CHAPTER 15

Audit sampling for:

Tests of Controls and
Substantive Tests of Transactions

Learning Objectives

1. Explain the concept of representative sampling.

2. Distinguish between statistical and non-statistical sampling, and
between probabilistic and non-probabilistic sample selection.
3. Select samples using probabilistic and non-probabilistic method.
4. Define and describe audit sampling for exception rates.
5. Use non-statistical sampling in TOC and STOT.
6. Define and describe attributes sampling and a sampling distribution.
7. Use attributes sampling in TOC and STOT.

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Learning Objective 1

• Explain the concept of representative sampling.

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 LO1 – Representative samples

A representative sample is one in which the characteristics in

the sample of audit interest are approximately the same as
those of the population.

In practice, an auditor can increase the likelihood of a

representative sample by using care in designing the sampling
process and selection and evaluating the results.
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LO1 - Sampling Risks

Sampling risk is the risk that an auditor reaches an incorrect

conclusion because the sample is not representative of the
population.

Non-sampling risk is the risk that audit tests do not uncover

existing exceptions in the sample.

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LO1 – Minimize Sampling Risks

Sampling Risk Meter

Step 1 Step 2

Use appropriate
Adjust
sample selection
sample size
method

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 Learning Objective 2

• Distinguish between statistical and non-statistical sampling

and between probabilistic and non-probabilistic sample
selection.

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LO2 – Sample selection process

Step 1 Step 2 Step 3

Plan the Select the sample and Evaluate the

sample perform the tests results

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LO2 - Statistical Vs Non-statistical Sampling

Statistical sampling: Apply mathematical rules to quantify sampling

risk in planning the sample (Step 1) & evaluating the results (Step 3)

In nonstatistical sampling those items that the auditor believes will

provide the most useful information are selected

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 LO2 - Probabilistic Vs Non-probabilistic Sample
Selection Methods

Probabilistic sample selection is a 1. Simple random sample selection

method in which each population 2. Systematic sample selection
item has a known probability of 3. Probability proportional to size
being included in the sample. sample selection

Non-probabilistic sample
selection is a method in which the
auditor uses professional judgment
rather than probabilistic methods.
1. Directed sample selection
2. Block sample selection
3. Haphazard sample selection
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LO2 – Applying statistical & Non-statistical

sampling in practice

➢ Auditors can use either statistical or non-statistical sampling methods

➢ All steps of the process must be followed carefully

➢ Statistical sampling must be used with probabilistic selection &

statistical evaluation method.
➢ Non-statistical sampling might be used with probabilistic selection
but never with statistical evaluation method.

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Learning Objective 3

• Select samples using probabilistic and non-probabilistic

methods.

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 LO3 - Probabilistic Sample Selection Methods

1. Simple random sample selection

➢ All items in the population has equal chance of being selected.

➢ Used when there is no need to emphasize one or more types of
population items.
➢ Random numbers might be without replacement, ie. an item could be
included only once in the sample, or with replacement.

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LO3 - Probabilistic Sample Selection Methods

2. Systematic sample selection

➢ The items being selected based on the same interval from random
starting point of the sample.
➢ The interval = population size/ desired sample size.
➢ Possibility of bias as almost items will be chosen automatically,
except the 1st item.
➢ Auditors must consider patterns in the population data.

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LO3 - Probabilistic Sample Selection Methods

3. Probability proportional to size (PPS)

➢ Emphasize population items with larger recorded amount.

➢ 2 ways:
1. The probability of an items being selected is proportional to its
recorded amount.
2. Divided the population into sub-population, usually by dollar size,

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 LO3 - Non-probabilistic Sample Selection

1. Directed sample selection

➢ The selection of each item based on auditor’s judgmental criteria.

➢ Focus on items that:
➢ Most likely to contain misstatements.
➢ Containing selected population characteristics.
➢ Large dollar coverage.

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LO3 - Non-probabilistic Sample Selection

2. Haphazard sample selection

➢ The selection of items without any conscious bias by the auditor.

➢ Population items are selected without regard to their size, source, or
other distinguishing characteristics.

3. Block sample selection

The selection of several items in sequence, only 1 st item is chosen.

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Learning Objective 4

• Define and describe audit sampling for exception rates.

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 LO4 - Sampling for Exception Rates

The occurrence rate, or exception rate is the percent of items in the

population containing the characteristic or specific attribute of interest
to the total number of population items.

Types of exceptions in populations of accounting data:

1. Deviations from client’s established controls

2. Monetary misstatements in populations of transaction data
3. Monetary misstatements in populations of account balance details
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Learning Objective 5

• Use nonstatistical sampling in tests of controls and

substantive tests of transactions.

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LO5 - Terms Used in Audit Sampling

Terms related to planning:

➢ Characteristic or attribute
➢ Acceptable risk of assessing control risk too low (ARACR)
➢ Tolerable exception rate (TER)
➢ Estimated population exception rate (EPER)
➢ Initial sample size
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 LO5 - Terms Used in Audit Sampling

Terms related to evaluating results:

➢ Exception
➢ Sample exception rate (SER)
➢ Computed upper exception rate (CUER)

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LO5 – Phase I: Plan the Sample

Step 1 Step 2 Step 3 Step 4 Step 5
State the Decide Define Define Define the
objectives whether attributes the sampling
of the audit and population unit
audit test. sampling exception
applies. conditions
Step 6 Step 7 Step 8 Step 9
Specify Specify Estimate Determine
the acceptable risk the the initial
tolerable of assessing population sample
exception control risk too exception size
rate low rate.
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LO5 – Phase II: Select the Sample and

Perform the Audit Procedures
Step 10 Step 11
Select the Perform
sample the audit
procedures

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 LO5 – Phase III: Evaluate the Results

Step 12 Step 13 Step 14

Generalize Analyze Decide the
from the exceptions acceptability
sample to of the
the population
population

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LO5 - Guidelines for ARACR & TER TOC

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LO5 - Guidelines for ARACR & TER STOT

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 LO5 - Effect on sample size of changing factors

Effect on initial
Type of change sample size
Increase acceptable risk of overreliance
Increase tolerable risk rate

Increase estimated population exception rate

Increase population size (minor)

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LO5 - Actions when population is not acceptable

➢ Revise TER or ARACR

➢ Expand the sample size

➢ Revise assessed control risk

➢ Communicate with the audit committee or management

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LO5 - Summary of Audit Sampling Steps

To/From Plan the sample

Step 6 (Steps 1-9)
Compare

Select the sample

(Step 10)

Computed No. of
upper Perform the tests exceptions
exception in sample
rate (Step 11) and actual
Step 12

sample size
From

Evaluate the results

To Step 14 (Steps 12-14) To Step 12 15 - 30

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 Learning Objective 6

• Define and describe attributes sampling and a sampling

distribution.

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LO6 - Statistical Audit Sampling

Attributes sampling
➢ Is the statistical sampling method.
➢ It is most used for tests of controls and substantive tests of
transactions is

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LO6 - Sampling Distribution

It is a frequency distribution of the results of all possible samples of a

specified size that could be obtained from a population containing some
specific parameters.

Attributes sampling is based on the binomial distribution.

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 LO6 - Sampling Distribution

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Learning Objective 7

• Use attributes sampling in TOC and substantive tests of

transactions.

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LO7 - Application of Attributes Sampling

➢ Select the sample

➢ Perform the audit procedures

➢ Evaluate the results

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 LO7 - Application of Attributes Sampling

Use of the tables:

i. Select the table corresponding to the ARO.

ii. Locate the TER on the top of the table.
iii. Locate the EPER in the far left column.
iv. Read down the appropriate TER column until it intersects with the
appropriate EPER row. The no at the intersection is the initial sample
size

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LO7 - Application of Attributes Sampling

Effect of population size:

➢ Population size is a minor consideration in determining sample size

➢ Attributable sampling is used for reasonably large populations
thus the reduction of sample size for smaller populations is
ignored.
➢ Representativeness is ensured by the sample selection process more
than by sample size

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©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 9 - 13