Chapter 17

Audit Sampling for

Tests of Details of
Balances

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Differentiate audit sampling for tests of

details of balances and for tests of controls
and substantive tests of transactions.
Apply statistical sampling to tests of details
of balances.
Apply monetary unit sampling.

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Describe variables sampling.

Use difference estimation in tests of details
of balances.

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1
Differentiate audit sampling for tests of details
of balances and for tests of controls and
substantive tests of transactions.

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Differences among tests

Type
Typeof
ofTest
Test

What
WhatItItMeasures
Measures

Controls

Effectiveness of
controls

Transactions

Monetary
correctness of
transactions
Existence of
material
misstatements
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2014 Pearson Education

Balances
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2
Apply nonstatistical sampling to tests of
details of balances.

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14 steps required in audit sampling for

tests of details of balances.
Steps parallel the sampling approach
used to test controls and/or test
transactions.
There are a few differences because
of the different objectives of the tests.
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Audit sampling for tests of

Audit sampling for testscontrols and substantive
of details of balances
tests of transactions
1. State the objectives
1.
of the audit test.
2. Decide whether audit
2.
sampling applies.
3. Define a misstatement. 3.

State the objectives

of the audit test.
Decide whether audit
sampling applies.
Define attributes and
exception conditions.
4. Define the population.
4. Define the population.
5. Define the sampling unit. 5. Define the sampling unit.
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Audit sampling for tests of

Audit sampling for testscontrols and substantive
of details of balances
tests of transactions
6. Specify tolerable
6.
misstatement.
7. Specify acceptable risk 7.
of incorrect acceptance.

Specify the tolerable

exception rate.
Specify acceptable risk
of overreliance.

8. Estimate misstatements8.
in the population.
9. Determine the initial
9.
sample size.

Estimate the population

exception rate.
Determine the initial
sample size.

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Audit sampling for tests of

Audit sampling for testscontrols and substantive
of details of balances
tests of transactions
10. Select the sample.
10. Select the sample.
11. Perform the audit
11. Perform the audit
procedures.
procedures.
12. Generalize from the
12. Generalize from the
sample to the population.
sample to the population.
13. Analyze the
13. Analyze the exceptions.
misstatements.
14. Decide the acceptability 14. Decide the acceptability
of the population.
of the population.
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Take no action until tests of other audit areas

are completed
Perform expanded audit tests in specific areas
Increase the sample size
Adjust the account balance
Request the client to correct the population
Refuse to give an unqualified opinion

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3
Apply monetary unit sampling.

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MUS is an innovation in statistical

sampling methodology that was
developed specifically for use
by auditors.

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 The definition of the sampling unit

is an individual dollar.
The population size is the recorded
dollar population.
Preliminary judgment of materiality
is used for each account instead of
tolerable misstatement.
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Sample size is determined using a

statistical formula.
A formal decision rule is used for
deciding the acceptability
of the population.
Sample selection is done using
probability proportional to size
sample selection (PPS).

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The auditor generalizes from the

sample to the population using MUS
techniques.
Attribute sampling tables are used to
calculate results
Attribute results must be converted to
dollars
Make an assumption about the % of
misstatement for each item misstated
Determine misstatement bounds.
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Materiality
Assumption of the average percent
of misstatement for population items
that contain a misstatement
Acceptable risk of incorrect acceptance
Recorded population value
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Estimate of the population exception rate

Relationship of the audit risk model
to sample size for MUS

PDR = AAR (IR CR)

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MUS increases the likelihood of selecting

high-dollar items

MUS often reduces the cost of audit testin

Easy to apply
MUS provides a statistical conclusion
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4
Describe variables sampling.

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Frequency of values in percent

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Value of x in dollars
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Three things shape the results of the

experiment of taking a large number of samples
from a known population:
1. The mean value of all the sample means
is equal to the population mean ( ).

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2. The shape of the frequency distribution

of the sample means is that of a normal
distribution (curve), as long as the sample
size is sufficiently large, regardless of the
distribution of the population.
3. The percentage of sample means between
any two values of the sampling
distribution is measurable.

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Frequency of values in percent

Sampling
distribution
Normal
Population
distribution
Skewed

Value of

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Mean

in dollars
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 Difference estimation
Ratio estimation
Mean-per-unit estimation

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 All of the elements of the population are

divided into two or more subpopulations
Each subpopulation is independently tested
The calculations are then made for each
stratum and then combined into one overall
population estimate

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Actual state of the population

Materially
Not materially
Actual audit decisionmisstated
misstated
Conclude that the
population is
materially misstated

Correct
conclusion
no risk

Incorrect
conclusion
risk is ARIR

Conclude that the

population is not
materially misstated

Incorrect
conclusion
risk is ARIA

Correct
conclusion
no risk

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5
Use difference estimation in tests of details of
balances.

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State the objectives of the audit test

Decide whether audit sampling applies
Define misstatement conditions
Define the population
Define the sampling unit
Specify tolerable misstatement
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ARIA

ARIR

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1. Estimate an expected point estimate

2.Make an advance population standard deviation
estimate variability of the population.

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n=
where:

n
SD*
ZA
ZR
N
TM
E*

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SD*(ZA + ZR)N
(TM E *)

=
=
=
=
=
=

initial sample size

advance estimate of the standard deviation
confidence coefficient for ARIA
confidence coefficient for ARIR
population size
tolerable misstatement for the population
(materially)
= estimated point estimate of the population
misstatement
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The auditor must use one of the

probabilistic sample selection methods
to select the items for confirmation.
The auditor must use care in confirming
and performing alternative procedures.

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Generalize from the sample to the population

1. Compute the point estimate of the
total misstatement
2. Compute an estimate of the population
standard deviation
3. Compute the precision interval
4. Compute the confidence limits
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The auditor must evaluate misstatements to

determine the cause of each misstatement
and decide whether modification of the
audit risk model is needed.

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Copyright

All rights reserved. No part of this publication may be reproduced,

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otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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