AUDIT SAMPLING

Audit Sampling
Involves the application of audit

procedures to less than 100% of items within an account balance or class of transactions.

Types Of Sampling
Statistical

Means any approach to sampling that has the following characteristics

Random Selection of a sample

Use of Probability theory to evaluate sample results Nonstatistical

A sampling approach that does not have characteristics of Statistical

AUDIT SAMPLING PLAN

Refers to the procedures an auditor applies to accomplish a sampling application. It aids an auditor in forming conclusions about one or more characteristics of either a particular class of transactions or a particular account balance

AUDIT SAMPLING PLAN

ATTRIBUTE SAMPLING VARIABLE SAMPLING

Applicable to test of control

Used to test an entitys rate of deviation ( also called rate of occurrence) from a prescribed control procedure.

Applicable to

Most commonly used to test whether recorded account balances are fairly stated

substantive tests

SAMPLING RISK
Arises from the possibility that the auditors conclusion, based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedures.

CONFIDENCE LEVEL (Reliability Level)

The mathematical complement of applicable sampling risk factor

NON SAMPLING RISK

Arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the size of sample.
Sampling Risk is to be measured and controlled. The auditor controls sampling risk by specifying the acceptable level when developing the sampling plan

For test of Control, Sampling Risk has the following aspects:

A. Risk of assessing control risk too low (risk of overreliance/beta risk/type II risk)
The risk that the auditor will conclude that control risk is

lower than it actually is It affects audit effectiveness and is more likely to lead to an inappropriate audit opinion

B. Risk of assessing control risk too high (risk of Under reliance/Alpha risk/Type I risk)
The risk that the auditor will conclude that control risk is higher than it actually is

It affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect

For Substantive tests, Sampling Risk has the following aspects:

A.Risk of incorrect acceptance(Beta risk/Type II risk)
The risk that the auditor will conclude that a material error does not exist when in fact it does It affects audit effectiveness and is more likely to lead to an inappropriate audit opinion.

B.Risk of incorrect rejection (Alpha risk/Type I risk)

The risk that the auditor will conclude that a material error exist when in fact it does not

It affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect

STEPS IN AN ATTRIBUTE SAMPLING PLAN

1. Define the Objectives of the Plan 2. Define population. 3. Define the attribute and deviation conditions 4. Determine the sample size 5. Determine the method of sampling selection 6. Perform the Sampling Plan 7. Evaluate and documents results

Determine the sample size

A. Risk of assessing control risk too low
There is an inverse relationship between the risk and the sample size. The higher the acceptable risk, the smaller the sample size
Because the risk of assessing control risk too low relates to the effectiveness of the audit, it is kept at a relatively low level by the auditor.

B. Tolerable deviation Rate

This is the maximum deviation rate that the auditor is willing to accept The lower the rate of deviation rate that the auditor is willing to accept, the larger the sample size needs to be.

Determine the sample size

C. Expected population deviation rate (expected error)
The rate of deviation from the prescribed control procedure the auditor expects to find in the population
The higher the rate of deviation that the auditor expects, the larger the sample size needs to be so as to be in a position to make a reasonable estimate of the actual rate of deviation Factors relevant to the auditors consideration of the expected error rate include:
The auditors understanding of the business Changes in personnel or in the accounting and internal control systems The results of audit procedures applied in prior periods; The results of other audit procedures

Determine the method of sampling selection

Random number Sampling
Each item in the population has an equal chance and nonzero probability of selection It is usually accomplished by generating random numbers from a random number table or computer program and tracing them to associated documents or items in the population It is appropriate for both statistical and nonstatistical sampling

Systematic selection
The number of sampling units in the population is divided by the sample size to give a sampling interval Although the starting point may be determined haphazardly, the sample is more likely to be truly random if it is determined by use of a computerized random number generator or random number tables. When using systematic selection, the auditor would need to determine that sampling units within the population are not structured in such a way that the sampling interval corresponds with a particular pattern in the population

Determine the method of sampling selection

Block selection (or cluster sampling)
It involves selecting a block(s) of contiguous items from within the population It cannot be ordinarily be used in audit sampling because most populations are structured such that items in sequence can be expected to have similar characteristics to each other, but different characteristics from items elsewhere in the population 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

Haphazard selection
The auditor selects the sample without following a structured technique It is not appropriate when using statistical sampling

Determine the method of sampling selection

Stratification
This involves subdividing a population into subpopulations or strata The strata must be explicitly defined so that each sampling unit can belong to only one stratum This method enables the auditor to direct his efforts towards the items he considers would potentially contain the greater monetary error.

Evaluate and documents results

These include: A. Determining the sample deviation rate Sample deviation rate = Number of deviations observed/Sample Size B. Determining the maximum population deviation rate (achieved upper deviation limit) and the allowance for sampling risk (achieved precision) The maximum deviation rate is based on the sample size and the number of deviations discovered. Those are standard tables that yield maximum population deviation rates at specified risks of assessing control risk too low Allowance for sampling risk = Maximum deviation Rate- Sample Deviation Rate C. Considering qualitative information D. Reaching an overall conclusion

COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES

1. Attribute Estimation Sampling
A statistical Sampling plan for test of controls Appropriate when an auditor wishes to estimate a true but unknown population deviation rate Uses a fixed sampling plan

2. Sequential sampling (also called stop or go sampling)

The sampling plan is performed in several steps Following each step, the auditor decides whether to stop or to go on to the next step Appropriate when the auditor expects zero or very few deviations

COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES

3. Discovery sampling
Appropriate when the expected deviation rate is near zero and when the auditors objective is to find at least one deviation in a sample if the actual population deviation rate exceeds or equals a predetermined critical rate (tolerable deviation rate)

STEPS IN A VARIABLES SAMPLING PLAN

1. Determine the objectives of the test 2. Define the population and sampling unit 3. Choose an audit sampling technique
1.Statistical vs Nonstatistical 2.Classical Variables Sampling vs Probability-to Size sampling

4. Determine the sample size 5. Determine the method of sample selection 6. Perform the sampling plan

7. Evaluate the sample results

Determine the sample size

The auditor considers the following: 1.Variation within the population a.Sample size varies in the same direction as the variation in population amounts. As population variation increases, so does the sample size b.An estimation of population variation is made by determining a population standard deviation 2. Acceptable risk of incorrect rejection 3. Acceptable risk of incorrect acceptance

4. Tolerable error-the maximum monetary error that may exist in an account balance without causing the financial statements to be materially misstated

CLASSICAL VARIABLES SAMPLING TECHNIQUES

Mean per unit Estimation A classical variables sampling technique that projects tha sample average to the total population by multiplying the same average by the number of items in the population Difference Estimation A classical variables sampling technique that uses the average difference between audited amounts and individual recorded amounts to estimate the total audited amount of a population and an allowance for sampling risk Ratio Estimation A classical variables sampling technique that uses the ratio of audited amounts to recorded amounts in the sample to estimate amount of a population and an allowance for sampling risk

Conditions for using difference and ratio estimation

Each population item must have a recorded book value

Total population book value must be known

Expected differences between audited and recorded book values must not be too rare

Choosing between difference and ratio estimation:

Ratio estimation is more appropriate when the differences are nearly proportional to book values Difference estimation is more appropriate when there is little or no relationship between the absolute amounts of the differences and the book values

PROBABILITY PROPORTIONAL TO SIZE SAMPLING (PPS)

PPS uses a peso as the sampling unit

PPS sampling gives each individual peso in the population an equal chance of selection
PPS is only useful for TEST OF OVERSTATEMENTS (assets) since the sample selection method dictates that the larger the transaction or amount, the more likely that it will be selected PPS is inappropriate for testing liabilities because understatement is the primary audit consideration

Evaluate the sample results

The following procedures are performed: 1.Projecting the sample error to the population 2.Considering the sampling risk 3.Considering qualitative information 4.Reaching an overall conclusion

FACTORS INFLUENCING SAMPLE SIZE FOR TEST OF CONTROL

FACTOR

EFFECT ON SAMPLE SIZE An increase in the auditors intended reliance on accounting and Increase internal control system
An increase in the rate of deviation from the prescribed control procedure that the auditor is willing to accept (tolerable error) Decrease

An increase in the rate of deviation from the prescribed control procedure that the auditor expects to find in the population
An increase in the auditors required confidence level (or conversely, a decrease in the risk that the auditor will conclude that the control risk is lower than the actual control risk in the population) An increase in the number of sapling units in the population

Increase
Increase

Negligible effect

FACTORS INFLUENCING SAMPLE SIZE FOR SUBSTANTIVE PROCEDURE

FACTOR An increase in the auditors assessment of inherent risk

An increase in the auditors assessment of control risk An increase in the use of other substantive procedure An increase in the auditors required confidence level (or conversely, a decrease in the risk that the auditor will conclude that a material error does not exist, when in fact it does exist)

EFFECT ON SAMPLE SIZE Increase

Increase Decrease Increase

An increase in the total error that the auditor is willing to accept Decrease (Tolerable error) An increase in the amount of error that the auditor expects to find Increase in the population(expected error) Stratification of the population when appropriate Decrease

The number of sampling units in the population

Negligible effect