CHAPTER 9
AUDIT SAMPLING FOR TESTS OF CONTROLS
BASIC AUDIT SAMPLING CONCEPTS
NATURE AND PURPOSE
In the last chapter, we learned about designing
tests of controls and substantive tests of
transactions needed to perform an audit. Before
these tests can be performed, the auditor needs
to decide for each audit procedure the sample
size and items to select from the population.
When the auditor decides to select less than
100% of the population for testing for the purpose
of making conclusions about the population, it is
called audit sampling.
PAS 530, Audit Sampling and Other Testing
Procedures, provides guidance on the use of
sampling in an audit of financial statements.
Audit sampling, whether statistical or
nonstatistical, is the application of an audit
procedure to less than 100% of the items within
an account balance or class of transactions for
the purpose of evaluating some characteristic of
all the items within the balance or class of
transactions.
WHY AUDITORS SAMPLE
No matter how competent the auditor or how
sophisticated the software used, reviewing each
account is a physical impossibility. Even if 100%
of the information could be tested, the cost of
testing would likely exceed the expected benefits
to be derived. What is required is a sampling of
the accounts. Also, auditor uses sampling when
the nature and materiality of the balance or class
does not demand a 100% audit.
TESTING PROCEDURES WHICH DO NOT INVOLVE
SAMPLING
There are many audit procedures which do not
involve sampling:


Inquiry and Observation:
a. Reviewing records for the method of
accounting and other information
b. Observing accounting procedures
c. Discussing methods of accounting
and reporting with buyer
d. Scanning documents for possible
issues
Analytical Review Procedures:
a. Comparing records, reports, and other
information

b. Recomputing or estimating amounts
c. Reviewing trends in reporting
d. Comparing similar businesses
100% Examination:
a. Reviewing all fixed asset purchases,
where appropriate
b. Examining all contracts, where there
are a smaller number
SAMPLING AND NONSAMPLING RISK
The auditor, in every audit engagement, is faced
with uncertainty that material errors may occur
and remain undetected. This uncertainty is
categorized into sampling and non-sampling
risk.
SAMPLING RISK
Sampling risk means the possibility that the
auditor’s conclusion, based on a sample, may be
different from the conclusion that would have
been reached if the entire population were
subjected to the same audit procedure.
Exhibit 9.1 shows the sampling risk the auditor
faced in both tests of control and substantive
procedures
TESTS OF CONTROL
SUBSTANTIVE
PROCEDURES
Risk of Under Reliance
The risk that, although the
sample result does not
support
the
auditor’s
assessment of control risk,
the actual compliance rate
would support such an
assessment.
Risk
of
Incorrect
Rejection
The risk that, although
the
sample
result
supports
the
conclusion
that
a
recorded
account
balance or class of
transactions
is
materially misstated, in
fact it is not materially
misstated.
Risk of Over Reliance
The risk that, although, the
sample result supports the
auditor’s assessment of
control risk, the actual
compliance rate would not
support
such
an
assessment.
Risk
of
Incorrect
Acceptance
The risk that, although
the
sample
result
supports
the
conclusion
that
a
recorded
account
balance or class of
transactions is not
materially misstated, in
fact it is materially
misstated.
The risk of under reliance and the risk of
incorrect rejection audit efficiency as they would
ordinarily lead to additional work being
performed by the auditor, or the entity, which
would establish that the initial conclusions were
incorrect. The risk of over reliance and the risk of
incorrect acceptance affect audit effectiveness
and are more likely to lead to an erroneous
opinion on them financial statements than
either the risk of under reliance or the risk of
incorrect rejection.
Sample size is affected by the level of sampling
risk the auditor is willing to accept from the
results of the sample. The lower the risk the
auditor is willing to accept, the greater the
sample size will need to be.
NON-SAMPLING RISK
Non-sampling risk is the risk of auditor error and
arises from:



Inappropriate or ineffective audit
procedures
Failure to recognize error in the sample
tested
Misinterpretation of evidence obtained
CONTROLLING THE RISKS
There are ways to control or minimize the
sampling and non-sampling risk. Auditors
control sampling risk by:


Adjusting the sample size and
Using the appropriate method of
selecting sample items from the
population
Auditors minimize the non-sampling risk by:


Careful design of the audit procedures,
and
Proper instruction, adequate training,
effective supervision and review of the
audit team.
STATISTICAL AND NON-STATISTICAL SAMPLING
Audit sampling methods can be divided into two
general approaches: statistical and nonstatistical.
STATISTICAL SAMPLING
Statistical sampling is a sampling approach
that applies the laws of probability to aid the
auditor in designing an efficient sample, in
measuring the sufficiency of evidence obtained
and in evaluating the sample results.
Table 9.1 shows the advantages
disadvantages of Statistical Sampling
and
ADVANTAGES
DISADVANTAGES
a. Design an efficient
sample
b. Measure the sufficiency
of evidence obtained.
c. Quantify the sampling
risk
Additional costs of:
a. Training auditors in
the proper use of
sampling techniques
b.
Designing
and
conducting
the
sampling
c. Selecting items for
examination
TYPES OF STATISTICAL SAMPLING TECHNIQUES
A. Attribute sampling
B. Monetary unit sampling
C. Classical variable sampling
NON-STATISTICAL SAMPLING
Non-statistical (judgmental) sampling is a
sampling approach that relies exclusively on
subjective judgement to determine the sample
size and to evaluate the sample results
TYPES OF SELECTION
STATISTICAL SAMPLING
METHOD
FOR
NON-
A. Haphazard sampling
B. Block selection
C. Judgmental sampling
Both approaches (statistical and non-statistical
sampling) require the use of the auditor’s
professional judgement to plan, perform, and
evaluate the sample evidence. In other words, the
use of statistical methods does not eliminate the
need to exercise judgement. A properly designed
statistical sampling. Both approaches are
acceptable and can provide auditors with
sufficient competent evidential matter. The
difference between statistical and nonstatistical sampling is that statistical sampling
allows the auditor to measure quantitively the
sampling risk associated with the procedure.
Figure 9.1 shows the relationship between
statistical and non-statistical sampling.
used by the auditor in performing the
substantive tests to determine whether an
account is materially misstated.
FACTORS AFFECTING THE SAMPLE DESIGN
In designing an audit sample, auditor should
consider the following factors:






Audit objectives
Population
Risk and assurances
Tolerable error
Expected error in the population
Stratification
AUDIT OBJECTIVES
ATTRIBUTE AND VARIABLES SAMPLING
The auditor may use either attribute or various
sampling when using statistical sampling.
ATTRIBUTE SAMPLING
Attribute sampling is a statistical sampling
technique used to estimate the proportion of a
population that possesses a specified
characteristic. The auditor wants to determine
the deviation rate (occurrence rate) for a control
implemented within the entity’s accounting
system. Measurement of deviation rate provides
support for the auditor’s assessed level of
control risk. It is normally used when performing
tests of controls.
VARIABLES SAMPLING
Variables sampling is a statistical technique
used to estimate the monetary value of a class of
transactions or account balance. It is normally
Auditors first consider the specific audit
objectives to be achieved and the audit
procedures which are likely to best achieve those
objectives. In addition, when audit sampling is
appropriate, consideration of the nature of the
audit evidence sought and possible error
conditions or other characteristics relating to
that audit evidence assist auditors in defining
what constitutes an error and what population to
use for sampling. For example, when performing
tests of control over an entity’s purchasing
procedures, auditors are concerned with matters
such as whether an invoice was clerically
checked and properly approved. On the other
hand, when performing substantive procedures
on invoices processed during the period,
auditors are concerned with matters such as the
proper reflection of the monetary amounts of
such invoices in the financial statements.
POPULATION
The population is the entire set of data from
which auditors wish to sample in order to reach
a conclusion. Auditors would determine that the
population from which the sample is drawn is
appropriate for the specific audit objective and
complete. For example, if the auditor’s objective
was to test for overstatement of debtors, the
population could be defined as the debtors
listing. On the other hand, when testing for
understatement of creditors, the population
would not be the creditors listing but rather
subsequent disbursements, unpaid invoices,
suppliers’ statements, unmatched receiving
reports or other populations that would provide
audit evidence of understatement of creditors.
The individual items that make up the
population are known as sampling units. The