Part Six
Audit Sampling
Structure of Seminar
•1. Basic Concepts
•2. Sampling Risk
•3. Types of Audit Sampling
•4. Audit Testing with Samples
•5. Statistical Sampling Techniques
•6. Conclusions
1. Basic Concepts
•ASA 530 Audit Sampling
–“a process which includes the application of auditprocedures to less than 100% of items within aclass of transactions or account balance, such thatall sampling units have an equal chance ofselection”
•Used in both tests of controls & substantive tests
•Why is sampling used?
–Cost/benefit analysis
Basic Concepts
—Increase efficiency without compromisingeffectiveness
2. Sampling Risk
•Requirement for reasonable basis in arriving atopinion allows for degree of uncertainty
•Uncertainty involves judgment as to consequences oferroneous opinion (audit risk) versus cost & time ofextra audit effort
•When sampling is used to obtain audit evidence,uncertainties may result from
–The use of sampling (sampling risk)
–Factors unrelated to sampling (non-sampling risk)
Sampling Risk
•conclusion, based on a sample, may be different fromthe conclusion reached if the entire population weresubjected to the same audit procedureSampling risk -the risk arising from the possibility that the auditor’s
•i.e. sample is not representative
•In the case of tests of controls
–Risk of over-reliance
–Risk of under-reliance
•In the case of substantive tests
Sampling Risk
–Risk of incorrect acceptance
–Risk of incorrect rejection
•Impacts on audit efficiency & effectiveness
Sampling risks for tests of controls andsubstantive tests of details
Sampling risks for tests of controls andsubstantive tests of details (cont’d)
Sampling Risk
•How sampling risk be controlled?
–By increasing the sample size
•How can sampling risk be eliminated?
–By testing the whole population!
•Even if sampling risk is zero, non-sampling riskcannot be eliminated!
•Non-sampling risk is risk of reaching wrongconclusion for reasons other than sample size
Sampling Risk
–Human error, relying on wrong info, etc
–Unlike sampling risk, cannot be quantified
–Can be controlled by taking “due care”
3. Types of Audit Sampling
•Sampling can be statistical or non-statistical
•Statistical sampling – random selection, use ofprobability theory to evaluate results, includingquantification of sampling risk
•Non-statistical sampling – other than the above!
•“Haphazard” selection
•Common practice in audit firms
•Emphasis on “auditor judgment”
Types of Audit Sampling
•Other types of testing
–Selecting all items
–Selecting specific items
•High value or key items
•All items over a certain amount
•Items to obtain information
•Items to test control activities
4. Audit Testing with Samples
A.Planning the sample
B.Selecting the sample
C.Performing the audit test
D.Evaluating the results
Audit Testing with Samples
•A. Planning the Sample
1.Determine the objectives of the test
2.Define what errors are being sought
3.Identify the population
4.Consider the use of stratification
5.Define the sampling unit
6.Specify the tolerable error
7.Specify the expected error
8.Specify required confidence level
9.Determine the sample size
Factors that influence sample size for tests ofcontrols
Factors that influence sample size for substantiveprocedures
Audit Testing with Samples
•B. Selecting the Sample
10. Select the sample
•Methods
–Random (statistical sampling)
–Systematic
•divide units by sample size to give samplinginterval
–Haphazard
Audit Testing with Samples
•C. Testing the sample
11. Perform the audit procedures and note errorsdiscovered
–Auditor tests in item in accordance with requiredaudit objective
–Errors or deviations discovered need to beevaluated
Audit Testing with Samples
•D. Evaluating the Results
12. Consider qualitative aspects of errors
13. Project the error to the population andconclude on audit test
–Tests of control – if projected deviation rateexceeds tolerable deviation rate, thenpreliminary control risk assessment notconfirmed – increase substantive tests
–Substantive tests – if projected error exceedstolerable error, more evidence may benecessary – management to adjust account
5. Statistical SamplingTechniques
•Attribute sampling plans (tests of control)
–Attribute sampling
–Sequential sampling
–Discovery sampling
•Variable sampling plans
•PPS - Probability-proportionate-to-size sampling
6. Conclusions
•Sampling is an efficient means of gathering auditevidence
•Sample must be representative of population
•Sample size is a function of
–Risk the auditor is willing to accept
–Magnitude of errors/deviations considered material
–Expected errors/deviations