Auditing &

Assurance
Services,
6e

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Module G
Variables Sampling

USA Today has come out with a new survey – apparently, three out
of every four people make up 75 percent of the population.
David Letterman, American comedian and television host

Mod G-2
Module G Objectives
1. Define variables sampling and understand when it is used in the audit.
2. Understand the basic process underlying monetary unit sampling
(MUS) and when to use it.
3. Identify the factors affecting the size of an MUS sample and calculate
the sample size for an MUS application.
4. Evaluate the sample results for an MUS by calculating the projected
misstatement, incremental allowance for sampling risk, and basic
allowance for sampling risk.
5. Understand the basic process underlying classical variables sampling
and the use of classical variables sampling in the audit.
6. Understand the use of nonstatistical sampling for variables sampling.

Mod G-3
Variables Sampling
• Variables sampling is used to estimate the amount (or value) of
a population
• Substantive procedures
– Estimate account balance or misstatement
– Compare estimated account balance or misstatement to recorded
amount or tolerable misstatement
• Approaches
– Monetary unit sampling (MUS)
– Classical variables sampling

Mod G-4
Major Topics
I. Monetary Unit Sampling (MUS)
− Basics of MUS
− Determining Sample Size
− Selecting and Measuring Sample Items
− Evaluating Sample Results

II. Classical Variables Sampling

III. Nonstatistical Sampling

Mod G-5
Monetary Unit Sampling
(MUS)
• Defines the sampling unit as an individual dollar (or
other monetary unit) in an account balance
• Auditor will select individual dollars (or monetary
units) for examination
• Auditor will verify the entire “logical unit”
containing the selected dollar (or monetary unit)
– Accounts receivable: Customer account
– Inventory: Inventory item

Mod G-6
Advantages of MUS
• Results in more efficient (smaller) sample sizes
• Selects transactions or components reflecting
larger dollar amounts
• Effective in identifying overstatement errors
– Asset and revenue accounts
• Generally simpler to use than classical
variables sampling

Mod G-7
Disadvantages of MUS
• Provides a conservative (higher) estimate of
misstatement
• Not effective for understatement or omission errors
– Liabilities and expenses
• Expanding sample is difficult if initial conclusion is
to reject the account balance
• Requires special consideration for accounts with
zero or negative balances

Mod G-8
Major Topics
I. Monetary Unit Sampling (MUS)
− Basics of MUS
− Determining Sample Size
− Selecting and Measuring Sample Items
− Evaluating Sample Results

II. Classical Variables Sampling

III. Nonstatistical Sampling

Mod G-9
Effect of Factors on Sample
Size
Factor Effect How Determined
Sampling risk (risk of incorrect Inverse Using the audit risk model and based on prior
acceptance) assessments of audit risk, risk of material
misstatement, and analytical procedures risk

Tolerable misstatement Inverse Based on recorded account balance and

relationship between the recorded account
balance and important financial statement
subtotals

Expected misstatement Direct Based on prior experience with the client (for
recurring audits) or a pilot sample (for initial
audits)

Population size Direct Based on the recorded balance in the account

balance or class of transactions

Mod G-10
 Summary: Sampling Risks
Under Variables Sampling
Decision Based on Population
Account is not Account is misstated
misstated (AM > TM)
(AM ≤ TM)

Account is not Correct decision Risk of incorrect

misstated acceptance
Decision (ULM ≤ TM)
Based on Account is Risk of incorrect Correct decision
Sample misstated rejection
(ULM > TM)

AM = Actual misstatement
TM = Tolerable misstatement
ULM = Upper limit on misstatements

Mod G-11
Using MUS Tables
• See Exhibit G.2 for Sample Size Table
• Inputs
– Risk of incorrect acceptance
– Expected misstatement
– Tolerable misstatement
– Population size

Mod G-12
Example
• Parameters
– Risk of incorrect acceptance = 5%
– Expected misstatement = $100,000
– Tolerable misstatement = $500,000
– Population size = $1,000,000
• Calculations
– Ratio of expected to tolerable misstatement: $100,000 ÷ $500,000 = 0.20
– Tolerable misstatement as a percentage of population: $500,000 ÷
$1,000,000 = 50%

Mod G-13
 Step 3: Select column for TM as % of
population = 50%

Step 1: Select entries for risk

of incorrect acceptance = 5%

Risk of Ratio of Tolerable Misstatement as a Percentage of

incorrect Expected to Population
acceptance Tolerable
Misstatement 50% 30% 10% 8%

5% - 6 10 30 38
5% 0.10 8 13 37 46
5% 0.20 10 16 47 58
5% 0.30 12 20 60 75
5% row for ratio
Step 2: Select 0.40 Step174: Read sample
27 81 102
of EM to TM = 0.20 size at junction of row
and column
Mod G-14
Major Topics
I. Monetary Unit Sampling (MUS)
− Basics of MUS
− Determining Sample Size
− Selecting and Measuring Sample Items
− Evaluating Sample Results

II. Classical Variables Sampling

III. Nonstatistical Sampling

Mod G-15
MUS: Selecting Sample Items
• Use systematic random sampling
• Calculate sampling interval as:
Population size ÷ Sample size
• Process
– Identify random start
– Skip number of items equal to sampling interval
– Select item (dollar in account) and examine entire logical unit
containing that item (customer account)
– May select same logical unit multiple times

Mod G-16
MUS: Measuring Sample
Items

Mod G-17
Major Topics
I. Monetary Unit Sampling (MUS)
− Basics of MUS
− Determining Sample Size
− Selecting and Measuring Sample Items
− Evaluating Sample Results

II. Classical Variables Sampling

III. Nonstatistical Sampling

Mod G-18
MUS: Evaluating Sample
Results
• Determine the upper limit on misstatements,
which has a (1 – Risk of incorrect acceptance) of
equaling or exceeding the true amount of
misstatement
• Components:
– Projected misstatement
– Incremental allowance for sampling risk
– Basic allowance for sampling risk

Mod G-19
Projected Misstatement
• Assumes entire sampling interval contains same
percentage of misstatement as the logical unit
examined by auditors
• Calculated for each misstatement as:
Sampling interval x Tainting %
• Do not project misstatements if the logical unit >
sampling interval

Mod G-20
Incremental Allowance for
Sampling Risk
• Adjusts the projected misstatement to control exposure to risk of
incorrect acceptance
• Allows for the possibility that the remainder of the sampling
interval might be misstated by a higher percentage than the logical
unit
• Procedure:
– Rank all projected misstatements in descending order
– Determine incremental confidence factor for each misstatement
– Multiply projected misstatement by (incremental confidence factor – 1)

Mod G-21
Basic Allowance for Sampling
Risk
• Provides a measure of the misstatement that might
exist in sampling intervals in which a misstatement
was not detected
• Calculated as:
Sampling interval x Confidence factor

Mod G-22
MUS: Evaluating Sample
Results
1 Projected Misstatement $ XX,XXX

2 Incremental allowance for sampling risk XX,XXX

3 Basic allowance for sampling risk XX,XXX

Upper limit on misstatements $XXX,XXX

Mod G-23
Upper Limit on
Misstatements
• If ULM = $50,000 and risk of incorrect
acceptance = 5%

$0 $50,000

95% probability (1 – risk of incorrect 5% probability (risk of

acceptance) incorrect acceptance)

Mod G-24
MUS: Making the Decision

Account
Upper Limit on Tolerable
Misstatement
≤ Misstatement
balance is
not
misstated

Account
Upper Limit on Tolerable
Misstatement > Misstatement
balance is
misstated

Mod G-25
Decisions under MUS
• Account balance is not misstated
– Suggest correction of identified misstatements
– Investigate cause of misstatements
• Account balance is misstated
– Increase sample size to attempt and reduce upper limit
on misstatements
– Recommend adjustment to reduce misstatement below
tolerable misstatement

Mod G-26
Major Topics
I. Monetary Unit Sampling (MUS)
− Basics of MUS
− Determining Sample Size
− Selecting and Measuring Sample Items
− Evaluating Sample Results

II. Classical Variables Sampling

III. Nonstatistical Sampling

Mod G-27
Classical Variables Sampling
• Uses normal distribution theory and the central limit
theorem to provide an estimated range of
– Recorded account balance or class of transactions
– Misstatement in an account balance or class of transactions

• Basic methodology
– Determine estimated range of account balance or
misstatement
– Evaluate using tolerable misstatement

Mod G-28
Additional Considerations in
Classical Variables Sampling
• Consider the following additional factors in
determining sample size
– Risk of incorrect rejection
– Population variability
• To reduce population variability, auditors
may choose to stratify the population

Mod G-29
Example
• Assume
– Recorded balance = $300,000
– Tolerable misstatement = $10,000
– Estimated balance = $292,500
– Precision = $2,275
– Risk of incorrect acceptance = 10%
– Risk of incorrect rejection = 15%

Mod G-30
Example (continued)
• Estimate ± Precision
$292,500 ± $2,275 = $290,225 to $294,775
$290,225 $294,775 $300,000

90% probability of including true

recorded balance

Difference between recorded balance and far end of interval <

Tolerable misstatement

Mod G-31
Classical Variables Sampling
Approaches
• Mean-per-unit:
– Assumes each item in population (component of account) has similar balance
– Estimates recorded balance by multiplying number of components by average audited value

• Difference estimation:
– Assumes each item in population (component of account) has similar difference between
recorded and audited value
– Estimates the amount of misstatement by multiplying number of components by average
misstatement
– Estimates recorded balance using estimated misstatement

• Ratio estimation:
– Assumes a constant percentage misstatement in population
– Estimates recorded balance by multiplying recorded balance by ratio of audited value to
recorded balance

Mod G-32
Sampling Methods
MUS Classical Variables Sampling
Overstatement errors are greatest Both overstatement and
concern understatement errors are of concern

Standard deviation difficult to estimate Standard deviation can be estimated

Smaller number of misstatements Larger number of misstatements

anticipated anticipated

Population has high degree of Population is homogenous (in terms of

variability and large dollar components dollar balances) and large dollar
exist components do not exist

Mod G-33
Major Topics
I. Monetary Unit Sampling (MUS)
− Basics of MUS
− Determining Sample Size
− Selecting and Measuring Sample Items
− Evaluating Sample Results

II. Classical Variables Sampling

III. Nonstatistical Sampling

Mod G-34
Nonstatistical Sampling
• Permissible under GAAS
• Does not permit auditors to control
exposure to sampling risk
• Major differences in:
– Determining sample size
– Selecting sample items
– Evaluating sample results

Mod G-35