Part (1)

Chapter (15)
Audit Sampling for Test of Controls and
Substantive Tests of Transactions
1- Representative Samples
A Representative sample , Is one which characteristics in the sample of
audit interest are approximately the same as those of the population ,
This means that the sampled items are similar to the items not sampled ,If
the population contains significant misstatement ,but the sample is free
from misstatement ,the sample is non –representative
Two things can cause a sample result to be non – representative:
1- Sampling error (Sampling risk)
2- Non sampling error (Non sampling risk)
1- Sampling Error(Sampling risk)
1- Is the risk that an auditor reaches an incorrect conclusion because the
sample is not representative of the population
2- Sampling risk is an inherent part of sampling that results from testing
less than the entire population
Sampling error simply means that the sample is not perfectly
representative of the entire population
3- Auditors have two ways to control sampling risk :
a- Adjust sample size, By increasing sample size ,which reduce
sampling risk and vice versa
b- Use an appropriate method of selecting sample items from the
population, which increase the likelihood of representative, and this does
not eliminate or even reduce sampling risk ,but it does allow the auditor to
measure the risk associated with a given sample size if statistical method
of sample selection and evaluation are used
2- Non Sampling Error(Non Sampling Risk)
1-Occurs when the audit tests do not cover existing exceptions in the
sample
2-The Two causes of non- sampling risk are :
a-The auditor failure to recognize exceptions
b-Inappropriate or ineffective audit procedures
3- Methods to control non- sampling risk :
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 - Careful design of audit procedures
- Proper instruction
- Supervision
- Review
2- Statistical Versus Non- Statistical Sampling
Audit sampling methods can be divided into :
1- Statistical
2- Non- Statistical Judgemental Sampling
Similarities & Differences between Statistical
and Non- Statistical Sampling
Similarities Statistical Non- Statistical
Both Involve three phases :
1- Plan the sample
2- Select the sample and perform the tests
3- Evaluate the results

Differences Statistical Non- Statistical

Use of mathematical The auditor does not quantify
measurement sampling risk , Instead , the
(Quantification ) auditor
techniques to calculate Selects those sample items that
Statistical results , the believes will provide the most
sampling risk in planning useful information ,and
and in evaluating results conclusions are reached about
population on judgmental basis

3- Probabilistic Versus Non - Probabilistic

Sampling
1- Non – Probabilistic Sampling Selection
Is a method of selecting a sample in which the auditor uses professional
judgment ,using one of several non- probabilistic Sampling Selection
methods to select sample items
2- Probabilistic Sampling Selection
The auditor randomly selects items such that each population item has a
known probability of being included in the sample

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 Probabilistic Sampling Selection Methods
1-Simple Random sample selection
1- In a Simple random Sample , every possible combination of population
items has been equal chance of selection
2- Auditors use simple random sample when there is no need to
emphasize one or more types of population item
3- Two Methods of simple random sample are use
- A random number table
- Use the computer to generate random numbers
2-Systematic Sample Selection
Steps:
1- Calculate the interval = Population Size / Sample Size
2- Selected Randomly Number (In the scale of interval)
3- First item from sampling = Randomly Number
4- Second item from sampling
= First item from sampling + Interval

Example
Purchases invoices 10,000 invoices , the Sample size 400 invoices , the
auditor selected the first item randomly invoice number 34, determine the
1- Calculate the interval
2- Determine the first ,second and third item (invoice) in the sample
Answer
1- Population size = 10,000
2- The Interval = 10,000 / 400 = 25
3- The number of items selected :
First item (Random) = 34
Second item = 24 + 25 = 59
Third item = 59 + 25 = 84, Reached to 400 items
The Advantage of Systematic Sample Selection :
It is Ease to use
The Disadvantage of Systematic Sample Selection:
Is the possibility of Bias

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 3- Probability Proportional to size and Stratified
Sample Selection
There are two ways to obtain such samples :
First
Take a sample in which the probability of selecting any individual item is
Proportional to its Recorded amount
Second
Divide the population into Subpopulations usually B dollar size and take
larger samples, from subpopulation which larger size , this is called
Stratified Sampling (Ch.17)
4- Sampling For Exception Rates
(Attributes Sampling)
1- Auditors use sampling for test of controls and substantive tests of
transactions to estimate the percent of items in a population containing a
characteristic or attribute of interest ,attributes is the characteristic being
tested in the population
Attributes sampling is a statistical method used to estimate the proportion
or percent which is called Occurrence rate or Exception rate ,usually
expressed as a percentage
2- Auditors are interested in the following types of exceptions :
Deviations from the client’s established controls
3- The exception rate in a sample is used to estimate the exception rate
in the entire population ,The exception rate is the auditor’s (Best Estimate)
of the population exception rate
4- The term (Exception) should be understood to refer to both , deviations
from prescribed control procedures ,and to situation where amounts are
not monetary correct
5- The term (Deviation) refer to specific types of exception of a deviation
from prescribed control procedures
Key Terms :
1-The Precision is the extent to which the sample exception rate and the
actual population exception rate are likely to differ
2- The sampling Risk is that the sample exception rate is not the most
likely estimate of the population rate
3- The Interval Estimate of the population exception rate, is the sample
exception rate (+ & -) the precision of the estimate
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 4- The computed Upper Exception Rate (CUER),The auditor is primarily
interested in knowing the most the exception rate might be , Thus , the
auditor focuses on the Upper Limit of the interval estimate which is termed
the Computed Upper Exception Rate (CUER)
Steps
1- Sample Exception Rate
= Sample Exceptions / Sample Size
2- Computed Upper Exception Rate (CUER)
= Sample Exception Rate + Precision of Estimate
3- Computed Lower Exception Rate (CLER)
= Sample Exception Rate - Precision of Estimate
4- Interval between 2 & 3
Example
Sample of 500 invoices , non attached shipping document 25, and
precision of estimate 2%
Required
Determine the interval
Answer
Determine the interval
1-Sample Exception Rate = 25/500 = 5%
2- CUER = 5% + 2% = 7%
3- CLER = 5% - 2% = 3%
4- Interval is between 3% - 7%

5- Sampling Steps(14)
The Steps for the application of non- statistical audit sampling in testing
transactions for control deviations and monetary misstatements
1-Plan the Sample 2-Select the sample 3-Evaluate the
9 and Perform of the Results
Tests 3
2
1- State audit objectives 10 – Select the Sample 12- Generalize from the
2- Decide if audit sampling 11- Perform the audit sample to the population
applies procedures 13- Decide the acceptability
3- Define attributes and of the population
exception condition 4- Decision
4- Define the population
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5- Define the sampling unit
6- Specify tolerable exception
rate (TER)
7- Specify acceptable risk of
over-reliance (ARO)
8- Estimate population exception
rate (EPER)
9- Determine initial sample size

6- Attributes & Exceptions Condition

Attributes Exceptions Condition
1- Approval of credit sale 1- No approval of authority
2- Shipping document attached to 2- No shipping documents found
invoice
3- Writing account number on sales 3-Account number not written on
invoice sales invoice
4- Invoice exists for each shipping 4- shipping document without
document invoice
5- Evidence that pricing are 5-Lack of verification of pricing
checked

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 Terms Related to Sample Size
Terms Related to Planning
1- Tolerable Exception rate that the auditor will permit in the population,
Exception Rate and still be willing to use the assessed control risk and or the
amount of monetary misstatements
(TER) TER is determined by the auditor based on his professional
judgment
Example : The auditor decides that TER for attribute (1) is 6%
,This means that the auditor has decided that even if 6% of
the duplicate sales invoices are not approved for credit , the
credit approval control is still effective
TER & Sample size inverse relationship
2- Acceptable Risk 1-The risk that the auditor concludes that controls are
of Over-reliance effective than they actually are is the Risk of over-
(ARO) reliance
2-The risk that the auditor is willing to take of
accepting a control as effective, when the true
population exception rate is greater than the tolerable
exception rate (TER)**
Note :Control as effective when the true population
exception rate is greater than TER
3- Estimated Exception rate that the auditor expects to find in the
Population population before testing begins
Exception Rate EPER And small sample size , Direct relationship
(EPER)
4-Initial (Statically) Sample size decided after considering the following
Sample size factors :
1- Population size
2- TER (Tolerable Exception Rate)
3- ARO (Acceptable Risk of Over-reliance)
4- EPER (Estimated Population Exception Rate)

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 7- Determine The Initial Sample Size
1- In Non- Statistical Sampling
Auditors using non-statistical sampling decide the sample size using
Professional Judgement rather than using a statistical formula or
tables
2- Statistical Sampling
Use The Tables To Determine Initial Sample Size (Table 15-8)
Three Factors determine the initial sample size
1- ARO 2- TER 3- EPER
Example :
1-Select the table Corresponding ARO (Two levels %5 & 10%)
For example , the auditor selected ARO = 5%
2- Locate TER 6% , at the top of the table
3-Locate EPER is equal 2% , at the far left column
4-Determine the initial size through the intersects TER 6% and EPER 2% ,
The Sample size = 127
ARO 5%
EPER TER
2 3 4 5 6 ………
.0 149 99 74 59 49
.25 236……………………………………
…………………………..
2 …………………………….
X=127… Sample size
Rules
1- TER …. Increase ….. Sample size ….Decrease … Inverse
TER …. always 2,3,4,5…..In the table ***
2- EPER …. Increase ….. Sample size …. Increase…. Direct
EPER …. 0.0, 0.25, 0.50. 0.75. 1 …….. In the table***
3- Another Table …… ARO is 10%, the same in first table except ARO
4- Precision Estimate = TER – EPER ,More Precision Required
Large Sample size
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Example :
An auditor is willing to reduce assessed control risk for the agreement
between sales orders and invoices does not exceed 6% at 10% on the
basis of past experience , Estimated population exception rate set at 1%
Required
Calculate the Sample size
Answer
ARO = 10% , TER = 6% , EPER = 1%
The initial sample size = 64 items from the table
8-Sensitivity of Sample Size to Change in the
Factors
Determining Sample Size In Case EPER is not Provided in
Table
Example:
ARO = 5% , TER = 9% , Sample size at 5% EPER = 158 , and Sample
size at 4% EPER = 100
Required
Determine the initial Sample size at EPER 4.8%
Answer
1- ARO = 5%
2- TER = 9%
3- EPER = 4.8% is not provided in the table
4- In this case Cross Multiplication is used
* Sample size at 5% EPER = 158
* Sample size at 4% EPER = 100
* Sample size at 1% = 58
* To Compute the items relevant to 0.8%
1% EPER : 58 items
0.8% EPER : ?? (x) items
x = 0.8% x 58 / 1% = 46.4 items
Sample size at 4.8% = Size at 4% + Size at 0.8% …. + EPER Add
= 100 + 46.6 = 146.4 =146 items

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Determining Sample Size In Case TER is not Provided in
Table
Example:
An auditor is willing to reduce assessed control risk for the agreement
between payroll sheet and time card does not exceed 5.5% (TER) at a 5%
(ARO) on the basis of past experience , EPER set at 1.5% ,and Sample
size at 5% TER = 124 , sample size at 6% TER = 103
Required
Calculate the initial Sample size at TER 5.5%
Answer
1- ARO = 5%
2- TER = 5.5% is not provided in the table
3- EPER = 1.5%
4- In this case Cross multiplication is used
* Sample size at 5% TER = 124
* sample size at 6% TER = 103
* sample size at 1% = 21
* To compute the items relevant to 0.8%
1% TER : 21
0.5% TER : ?? (x)
x = 0.5% x - 21 / 1% = -10.5 items
Sample size at 5.5% = Size at 5% + Size at 0.5%..Increase TER… Minus
= 124 – 10.5 = 113.5 = 114 items
Example:
The auditor is willing to reduce assessed control risk for the agreement
between purchases and purchases orders does not exceed 4.5% TER , at
a 10% ARO on the basis of past experience ,EPER set at1.5% , Sample
size at TER 4% is 132 and at TER 5% is 105
Required
What is the initial sample size at TER 4.5%
Answer
1- ARO = 10%
2- TER = 4.5% is not provided in the table
3- EPER = 1.5%
4- In this case Cross Multiplication is used
* Sample size at 4% TER = 132

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 * sample size at 5% TER = 105
* sample size at 1% = Difference = 132 – 105 = 27 items
* To compute the items relevant to 0.8%
1% TER : 27
0.5% TER : ?? (x)
x = (0.5% x 27) / 1% = -13.5 items
Sample size at 4.5% = Size at 4% + Size at 0.5%
= 132 – 13.5 = 118. 5 = 118 items %..Increase TER… Minus
Question .M.T
The following are the results of the statistical sampling of 8 large
population
1 2 3 4 5 6 7 8
ARO 5% 5% 5% 10% 5% 10% 10% 10%
TER 4% 4% 4.8% 7% 5% 6% 7% 7%
EPER 1% 1.5% 1% 2.75% 1% 2.50% 2.55% 2.50%
Statistical Sample 156 192 ? 94 93 110 ? 75
Size
Required
Determine the Statistical Sample Size in population (3) and (7)
Answer
Sample size in Population (3)
Use Population 1 & 5
Population (1) At TER 4% Sample size 156
Population (5) At TER 5% Sample size 93
TER 1% 63 items
1% TER 63 items
0.8% TER X items
X items = (0.8 x 63) / 1 = 50.4 items
Sample size at 4.8% TER
= Sample size at 4 % TER +Sample size at 0.8% % +TER Minus
= 156 – 50.4= 105.4 = 105 items

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Sample size in Population (7)
Use Population 4 & 8
Population (4) At EPER 2.75% Sample size 94
Population (8) At EPER 2.50% Sample size 75
EPER 0.25% 19 items
0.25 EPER 19 items
0.05 EPER X items
X = ( 0.05 * 19 ) /0.25 = 3.8
Sample size at 2.55% EPER ……..increase EPER +
= 75 (2.50) + 3.8 (0.05%) = 78.8 = 79 items

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