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What it Audit Sampling
ØApplying a procedure to less than 100% of a population
ØTo estimate some characteristic of the population
 lQualitative
 lQuantitative

Risk
 ØSampling risk
 lrisk that the auditors’ conclusions based on a sample may be different from the conclusion they would reach if they examined every item in the population
 ØNonsampling risk
 lrisk pertaining to nonsampling errors
 lCan be reduced to low levels through effective planning and supervisions of audit engagements

Nonstatistical Sampling
ØThe auditor estimates sampling risk by using professional judgment rather than statistical techniques
ØProvides no means of quantifying sampling risk
 ØSample may be larger than necessary or auditors may unknowingly accept a higher than
 acceptable degree of sampling risk

Advantages of Statistical Sampling
 ØAllows auditors to measure and control sampling risk which helps:
 lDesign efficient samples
 lMeasure sufficiency of evidence
 lObjectively evaluate sample results

Disadvantages of Statistical Sampling
lComplications, need for training
lMathematics, need for computer applications

Selection of Random Sample
 ØRandom sample results in a statistically unbiased sample that may not be a
 representative sample
 ØRandom sample techniques
 lRandom number tables
 lRandom number generators
 lSystematic selection

Other Methods of Sample Selection
 lHaphazard selection
 •Select items on an arbitrary basis, but without any conscious bias
 lBlock selection
 •Block sample consists of all items in a selected time period, numerical sequence or alphabetical sequence
 ØStratification
 lTechnique of dividing population into relatively homogeneous subgroups

Types of Statistical Sampling Plans
 ØAttributes sampling
 ØDiscovery sampling
 ØClassical variables sampling
 ØProbabilityproportionaltosize sampling

Types of Statistical Sampling Plans 
Attributes Sampling
 Qualitative
 Occurrence for operation of control

Types of Statistical Sampling Plans 
Discovery Sampling
 subset of attribute sampling
 used for fraud

Types of Statistical Sampling Plans 
Classical Variable Sampling
Numerical  ck correction of amounts

Dual Purpose Test
 ØTested used both as a test of control and
 substantiating the dollar amount of an account balance
lEx. Test to evaluate the effectiveness of a control over recording sales transactions and to estimate the total overstatement or understatement of the sales account

Allowance for Sampling Risk
ØAmount used to create a range, set by + or – limits from the sample results, within which the true value of the population characteristic being measured is likely to lie
 ØPrecision
 ØWider the interval, more confident but less
 precise conclusion
 ØCan be used to construct a dollar interval

Sample Size
 sample risk DOWN sample size UP
 sample risk UP sample size DOWN
 ØSignificant effect on allowance for sampling
 risk and sampling risk
 lSample size increase > sampling risk and allowance for sampling risk decrease
 ØSample size affected by characteristics of
 population
 lGenerally as Population increases > sample size increase

Requirements of Audit Sampling Plans
 ØWhen planning the sample consider:
 lThe relationship of the sample to the relevant audit objective
 lMateriality or the maximum tolerable misstatement or deviation rate
 lAllowable sampling risk
 lCharacteristics of the population
 ØSelect sample items in such a manner that
 they can be expected to be representative of the population
 ØSample results should be projected to the
 population
 ØItems that cannot be audited should be
 treated as misstatements or deviations in evaluating the sample results
 ØNature and cause of misstatements or
 deviations should be evaluated

Sampling RisksTests of Controls
Risk of assessing control risk too high
Risk of assessing control risk too low

Sampling RisksTests of Controls 
Risk of assessing control risk too high
 !EFFICIENCY
 !Testing too much (better than testing too little)
 !Assessing control risk at a higher level than is warranted
 !Saying it is inadequate when it is actually adequate

Sampling RisksTests of Controls 
Risk of assessing control risk too low
 !EFFECTIVENESS
 !Not testing enough (VERY BAD)
 !Assessing control risk at a lower level than is warranted
 !Saying it is adequate when it is actually inadequate

Audit Sampling Steps for Tests of Controls
ØDetermine the objective of the test
ØDefine the attributes and deviation conditions
ØDefine the population to be sampled
 ØSpecify:
 lThe risk of assessing control risk too low
 lThe tolerable deviation rate
ØEstimate the population deviation rate
ØDetermine the sample size
ØSelect the sample
ØTest the sample items
ØEvaluate the sample results
ØDocument the sampling procedure

Attributes Sampling: Relationship Between the Planned Assessed Level of Control Risk and
the Tolerable Deviation Rate

Sampling RisksSubstantive Tests
 Risk of incorrect rejection:
 results will indicate that account balance is materially mistated when it not mistated
 Risk of incorrect acceptance:
 results will indicate that account balance is not materially mistated when it is

Audit Sampling Steps for Substantive Tests
ØDetermine the objective of the test
ØDefine the population and sampling unit
ØChoose an audit sampling technique
ØDetermine the sample size
ØSelect the sample
ØTest the sample items
ØEvaluate the sample results
ØDocument the sampling procedure

Nonstatistical Variables Sampling Illustration
 lPopulation: •Size=363•BV=$200,000
 lTolerable misstatement = $10,000
 lRisk assessments:
 •Inherent and control risk=Slightly below Max
 •Other substantive tests = Moderate

Audit Risk
 AR = IR x CR x DR
 where
 ØAR=The allowable audit risk that a material misstatement might remain undetected for
 the account balance and related assertions.
 ØIR= Inherent risk, the risk of a material misstatement in an assertion, assuming
 there were no related controls.
ØCR= Control risk, the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by internal control.
ØDR= Detection risk, the risk that the auditors’ procedures will fail to detect a material misstatement if it exists.

