AUDIT SAMPLING

Audit sampling

Is performed on the assumption that the sample selected for testing is

representative of the population. Thus, an inference or conclusion can be
drawn about the characteristics of the population based on the sample
results.
Not all testing procedures performed by auditors involve audit sampling. The
auditor may decide that it would be more appropriate to examine the entire
population of items that make up an account balance since the population
constitutes a small number of large value items.
Sampling Risk
Refers to the possibility that the auditors conclusion, based on sample may
be different from the conclusion reached if the entire population were
subjected to the same audit procedures.
The sample selected for testing may not be truly representative of a
population.
Two types:
Alpha Risk is the risk the auditor will conclude
a) In the case of tests of control, that internal control is not reliable
when in fact it is effective and can be relied upon (risk of
underreliance); or
b) In the case of substantive test, that material misstatement exists in
an account balance or transaction class when in fact such
misstatement does not exist (risk of incorrect rejection)
 Beta Risk is the risk the auditor will conclude
a) in the case of tests of control, that internal control is reliable when in fact it
is not effective and cannot be relied upon (risk of overreliance)
b) in the case of substantive test, that material misstatement does not exist
when in fact material misstatement does exist (risk of incorrect acceptance)

Non-sampling Risk
Refers to the risk that the auditor may draw incorrect conclusions about that
the account balance or class of transactions because of human errors such as
application of inappropriate audit procedures, failure to recognize errors in
the sample tested and misinterpretation and evidence obtained.
Controlling the Risks
Sampling Risk
The auditors control sampling risk by
Increasing the sample size
Using appropriate sample selection method
Non-Sampling Risk
The auditor can minimize the control risk by
Proper planning; and
Adequate direction, review, and supervision of the audit team
General Approaches to Audit Sampling
Statistical Sampling- is a sampling approach that
a) uses random based selection of sample; and
b) uses the law of probability to measure sampling risk and evaluate sample
results
Non-statistical sampling- is a sampling approach that purely uses auditors
judgment in estimating sampling risks, determining the sample size, and
evaluating sample results.
Audit Sampling Plans
The auditor may use either attribute or variable sampling plans.
Attribute sampling
a) This is a sampling plan used to estimate the frequency of occurrence of a
certain characteristic in a population (occurrence rate)
b) It is generally used when performing tests of controls to estimate the rate
of deviations from prescribed internal control policies or procedures.
Variable sampling
a) This is a sampling plan used to estimate a numerical measurement of a
population such as peso value.
b) It is generally used in performing substantive tests to estimate the
amount of misstatements in the financial statements.
Basic Steps in audit Sampling

1. Define the Objective

2. Determine the Procedure
3. Determine the Sample size
Statistical Sampling
Non- statistical sampling

4. Select the Sample

5. Apply the Procedures
6. Evaluate the results
Sampling for test of control

Determination of Sample size

Acceptable sampling risk;
Tolerable deviation risk; and
Expected deviation rate

Acceptable sampling risk (ASR)

-the size of sample is affected by the level of sampling risk the auditor is
willing to accept
-inverse relationship between sample size. The smaller the acceptance
sampling risk the auditor is willing to accept, the larger the sample size to be.
Tolerable deviation rate (TDR)
-Maximum rate of deviations the auditor is willing to accept, without
modifying the planned degree of reliance on the internal control.
-Inverse relationship between sample size. Decrease in TDR will cause the
sample size to increase.

Expected deviation rate (EDR)

-Rate of deviation the auditor expects to find in the population before
testing begins.
-Direct relationship between sample size. The larger the EDR the larger the
sample size.
-EDR should not exceed the TDR if so prior testing, auditor generally omits
testing of that control.
Sample Number Selection
Random number selection
Systematic selection
Haphazard selection

Evaluate the results

I. Determine the sample size
II. Compare the sample deviation rate the TDR and draw an overall conclusion about
the population

Other sampling application for test of control

. Sequential sampling
. Discovery sampling
Sampling for substantive test

Substantive test- are concerned with the amounts reported in the financial
statements

Two types of substantive test:

1. Analytical procedures- that involves comparison in the financial
statements with the auditors expectations do not involve sampling
2. Test of details- when it performs audit sampling is appropriate one to
estimate the amount of misstatements in the financial statements.
Determination of Sample Size
a) Acceptable sampling risk
b) Tolerable misstatements
c) Expected misstatements
d) Variation in the population

Acceptable sampling risk

-when determining the acceptable level of sampling risk for substantive test,
the auditor consider the components of audit risk- inherent, control, and
detection risks.
-there is an inverse relationship between the acceptable sampling risk and
sample size.
Tolerable misstatements
-the maximum amount of misstatements that the auditor will permit in the
population and conclude that account balance is fairly stated.
-there is an inverse relationship between the tolerable misstatements and
sample size.

Expected misstatements
-is the amount of misstatement that the auditor believes exists in a
population
-the estimate is based on prior experience with the client, inherent risk,
control, etc.
-there is direct relationship between the expected misstatement and sample
size
Variation in the population
-the peso amount included in the population tends to vary significantly
Sample selection method
1. Stratified sampling
2. Value weighted selection

Stratified sampling
-population divides into separate groups called strata, then a probability
sample is drawn from each group
-stratification enables the auditor to relate sample to materiality, often the
auditor examine a large percentage of the stratum containing high value items

Value weighted selection

-is used when population consist of monetary amounts. The sampling unit is
each individual peso in the account balance. The amounts in the account balance
that contain the selected peso unit are picked as the sample
-amounts with a higher value have greater chance or probability of being
selected
Evaluate the Results
1. Project the misstatements to the population
After the audit procedures to the sample, the auditor may have identified
misstatements in the sampling by using :
a) Ratio estimation
b) Difference estimation

2. Compare the projected misstatements together with the tolerable

misstatements and draw an overall conclusion
*if the projected misstatement is greater than the tolerable misstatements,
the auditor will conclude that the account balance is materially misstated. In
case, auditor may:
a) Examine additional units
b) Perform suitable alternative procedures
c) Request the client to adjust the account balance
*if the projected misstatement is less than tolerable misstatement, the
auditor should consider the allowance for sampling risk
 Post Audit Responsibilities-

Events after the financial statements

have been issued
Subsequent discovery of facts
The auditor has no obligation to make any inquiry about financial statements
that previously issued unless he becomes aware of a material fact,
Which existed at the date of the auditors report
Which, if known at that date may have caused the auditor to modify the report

When the auditor becomes aware of this type of information, he should:

1) Discuss the matter with the appropriate level of management and consider
whether the financial statements need revision
2) Advise management to take the necessary steps to ensure that the users of
the previously issued financial statements are informed of the situation.
Subsequent discovery of omitted procedures

Auditor should follow these guidelines:

1. Assess the importance of the omitted procedures to the auditors ability to

support his opinion
2. Undertake to apply the omitted or the corresponding alternative procedures