%+ective of sampling the auditor shall ensure that population is complete in all
respects& 3or e/ample, if the auditor intends to select a sample of pa,ment vouchers from a file,
conclusions cannot %e dra$n unless the auditor is satisfied that all vouchers have in fact %een filed&
4hichever form of sampling is used %, the auditor all the population shall have a chance of selection&
3urther, as the purpose of sampling is to dra$ conclusions a%out the entire population, the internal auditor
shall endeavor to select a representative sample %, choosing samples, $hich have characteristics t,pical
of the population&
I5 Planning 'he Sample
4hen planning the sample, the follo$ing needs to %e considered:
(a) The Audit Objectives
In particular, this $ould %e $hether tests are for over or under statement of an account %alance or class of
transactions&
(b) The Population
'he parameters of the population to %e tested need to %e determined& It must %e ensured that the
population from $hich the sample is to %e dra$n, is appropriate for the specific audit o%+ective for
e/ample, if testing de%tors, the population should %e the de%tors %alances listing6 if testing creditors, the
population should %e su%se-uent dis%ursements, or unpaid invoices or suppliers7 statement!& 4hen
defining a population, the follo$ing should %e remem%ered:
( the results of a test on a sample can onl, %e evaluated to form a conclusion on the population from
$hich the sample is ta*en
( sampling from a population does not esta%lish the completeness of that population i&e& for
completeness other specific tests are performed e&g& chec*ing su%se-uent period e/pense vouchers,
deliver, challans 1 good receiving notes %efore and after ,ear end etc&!&
( the e/tent of *e, or high value items must %e considered
( the different considerations that appl, to de%it or credit %alances $ithin an account %alance
( the e/tent of *e, or high value items must %e considered
( the different considerations that appl, to de%it or credit %alances $ithin an account %alance
( the e/tent to $hich a population can %e divided into smaller populations, each of $hich is a group of
sampling units $ith similar characteristics that is, ho$ stratified the population can %e!&
e&g& In net de%tors, $e have some credit %alances along$ith de%it %alances, thus, the population is
stratified into t$o, a! 8redit )alances and %! De%it )alances&
(c) The Samplin !nit
'he sampling unit needs to %e defined, as the selection of the sample and the evaluation of the test results
depend on the unit selected& 'he value of all units must e-ual the total value of the account %alance or
class of transactions& 9ften the population can %e divided into sampling units in a variet, of $a,s for
e/ample, in de%tor %alances confirmation re-uests, customer %alances, individual invoices or items on
invoices can %e used!&
(d) "efinin Tolerable Error
n in su%stantive testing, the tolera%le error is the ma/imum amount or level of monetar, error $hich can
%e accepted to still conclude that the audit o%+ective has %een achieved& 'olera%le error is considered
at the planning stage and, for su%stantive procedures, is related to +udgement on materialit,& 'he
smaller the tolera%le error, the greater the sample si.e $ill need to %e&
n All errors found from all tests should %e recorded on an overall :summar, of error7 schedule6 the
cumulative effect of all errors found from all audit tests ma, %e material, even if, on an individual test
%asis, errors are less then the tolera%le error level&
n 8onsideration should also %e given as to $hat level or amount of error is e/pected from the test& A
high e/pected error rate $ill impl, that a larger sample should %e ta*en& Presentl,, $e are considering
a medium ris* factor i&e& 1&; as $e heavil, rel, on the results of our su%stantive procedures&
(e) Settin the sample size for substantive tests of transactions and balances
n 'he follo$ing factors are particularl, important $hen setting a sample si.e:
n the sampling ris*
n the tolera%le error rate
n the e/pected error rate
n the population value su%stantive tests of account %alances onl,!
n the num%er of items in the population small populations onl,!
n sampling ris*
Sampling ris* is the ris* that the conclusion, %ased on the sample tested, $ould differ from the
conclusion that $ould %e reached if the entire population $ere su%+ect to testing& Sampling ris* $ill
al$a,s %e present if a sample is tested, rather than 1""# of a population6 the *e, factor is to decide
the level of sampling ris* to accept& 'he vital element in this decision is ho$ much reliance is %eing
placed on the test& 'he reliance on the test $ill %e lo$ if:
n the population tested is inherentl, unli*el, to contain errors
n reliance is %eing placed on anal,tical procedures, or
n reliance is %eing placed on internal controls&
n 'he lo$er the ris* the auditor is $illing to accept, the greater the sample si.e $ill need to %e and
lesser the transaction $ill %e selected for verification& 'herefore, the level of sampling ris* to accept
$ill %e decided %, his assessment of inherent, anal,tical and control ris*& Presentl, %ased on our
e/perience $ith clients and management attitude of companies, $e are setting ris* factor to 1&;&
n Sampling ris* can %e contrasted $ith non(sampling ris*, $hich occurs during an, audit procedures,
since most evidence is persuasive rather than conclusive& 'he auditor ma, use inappropriate
procedures or misinterpret evidence and fail to recognise an error and he attempts to reduce non(
sampling ris* %, appropriate planning, supervision and revie$ procedures&
5 Sampling methodolog,
Sample shall %e dra$n from the most current period that is from the immediatel, ended -uarter& Dra$ing
of sample could %e e/tended to a full ,ear in circumstances $here the result of tests signifies
nonconformit, $ith the internal controls assessed during the preliminar, revie$ stage& In these cases the
%est practice shall %e to dra$ ma+orit, of samples from the most recent period&
5arious techni-ues ma, %e used in selection of a sample depending on the nature, si.e of population and
+udgment of auditor& 'he follo$ing are some of the e/amples of sampling techni-ues&
5I Sampling techni-ues
Sampling is classified as pro%a%ilistic statistical sampling! or non(pro%a%ilistic&
n A pro%a%ilistic sample must %e un%iased so that each element of the population has the same chance
of selection, and the pro%a%ilit, of selection is *no$n& 'he result can then %e statisticall, evaluated,
o%+ectivel, interpreted, and precision and relia%ilit, can %e calculated& )ias can %e avoided %,
choosing samples using a randomi.ation process&
n <on(pro%a%ilit, sampling techni-ues result in samples that ma, not contain each element of the
population& 'here is also no attempt to control %ias, as the auditor decides $hich item to select&
Sample plans are necessar, for an, audit as the, document:
n 'he testing o%+ectives6
n the population si.e and composition the population is the class of transactions %eing tested, and a
sampling unit is an individual element in the population!6
n the method of sampling and the sample si.e6 and
n interpretation of the results&
(a) Statistical samplin
Statistical sampling provides a method to arrive at an informed opinion of the $hole population, on the
%asis of mathematical concepts& 'he ma+or advantage of statistical sampling $ill %e evident if the auditor
has to +ustif, the methods used, as statistical sampling provides an o%+ective, accepta%le methodolog, to
determine the sampling ris*, sample si.e, and an evaluation of the results&
'he most practical use of statistical sampling is in the testing of attri%utes to determine $hether
prescri%ed control procedures are in use& 3or e/ample, attri%utes to %e tested in a sample of vouchers
$ould include the verification that each $as appropriatel, authorised&
'he methods used for selecting the statistical sample include:
Random selection
'he most appropriate method of selection is %, use of random num%ers& 0andom num%er ta%les or
computer program can provide the num%ers& =ach item in the population is e-uall, li*el, to %e selected
and the result can %e statisticall, evaluated&
Systematic selection
'he main characteristic of this method is the use of an interval, for e/ample, selecting ever, tenth item in
a se-uence& 'here is a potential %ias as onl, the first item is selected randoml,& 'herefore a statistical
evaluation of the sample selected is not appropriate&
Rupee unit sampling
'his method has the simplicit, of attri%utes sampling %ut provides a statistical result in rupees& It tests
details of %alances to determine $hether the account %alance %eing audited is fairl, stated& 'he population
is the recorded aggregate rupee amount of the entire population, and a sample unit is an individual
account %alance in rupees&
(b) #udemental samplin
'he selection of a +udgemental sample re-uires professional +udgement& It is more efficient and economic
to use +udgement $here the sample si.es are small, or $here randomisation is not e/pected to provide
representative samples& If a preliminar, surve, indicates that the -ualit, of control in a s,stem is of a high
standard, a revie$ of a small +udgemental sample ma, provide an assurance that the s,stem is actuall, in
operation& 'his approach is appropriate in areas $here the transaction populations are relativel, small,
and the auditor has prior *no$ledge of the population&
In order to ensure that a +udgemental sample is representative, the auditor shall consider the follo$ing:
n =nsure that each ma+or t,pe of transaction is included&
n Include transactions processed %, each person emplo,ed during the period&
n 'est high value items more heavil, than the smaller ones& If these are error free there is a high chance
that the more normal transactions $ill also %e error free&
If errors occur in the sample, +udgement is re-uired to arrive at an opinion on the total population& 'here
ma, %e a need to e/tend or even a%andon a sampling procedure&
9ther non(pro%a%ilistic sampling includes:
Block sampling
Several items are selected in se-uence& 4hen the first item is selected, the remainder are chosen
automaticall,& A sample of 1"" items could consist of > %loc*s of ?"& 3or e/ample, a %loc* sample might
include all input forms in a dail, %atch& 'he limitation of the approach is that the sample is not necessaril,
representative&
Haphazard selection
Such sampling is performed $ithout an, regard to the si.e of the sample population, source or other
distinguishing characteristics& 'he most serious limitation is that the selection cannot %e performed
$ithout some %ias, especiall, if the auditor is seen to select items that are easil, located&
9n the %asis errors found in the sample of the population the auditor shall pro+ect monetar, errors for the
$hole population&
5II @sing Sampling in Auditing
(a) Some Precautions before !nderta$in Statistical Samplin
'he use of sampling in this section is restricted to the follo$ing t$o stages:
a! Determine Sample Si.e
%! @se Statistical 'echni-ue
4e, no$, ma*e out a simple ta%le for calculating Sample Si.e:
Table A
=/tract of sample si.es for Sampling Attri%utes =/pected 0ate of occurrence not over ># 8onfidence
Aevel 9>#&
"esired Precision
%umber of items in population &' (' )'
;""" 1B;> B31 19;
9""" 1>1C B3B 19;
1"""" 1>B3 B3D 199
1>""" 1D?D B3 ?""
?"""" 1DC? BBD ?"1
Table A meats that the auditors $ould li*e a 9># level of assurance or confidence that his results $ill %e
$ithin ?# sa,! precision level of the actual amount& At this point, it $ould %e note$orth, that the
auditor can use a spreadsheet pac*age in computer to calculate random num%ers& This is illustrated
belo*+
Step 1: 9pen a %lan* $or*sheet in the A9'@S(1?3 spreadsheet pac*age&
Step ?: 4rite do$n the total sample si.e in cell A1&
Step 3: 8o to cell A3& Press 1 0ange 3ormat 3i/ed A3&&A?" =nter&
Step B: In cell A3, ',pe E0andFGAG1 and press =nter *e,&
Step >: Press 1 8op, A3 =nter AB&&A?" =nter&
Step D: <ote Do$n the random num%er in cells A3 to A?"&
Step C: 8hange the total sample si.e figure in A1 and all figures $ill automaticall,
change&
Explanation: 'he E0A<D is the random num%er function& It is dependent upon time and $ill change
each time ,ou t,pe it& 'he GAG1 is the a%solute address of cell A1, $hich if copies, $ill not change
relativel,&
Step 3 is necessar, to format the range to .ero decimal places& 'he E0A<D give a num%er %et$een "
and 1 sa, "&"?3>!& 'his is multiplied %, sample si.e to get random num%er&
An e/haustive illustration of audit sampling of attri%utes:
An e/ample of the application of sampling techni-ues on an attri%utes pro%lem is give %elo$:
The population+ (field)
'he audit procedure %eing follo$ing is the sending of letters to selected customers to o%tain confirmation
of their %alances& 'he client has appro/imatel, 1>,""" customers& )alances range from small amounts to
seven digit figures& 9ver ;"# of replies have %een received in the past& As to the %alance ?"#, it is
assumed that the auditors gets satisfaction e-uivalent to the receipt of a signed confirmation from a Hno
repl,I %ecause there e/ist certain customers $ho $ill not repl, no matter ho$ persuasive the re-uest
might %e& So, the sample $ill %e considered to comprise all re-uests not onl, the replies&
(b) ,or$sheet for Evaluation of Statistical Sample for Attributes
&
-
The Population %umber Amount
'otal Population &./// 0s- )(1)2.1///
(
-
The Sample
a! Sample Si.e 33) (Table A) (' precision
%! =rrors found 3(
c! Percentage of total sample (3( 4 33)) 5 &// 6-37'
d! Amount of total error 0s- (/1.//
e! Average =rror per account 0s- ((/1.// 4 33)) 0s- 38-(7
f! 4e assume that Standard =rror is
negligi%le:
g! Appl,ing Average error per account to
total num%er of accounts:
(38-(7 5 &.///) 0s- 8631(//
'his implies that the total error $ill range around 0s& C la*hs& 'hus the auditor ma, modif, his audit
programme accordingl,&