Chapter 17: Audit Sampling Concepts

The auditor doesnt look at everything.. The auditor CANNOT look at everything.

Purpose of Sampling
Sampling is a method of obtaining information that will permit an estimate of the value or quality of a population by examining only a portion of the population.

PSA 530
Audit Sampling as the application of a compliance or substantive procedure to less than 100% of the items within an account balance or class of transactions to enable the auditor to obtain and evaluate evidence of some characteristic of the balance or class and to form or assist in forming a conclusion.

Auditors sample when

 The nature and materiality of the balance or class of transactions does not demand a 100% audit  A decision must be made about the balance or class of transactions  The time and cost to audit 100% of the population would be too great

 Note: Not all testing procedures performed by auditors involve audit sampling. The auditor may decide to apply audit procedures only to those items which have particular significance.

Sampling Risk
Sampling risk refers to the possibility that the auditors conclusion, based on a sample maybe different from the conclusion reached if the entire population were subject to the same audit procedures.

Types of Sampling Risk

 Alpha Risk is the risk the auditor will conclude, a. In the case of test of control, that the internal control is not reliable when in fact it is effective. b. In the case of substantive test, that the material misstatements exist in an account balance or transaction class when in fact such misstatement does not exist.

Types of Sampling Risk

 Beta Risk a. Test Control- internal control is reliable when in fact it is not effective and cannot be relied upon. b. Substantive Test- material misstatement does not exist when in fact material misstatement exist

Non-sampling Risk
Non-sampling Risk arises from factors that cause the auditor to reach an erroneous conclusion for any reason related to the size of the sample. Example: Use of inappropriate procedures, misinterpretation of evidence and failure to recognize an error.

Controlling the Risks

 Control Sampling Risk
Increase the sample size Using an appropriate sample selection method

 Control Non-sampling Risk

Proper Planning Adequate direction, review and supervision of the audit team

Approaches to Audit Sampling

Statistical Sampling Non-Statistical Sampling

Statistical Sampling
Statistical Sampling is a mathematically derived tool which provides the auditor with an objective basis for expressing conclusions about population characteristic based upon a sample of items from the population.

Statistical Sampling
Sampling that uses the laws of probability for selecting and evaluating a sample from a population for the purposes of reaching a conclusion about the population
selected at random statistical calculations are used to measure and express the results

Statistical Sampling
Advantages Provides:  for quantitative evaluation of the sample results.  a more defensible expression of the test results.  for more objective recommendations for management.

Statistical Sampling
Disadvantages  Requires random sample selection which may be more costly and time consuming.  Might require additional training costs for staff members to use statistics or specialized software.

Non-Statistical Sampling
Non-Statistical Sampling is an approach that purely uses auditors judgement in estimating sampling risks, determining sample size, and evaluating sample results.

Non-Statistical Sampling
 Directed sample selection, useful for:
Items likely to contain errors Items containing selected characteristics (e.g. old

amounts Large peso item coverage

 Block sample selection (e.g. sequences)  Haphazard sample selection

Non-statistical Sampling
Advantages  Allows the auditor to inject his or her subjective judgment in determining the sample size and selection process to audit items of greatest value and highest risk.  May be designed so that it is equally effective and efficient as statistical sampling while being less costly.

Non-statistical Sampling
Disadvantages  Cannot draw objectively valid statistical inferences from the sample results.  Cannot quantitatively measure and express sampling risk.

Statistical vs. Non-statistical

 Similarities  Both require a structured process involving planning, selection, conducting, evaluating  Any type can be stratified Differences  Sampling risk can be quantified in statistical sampling using mathematical formulae

Sampling process
 For both statistical and non-statistical methods, the four main parts are:

1. Planning the sample 2. Selecting the sample 3. Performing the tests 4. Evaluating the results

Attribute and Variables Sampling Techniques

 Attribute estimation procedures measure qualitative characteristics  Variables estimation procedures measure quantitative characteristics

Design of the sample

 Audit objectives  Population and its characteristics  Risk and Assurance  Tolerable error  Expected error in the population  Stratification

Audit objectives
The auditor first considers the specific objectives to be achieved and the combination of audit procedures which is likely to best achieve those objectives.

Population
Population can be defined in a way to suit the audit tests It is important for the audit to ensure that the population is:
a. Appropriate b. Completeness

Risk and Assurance

In planning the audit, the auditor uses professional judgement to assess the level of audit risk that is appropriate. Audit risks include:
The risk that material errors will occur The risk that the clients system of internal control will not prevent or correct such errors The risk that any remaining material errors will not be detected by the auditor

Tolerable Error
This is the maximum error in the population that the auditor would be willing to accept and still conclude that the result from the sample has achieved its audit objective.

Expected Error in the Population

The following factors should be considered in determining the Expected Error in the Population:

a. Error levels identified in previous audits b. Changes in client procedures c. Evidence available from his evaluation of the system of internal control and from results of analytical review procedures

Stratification
Stratification is the process of dividing a population into subpopulation, that is, a group of sampling units which have similar characteristics.

Sample Selection Methods

Most commonly used selection methods for Statistical and Non-statistical Sampling are as follows..

Sample Selection Methods

a. Random Sampling
 sample that is selected in such a way that every item in a population has an equal chance of being selected  accomplished by using a printed table of random numbers or computer software that generates random numbers

Sample Selection Methods

b. Systematic Sampling
 in using this method, the auditor counts through the population and selects items on the basis of a sampling interval which is determined by dividing the number of physical items in the population by the sample size.

Sample Selection Methods

c. Stratified Random Sampling
 to stratify, the auditor groups the population into subpopulation, or strata that are similar in amount  samples are then drawn from each stratum using one of the random selection methods

Sample Selection Methods

d. Sampling with Probability Proportional to Size
 method of sampling that emphasizes larger peso items within an account balance  the probability of an item being selected in this method is directly proportional to its peso amount

Sample Size
-can be determined by the application of statistically-based formula or through the exercise of professional judgment objectively applied to the circumstances -affected by the level of sampling risk that the auditor is willing to accept -the lower the risk the auditor is willing to accept, the greater sample size will need to be

Examples of Factors Influencing Sample Size for Tests of CONTROL FACTOR

1.An increase in the extent to which the auditors risk assessment takes into account relevant controls 2. An increase in the tolerable rate of deviation 3.An increase in the expected rate of deviation of the population to be tested 4.An increase in the auditors desired level of assurance that the tolerable rate of deviation is not exceeded by the actual rate of deviation in the population. 5.An increase in the number of sampling units in the population

EFFECT ON SAMPLE SIZE INCREASE DECREASE INCREASE

INCREASE NEGLIGIBLE EFFECT

Examples of Factors Influencing Sample Size for Tests of DETAILS FACTOR

1.An increase in the auditors assessment of the risk of material misstatement 2.An increase in the use of other substantive procedures directed at the same assertion 3.An increase in the auditors desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population 4.An increase in tolerable misstatement

EFFECT ON SAMPLE SIZE INCREASE DECREASE INCREASE DECREASE

FACTOR

EFFECT ON SAMPLE SIZE

5.An increase in the amount of misstatement the auditor expects to find in the population

INCREASE

6.Stratification appropriate

of

the

population

when

DECREASE

7.The number of sampling units in the population

NEGLIGIBLE EFFECT

Performing the Audit Procedure

The auditor should perform audit procedures appropriate to the particular test objective on each item selected

Evaluation of Sample Results

Analyze any error detected in the sample Project the errors found in the sample to the population Assess the sampling risk

Evaluation of Sample Results

Analysis of Errors in the Sample - the auditor should consider the sample results, the nature and cause of any errors identified, and their possible effect on the particular test objective and on other areas of the audit

Evaluation of Sample Results

 Projection of Errors
-for substantive procedures, the auditor should project monetary errors found in the sample with the population and should consider the effect of the projected error on the particular test objective and on other areas of the audit. -when an error has been established as an anomalous error, it may be excluded when projecting sample errors to the population. -for tests of control, no explicit projection of errors is necessary.

-the auditor should project the error results of the sample to the population from which the sample was selected -when projecting error results, the auditor should keep in mind the qualitative aspects of the errors found

Evaluation of Sample Results

Assessing Sampling Risk
-the auditor should evaluate the sample results to determine whether the preliminary assessment of the relevant characteristic of the population is confirmed or needs to be revised. -auditor should consider whether errors in the population might exceed the tolerable error.

-as projected error approaches tolerable error, the risk of incorrect acceptance or over reliance increases. The auditor should therefore reconsider the sampling risk and if he determines that the risk is unacceptable, he should consider extending his audit procedures or performing alternative audit procedures.

Conclusion
Having evaluated the sampling result, the auditor should conclude as to the extent to which he has obtained sufficient appropriate audit evidence in support of the particular characteristic of the account balance or class of transaction with which he is concerned.

Detailed Audit Sampling Plan

Audit Sampling
Attributes Sampling in Tests of Control Variable Sampling In Substantive Tests of Details

Statistical

Non-statistical

Statistical

Non-statistical

Regular or Classical

Probability Proportional to Size

Discovery
Sequential or Stop or Go

Classical Mean per unit

Difference Estimation

Ratio Estimation Regression

Attributes Sampling Plan

 used to test an entity's rate of deviation from a prescribed control procedure  audit sampling in which auditors look for the presence or absence of a control condition

Variables Sampling Plan

 used to test whether recorded account balances are fairly stated  might be used by an auditor to test recorded peso amounts for receivables, inventory and fixed asset additions

Statistical Sampling Plan

 sampling technique in which an auditor uses the laws of probability to select and evaluate a sample

Non statistical Sampling Plan

 rely exclusively on subjective judgment to determine sample size and to evaluate sample results

Regular or Classical Statistical Attributes Sampling

 enables the auditor to estimate the rate of occurrence of certain characteristics in the population

Discovery Sampling
 designed to locate at least one deviation in the population  often used in situations in which the auditors expect a very low rate of occurrence of some critical deviation

Sequential (Stop or Go) Sampling

 sample is selected in several steps, with the need to perform each step conditional on the results of the previous steps

Probability Proportional to Size

 also referred to as peso-unit sampling  applies attributes sampling theory to develop an estimate of the total peso amount of misstatement in a population

Classical Variables Sampling Models

 use normal distribution theory to evaluate selected characteristics of a population on the basis of a sample of the items constituting the population  provide the auditors with an estimate of a numerical quantity such as the peso balances of an account

Mean-per-unit Estimation
 classical variables sampling plan enabling the auditors to estimate the average peso value of items in a population by determining the average value of items in a sample

Difference Estimation
 uses the difference between the audited values and book values of items in a sample to calculate the estimated total audited value of the population

Ratio Estimation
 uses the ratio of audited values to book values of items in the sample to calculate the estimated total audited value of the population

Regression
 has the effect of using both the average ratio and the average difference in calculating an estimate of the total amount for the population

Presented by:
 Casas, Lorenz Nicole  Mauhay, Ana Kristina