ch12 70 360

Chapter 12:
Audit Sampling Concepts
1
Copyright © 2007 Pearson Education Canada
Chapter 12 objectives
 Define sampling
 Discuss the advantages and disadvantages
of statistical and non-statistical sampling
 Identify three ways that a statistical
sampling method can be selected
 Describe the 14 steps in planning,
selecting, performing the tests and
evaluating a sample
12-2
Importance of sampling to auditors
 The auditor
doesn’t look at
everything…
just pieces. The
auditor
CANNOT look
at everything.
12-3
Purpose of Sampling
12-4
Purpose of sampling
 Sampling is a method of obtaining
information that will permit an
estimate of the value or quality of a
population by examining only a
portion of the population.
12-5
Auditors sample when
 The nature and materiality of the
balance or class of transactions does
not demand a 100% audit
 A decision must be made about the
balance or class of transactions
 The time and cost to audit 100% of
the population would be too great
12-6
Sampling is used to conduct
 Walk through tests (to understand
internal controls)
 Tests of controls
 Tests of details
12-7
Nature of Sampling
12-8
Representative sampling
 Definition: The characteristics in the
sample of audit interest are
approximately the same as those of
the population
12-9
Representative sampling (cont’d)
 Non-representativeness can occur due to:

-Non-sampling risk: Audit test do not uncover
the exceptions in the sample due to failure to
recognize them, or due to ineffective procedures
(there is an error in the sample but it is not
uncovered)
-Sampling risk: Results from testing less than the
entire population (sample is not representative of
population)
12-10
Statistical sampling
 Sampling that uses the laws of
probability for selecting and
evaluating a sample from a population
for the purposes of reaching a
conclusion about the population
– selected at random
– statistical calculations are used to
measure and express the results
12-11
Statistical vs Non-statistical
12-12
Probabilistic sample selection
methods
 Simple random sample selection
 Systematic sample selection
 Probability proportionate-to-size sample
selection (also known as MUS monetary
unit sampling)
12-13
Non-probabilistic (judgmental)
sample selection methods
 Directed sample selection, useful for:
– Items likely to contain errors
– Items containing selected characteristics (e.g.
old amounts
– Large dollar item coverage
 Block sample selection (e.g. sequences)
 Haphazard sample selection
12-14
Statistical sampling
Advantages -- Provides
 for quantitative evaluation of the sample

results.
 a more defensible expression of the test
results.
 for more objective recommendations for
management.
12-15
Statistical Sampling (cont’d)
Disadvantages
 Requires random sample selection which

may be more costly and time consuming.
 Might require additional training costs for
staff members to use statistics or
specialized software.
12-16
Non-statistical Sampling
(Judgmental)
Advantages
 Allows the auditor to inject his or her subjective

judgment in determining the sample size and
selection process to audit items of greatest value
and highest risk.
 May be designed so that it is equally effective
and efficient as statistical sampling while being
less costly.
12-17
Non-statistical Sampling
(Judgmental) (cont’d)
Disadvantages
 Cannot draw objectively valid statistical
inferences from the sample results.
 Cannot quantitatively measure and express
sampling risk.
12-18
Statistical vs. non-statistical
 Similarities Differences
 Both require a  Sampling risk can be
structured process quantified in
involving planning, statistical sampling
selection, conducting, using mathematical
evaluating formulae
 Any type can be

stratified
12-19
Practice problem 12-23 (p. 366)
 Making decisions
about sampling
 Does the
implementation
method matter?
12-20
Steps in Conducting the Sample
12-21
Sampling process
 For both statistical and non-statistical
methods, the four main parts are:
1. Planning the sample
2. Selecting the sample
 Performing the tests
 Evaluating the results
12-22
Sampling process
 We are going to look at the fourteen steps
in the sampling process, comparing the
process for tests of controls versus tests of
details
12-23
1. State the objectives of the test
Test of control: Test of detail:

 Are the controls  Auditor wants to
applied? determine the
 Are there monetary maximum amount of
errors or fraud or overstatement and
other irregularities understatement that
could exist based on
the sample
12-24
2. Decide if audit sampling applies
 Some controls can be  Ability to sample for

sampled (e.g. is a test of details
shipping document depends on the nature
attached?) while of the population (e.g.
others cannot be (e.g. capital assets may not
separation of duties) be sampled,
depending upon
volume, while A/R
confirmations will be
12-25
3. Define attributes and exception or
error conditions
Term related to Test of control (e.g. Test of detail (e.g.
planning: attribute sample) for MUS sample)
Define the item Identify the Individual dollars

of interest characteristic or
attribute of interest
Define Define the control Normally, any

exceptions or deviation (an monetary
errors exception) difference (error)
12-26
3. Define attributes and exception or
error conditions (cont’d) - Sales and A/R
Term related to Test of control Test of detail (e.g.
planning: (e.g. attribute for MUS sample)
sample) Sales Accounts Rec’bl
Define the item of Are sales approved Individual dollars

interest for credit?
Define exceptions Sale made that Confirmed amount

or errors causes customer different from
balance to exceed amount in customer
credit limit account
12-27
4. Define the population
 Population can be defined in a way to suit the audit
tests
 Must sample from the entire population as defined
 In testing controls over sales population is likely
recorded sales invoices
 In testing details in accounts receivable it is the
recorded dollar population
Most populations can be stratified, if needed.
12-28
5. Define the sampling unit
Tests of controls: Test of detail:

 Usually a physical  If MUS, would be the
unit, e.g. invoice, individual dollar
shipping document,  For non-statistical
purchase order sampling, it is likely
the unit making up the
balance, e.g. an
unpaid invoice
12-29
6. Specify tolerable exception rate (TER)
or specify materiality
 Test of control  Test of detail
 TER is the exception rate  Materiality is used to
the auditor will permit in determine the tolerable
the population and still be misstatement amount for
willing to use the the audit of each account
assessed control risk
 As TER increases, the These decisions require the
sample size decreases use of professional
judgment.
12-30
7. Specify ARACR or ARIA

 Acceptable Risk of  Acceptable Risk of
Assessing Control Risk Incorrect Acceptance
Too Low (ARACR) is the (ARIA) is the risk the
risk that the auditor will auditor will take of
take of accepting controls accepting a balance as
as effective when correct when the true
population error rates are misstatement is greater
actually greater than materiality
12-31
• Specify ARACR or ARIA (cont’d)
examples
ARACR and ARIA are measures of sampling risk.

 Assumes TER 6%,  If ARIA changes from
ARACR 10%, true 10% to 5%, sample
error rate 8% size increases, since
 True error rate assurance required
exceeds TER, so increases
population is NOT  When controls are
acceptable, but good (control risk is
auditor does not low), ARIA can be
know! increased
12-32
8. Estimate population exception rate or
misstatements
 Test of detail
 Test of control  Provide an advance
 Estimated population estimate of the total
error rate (EPER) is an dollar error
advance estimate of (misstatements) in the
the percentage of population
exceptions in the
population
Use prior year data and
 The lower the EPER, professional
the smaller the sample judgment.
size
12-33
9. Determine the initial sample size
 For non-statistical (also called judgmental)

sampling, professional judgment is used to
calculate the sample size
 For statistical sampling, mathematical formulae
are used, either in specially prepared tables or
using software designed for audit sampling
 For stratified sampling, the sample is allocated
among the strata
12-34
10. Select the sample
 Using the number of items determined in Step #9,

choose the items from the population using the
sampling unit defined in Step #5
 Use probabilistic or non-probabilistic methods
 To enable quantification of sampling risk,
probabilistic (statistical) methods must be used
12-35
11. Perform the audit procedures
 For test of controls, examine each item for the

attribute defined in Step #3, recording all
exceptions found (e.g. all sales approved for
credit)
 For test of details, apply the audit procedures to
each item to determine whether it is correct or
contains a misstatement (e.g. send and reconcile
confirmations, conduct alternative procedures)
12-36
12. Generalize from the sample to
the population
 For test of controls sample error rate (SER)
equals actual number of exceptions divided by
actual sample size
– But that is not necessarily equal to the actual
population rate: a potential range must be
calculated
 In practice, auditors tend to test controls when
they expect no exceptions
Method of generalization depends on the
sampling methodology used
12-37
12. Generalize from the sample to
the population (cont’d)
 When generalizing tests of details, auditors deal
with dollar amounts rather than with exceptions
 Misstatements found are projected from the
sample results to the population
 Need to consider sampling error and sampling
risk (ARIA)
12-38
13. Analyze exceptions or
misstatements
 What breakdown in  Were the
internal controls misstatements caused
caused the by control
exceptions? (does it exceptions? (need to
affect control risk?) reassess control risk?
 Should additional  Is additional
substantive testing be substantive testing
conducted because of required?
these results?
12-39
14. Decide the acceptability of the
population
 If TER (Tolerable  Compare the
Error Rate) is difference between
sufficiently larger the projection to the
than SER (sample population and
error rate) will materiality
normally accept the  Use decision rule for
population statistical sampling
12-40
14. Decide the acceptability of the
population (cont’d)
 What if the auditor decides the population is NOT

acceptable? What to do?
– 1. Revise TER (tolerable error rate), ARACR, or
ARIA (the risks of accepting incorrect
populations) - not easily defensible
– 2. Expand the sample size. Will decrease the
sampling error OR you could end up with the same
result.
– 3. Revise assessed control risk. This will likely
mean an increase in tests of detail.
– 4. Report weaknesses in management letter.
12-41
Practice question 12-17, p. 364
 Sampling multiple
choice
 Concept check
12-42

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Chapter 12:

Audit Sampling Concepts

 Non-representativeness can occur due to:

 for quantitative evaluation of the sample

 Requires random sample selection which

 Allows the auditor to inject his or her subjective

 Any type can be

Test of control: Test of detail:

 Some controls can be  Ability to sample for

Define the item Identify the Individual dollars

Define Define the control Normally, any

Define the item of Are sales approved Individual dollars

Define exceptions Sale made that Confirmed amount

Tests of controls: Test of detail:

 Test of control  Test of detail

 Test of control  Test of detail

 For non-statistical (also called judgmental)

 Using the number of items determined in Step #9,

 For test of controls, examine each item for the

 What if the auditor decides the population is NOT

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