Audit Sampling

Audit Sampling
 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.

 It is performed on the assumption that the sample

selected for testing is representative of the
population. Thus, an inference or conclusion can
be drawn about the characteristics of the
population based on the sample results.
 Risks in Sampling
1. Sampling risk-
✔refers to 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 procedures.
✔exists when the sample selected for testing
may not be truly representative of a
population.
2 types of sampling risks:
a) Alpha Risk
✔in the case of tests of control, that internal control is not
reliable when in fact it is effective and can be relied upon (risk
of underreliance)

✔in the case of substantive test , that material misstatement

exists in an account balance or transaction class when in fact
such misstatement does not exist (risk of incorrect
rejection)

✔this type of sampling risk results in an auditor performing

audit procedures more than what is necessary, thus affecting
audit efficiency
b) Beta Risk

✔in the case of tests of control, that internal control is reliable

when in fact it is not effective and cannot be relied upon (risk of
overreliance)

✔in the case of substantive test, that material misstatement does

not exist when in fact material misstatement does exist (risk of
incorrect acceptance)

✔this type of sampling risk results in an auditor performing audit

procedures less than what is necessary thereby affecting the
auditor’s ability to detect material misstatement in the financial
statements, thus affecting the audit effectiveness
2. Non- Sampling Risk
✔Refers to the risk that the auditor may draw incorrect
conclusions about the account balance or class of
transactions because of human errors such as,
application of inappropriate audit procedures, failure
to recognize errors in the sample tested, &
misinterpretation of evidence obtained.

✔This includes all aspects of audit risk that are not due
to sampling.
 Controlling the Risks
 Auditors control sampling risks by:
✔Increasing the sample size.
✔Using an appropriate sample selection
method.

 Non-sampling risk can be minimized by:

✔Proper planning.
✔Adequate direction, review, &
supervision of the audit team.
 General Approaches to Audit Sampling
1. Statistical Sampling
Uses random based selection of sample.
Uses the law of probability to measure sampling risk and
evaluate sample result.
2. Non-statistical Sampling
Purely uses auditor’s judgment in estimating sampling
risks, determining sample size & evaluating sample result.

Both approaches are acceptable.

 The only difference between the 2 methods is that statistical
sampling allows auditor to measure or quantify the
sampling risks by using mathematical formula.
 Audit Sampling Plans
1. Attribute Sampling
A sampling plan used to estimate the frequency of
occurrence of a certain characteristic in a population
(occurrence rate).
Generally used when performing tests of controls to
estimate the rate deviations from prescribed internal
control policies or procedures.
2. Variable Sampling
A sampling plan used to estimate a numerical
measurement of a population such as peso value.
Generally used in performing substantive tests to
estimate the amount of misstatements in the
financial statements.
 Basic Steps in Audit Sampling
1) Define the objective of the test.

2) Determine the audit procedure to be performed.

3) Determine the sample size.

4) Select the sample.

5) Apply the procedures.

6) Evaluate the sample results.

 Sampling for Tests of Controls
I. Determination of Sample Size
3 factors affecting the determination of sample size:
a. Acceptable sampling risk
b. Tolerable deviation rate
c. Expected deviation rate
II. Sample Selection Method
a. Random number selection
b. Systematic Selection
c. Haphazard selection
III. Evaluation of Results
IV. Other Sampling Applications for Tests of Controls
a. Sequential Sampling
b. Discovery Sampling
I. Determination of Sample Size
Factors affecting the determination of sample size:
a. Acceptable sampling risk
✔Sampling risk is inherent in an audit sampling
application. A sample drawn can only be expected to be
representative of the population. The size of the sample is
affected by the level of sampling risks the auditor is
willing to accept.
✔There is an inverse relationship between the
acceptable sampling risk & sample size. The smaller the
sampling risk the auditor is willing to accept, the larger
the sample size to be (and vice versa).
b. Tolerable deviation rate
✔The maximum rate of deviations the auditor is
willing to accept, without modifying the planned
degree of reliance on the internal control.
✔Inversely related to the sample size. Therefore, a
decrease in the tolerable deviation rate will cause the
sample size to increase.
c. Expected deviation rate
✔The rate of deviations the auditor expects to find in
the population before testing begins.
✔Has a direct effect on the sample size; the larger the
expected population deviation rate, the larger would
be the sample size.
II. Sample Selection Method
a. Random number selection
✔Under this method, the auditor selects the sample by matching
random numbers, generated by a random number table or a computer
software generator, with the population numbering system such as
document number.
✔An advantage of this selection technique is that it gives each item in
the population an equal opportunity to be selected.
b. Systematic selection
✔This method involves determining a constant sampling interval and
then selects the sample based on the size of that interval.
✔An advantage of this type of selection is that it is easy to use.
c. Haphazard selection
✔The sample is selected without following an organized or structured
technique.
✔Useful for non-statistical sampling but it is not used for statistical
sampling because the auditor cannot measure the probability of an
item being selected when using this method.
III. Evaluation of Results

Both the qualitative & the quantitative factors of deviations

should be considered.

General guidelines that may be used in evaluating sample

results for tests of controls:
1. Determine the sample deviation rate.
✔Computed by dividing the number of deviations
found in the sample by the sample size.
✔This sample deviation rate represents the auditor’s
best estimate of the deviation rate in the population.
2. Compare the sample deviation rate with the tolerable deviation
rate and draw an overall conclusion about the population.
This comparison may result to the following situation:
✔The sample deviation rate exceeds the tolerable deviation
rate- This means that the sample result do not support the auditor’s
planned degree of reliance on internal control. Hence, control risk will
be assessed at a high level & more extensive substantive tests should be
performed.

✔The sample deviation rate is less than the tolerable

deviation rate- The auditor should consider the allowance for
sampling risk. Before making conclusion, the auditor should
determine how close the sample deviation rate is to the tolerable
deviation rate.
IV. Other Sampling Applications for Tests of Controls
a. Sequential Sampling- can be used as an alternative form of testing
controls when an auditor expects very few deviations within the
population.
✔Sometimes called as stop-or-go sampling because after testing the
sample, the auditor makes a decision of whether to stop or to go on with
the sampling plan.
✔Under this method, the auditor does not use fixed sample size.

b. Discovery Sampling- normally used when the auditor suspects that an

irregularity might have been committed.
✔This is most appropriate when no deviations are expected in the
population & therefore even one deviation would cause concern.
✔Under this method, the auditor determines a sample size sufficient to
discover at least one deviation to confirm whether an irregularity has
occurred.
 Sampling for Substantive Tests
I. Determination of Sample Size
 Factors must be considered:
a) Acceptable sampling risk
b) Tolerable misstatement
c) Expected misstatement
d) Variation in the population
II. Sample Selection Method
a) Stratified sampling
b) Value weighted selection
III. Evaluating the Results
I. Determination of Sample Size
a) Acceptable sampling risk
✔The auditor should consider the components of audit risk-
inherent, control, & detection risks.
✔There is an inverse relationship between the acceptable sampling
risk & the sample size: the lower the risk the auditor accepts, the
larger the sample size must be.
b) Tolerable misstatement
✔The maximum amount of misstatement that the auditor will
permit in the population & still be willing to conclude that the
account balance is fairly stated.
✔ There is an inverse relationship between the tolerable
misstatement and the sample size. A smaller measure of tolerable
misstatement will caused the sample size to increase.
c) Expected misstatement
✔The amount of misstatement that the auditor believes exists in the
population.
✔There is a direct relationship between the expected misstatement
and the sample size. An increase in the amount of misstatement that
the auditor expects to be present in the population will cause the
sample size to increase.
d) Variation in the population
✔When using statistical sampling, this variability is measured by the
standard deviation.
✔A larger sample size is required as the degree of variability within the
population increases.
✔ The auditor can estimate the variation based on the prior year’s tests
results or a pilot sample.
II. Sample Selection Method

a) Stratified sampling
✔It decreases the effect of variance in the population & as a
result, decreases the sample size.
✔It allows the auditor to give more emphasis to those items
with higher monetary value.
b) Value weighted selection
✔Sometimes called probability proportional to size
sampling because the probability of an item to be selected is
directly proportional to the monetary value of such item.
✔Each peso is treated as one sampling unit that’s why value
weighted sampling is also called monetary unit sampling.
III. Evaluation of Results
Steps in evaluating sample results for substantive
tests:
1. Project the misstatements to the population.
a) Ratio estimation
b) Difference estimation
2. Compare the projected misstatements
together with the tolerable misstatements and
draw an overall conclusion.
 EXAMPLE: (Projecting the misstatements to the population)
In terms of Value In terms of Amount of
number of misstatements
customers found
POPULATION P 10,000,000 200 ?
SAMPLE SIZE P 1,000,000 24 P 48,000

Using ratio estimation approach the projected misstatements is determined

as follows:
P 48,000 x (P 10,000,000/P 1,000,000) = P 480,000
Using difference estimation, the projected misstatements will be:
P 48,000 x (200 customers / 24 customers) = P 400,000
✔Note that both methods basically follow the same formula:
Projected misstatements = Amount of misstatements* (Population/Sample Size)
✔The only difference between the 2 methods is that ratio estimation uses the
book values of the population size & sample size to project the misstatement,
while difference estimation uses the number of customers .
2. Compare the projected misstatements together with the
tolerable misstatements and draw an overall conclusion.
✔If the projected misstatement is greater than the tolerable
misstatement, the auditor will conclude that the account
balance is materially misstated. In this case, the auditor may:
a) Examine additional units.
b) Perform suitable alternative procedures.
c) Request the client to adjust the account balance.
✔If the projected misstatement is less than the tolerable
misstatement, the auditor should consider the allowance
for sampling risk. The auditor should recognize that
sampling risk increases as the projected misstatement
approaches the tolerable misstatement.