Question

Q.1 There is a growing realisation that the traditional

approach to audit is economically wasteful be¬cause all
efforts are directed to check all transactions without
exception. Explain.
[RTP-Nov. 19]
 Answer

Ans : Limitations of Traditional Approach:

• There is a growing realisation that the traditional approach to audit is economically
wasteful because all efforts are directed to check all transactions without exception.
• Traditional Approach: In traditional approach, more emphasis put on routine
checking, which often is not necessary considering the time and the cost involved. In
routine checking auditor considers detailed checking and vouching of all entries.
• With the passage of time, formal internal controls are being introduced in the
management of affairs of organisations, due to which the possibilities of routine errors and
frauds have greatly diminished and auditors often find extensive routine checking as
nothing more than a ritual because it rarely reveals anything material.
• Risk Based approach: Audit approach, now a days, has undergone considerable
changes and the extent of checking are undergoing a progressive change in favour of
more attention towards the questions of principles and controls with a curtailment of non-
consequential routine checking.
 SA 530 – Audit Sampling
Scope Definitions Population Other Imp points
1.Applies 1.Sampling: Sample selected must be
when Checking less than representative of the 1. Sample must be true representative
auditor 100% data in population of data
decides to entire population
use Characteristics: 2. Sampling perform on Test of
sampling in 2.Population:
performing entire set of data 1.Appropriateness: Controls (to identify deviations in
from which Population from which
audit
sample is selected sample taken expected controls ) and test of
appropriate or not. The details (to identify mis-statements )
3.Sampling Risk: individual items that
Risk that auditors make up the population 3. While designing sample – auditor
conclusion on are known as sampling
sample may be units includes specific purpose to be
different if entire
2.Completeness: achieved and procedures which
population was
checked (dealt in population needs to give best results .
include all relevant
detail further)
items throughout the 4. Size of entity has no effect on
4.Non-sampling entire period sample size
risk:
Risk that auditor 3.Reliable: 5. Anamoly is mis-statement and
reaches erroneous ensure that information
conclusion for upon which sampling is deviation not representing mis-
reason other than performed is complete statement in population
sampling risk & accurate
 Question

11. Tolerable error, is the maximum monetary error that

the auditor is prepared to accept in the popula-tion and
still conclude that audit objective has been achieved, is
directly related to
a. Sample size
b. Audit risk
c. Materiality
d. Expected error
Answer
 SA 530 – Audit Sampling
Techniques / types Method to pick Sample
Judgmental / Traditional Statistical
/ non-statistical 1. Random Sampling: equal chance of selection & may involve use of
Auditor use random
Auditor use experience / selection of samples random number tables
judgement and use probability Simple random – data homogenous
theory / Statistics
Advantages Stratified sampling – data heterogenous
- Easy to operate Advantages:
- TIME SAVING - More scientific 2. Systematic / Interval Sampling: items chosen in such
- No personal a way that there is constant interval between
biasness selections. 1st interval has random start
- Results can be
a) Block: block of consecutive items. It may be biased
projected in more
reliable way at times
b) cluster: population divided into clusters. No. of
clusters are selected on random basis
3. Monetary unit sampling/ Value weighted selection :
Disadvantages Disadvantages
- Complex to operate Conclusions are drawn in monetary amount
- Less scientific
- Personal biasness - Time consuming 4. Haphazard Sampling: combination of other methods
- LESS RELIABLE exercise
5. Block Sampling – of Contiguous items
 Question

7. The method which involves dividing the population

into group of items is known as block sampling.
[Nov 16 (2 Marks), MTP-Oct. 19]
 Answer

Ans : Statement is incorrect.

• Dividing the population into groups of items is
known as cluster sampling.
• Block sampling involves the selection of a defined
block of consecutive items.
 Question

11. Sample size is not a valid criterion to distinguish

between statistical and non-statistical approaches.
[MTP-April 19]
 Answer

Ans : Statement is correct.

• The decision whether to use a statistical or non-statistical
sampling approach is a matter for the auditor's judgment; however,
sample size is not a valid criterion to distinguish between
statistical and non-statistical approaches.
• Whatever may be the approach non-statistical or statistical
sampling, the sample must be representative. This means that it
must be closely similar to the whole population although not
necessarily exactly the same. The sample must be large enough to
provide statistically meaningful results.
 Question

12. The non-statistical sampling in criticized on the

grounds that it neither objective nor scientific.
[Nov. 19 (2 Marks)]
 Answer

Ans : Statement is correct.

• The non-statistical sampling is criticized on the grounds that it
is neither objective nor scientific. The expected degree of
objectivity cannot be assured in non-statistical sampling because
the risk of personal bias in selection of sample items cannot be
eliminated.
• The closeness of the qualities projected by the sample results
with that of the whole population cannot be measured because the
sample has not been selected in accordance with the
mathematically based statistical techniques.
 Question

13. Statistical sampling has narrower application where

a population to be tested consists of a large number of
similar items.
[RTP-May 20]
 Answer

Ans : Statement is incorrect.

• Statistical sampling has reasonably wide application
where a population to be tested consists of a large
number of similar items and more in the case of
transactions involving compliance testing, trade
receivables' confirmation, payroll checking, vouching of
invoices and petty cash vouchers.
 Question

1. Which of the following is more scientific?

a. Statistical
b. Non-statistical
c. Both (a) and (b)
d. None of the above
Answer
 Question

3. The main advantage of using statistical sampling

techniques is that such techniques:
a. Mathematically measure risk
b. Eliminate the need for judgmental sampling
c. Defines the values of tolerable error
d. all of the them
Answer
 Question

10. Value-weighted selection in which sample size,

selection and evaluation results in a conclusion in
monetary amounts, is known as:
a. Haphazard sampling
b. Monetary Unit Sampling
c. Stratified Sampling
d. Interval sampling
Answer
 Question

18. _______ in which the auditor selects the sample

without following a structured technique.
a. Haphazard selection,
b. Monetary Unit Sampling
c. Block Sampling
d. Structured Sampling
Answer
• Whatever may be the approach non-statistical or statistical
sampling, the sample must be representative. Discuss
explaining Statistical and Non-Statistical sampling
approaches.
• [RTP-May 18]
• Write short note on: Advantages of Statistical Sampling.
• [Nov. 11, May 14 (4 Marks)]
• Or
• Audit testing done through Statistical sampling is more
scientific than testing based entirely on the auditor's own
judgment because it involves use of mathematical laws of
probability in determining the appropriate sample size in
varying circumstances. Explain and also state advantages of
Statistical sampling.
• [MTP-Oct. 20]
 SA 530 – Audit Sampling
Sampling Risk Factors affecting Sample Size
Test of Control Test of Detail 1. Lower the acceptable risk , higher
sample size
1.Over reliance 1.Incorrect 2. Greater reliance placed on controls ,
 Acceptance more test of controls , more sample
erroneous/insuffici  size
ent AR erroneous / 3. More tolerable error , less sample size
insufficient AR 4. Higher expected rate of deviation ,
2.Under Reliance higher sample size
 2.Incorrect Rejection 5. Desired level of assurance high , more
no error in AR  sample size required
additional work no error in AR 6. More auditor rely on other substantive
additional work procedure , less reliance on sampling ,
so size of sample will decrease
7. Higher romm , high S.S
 Question

12. While determining the sample size for tests of controls,

an increase in the auditor's desired level of assurance that
the tolerable rate of deviation is not exceeded by the actual
rate of deviation in the population will:
a. require the auditor to increase the sample size
b. allow the auditor to decrease the sample size
c. have negligible effect
d. none of the above
Answer
 Question

15. While determining the sample size for tests of

details, an increase in the auditor's assessment of the
risk of material misstatement will:
a. require the auditor to increase the sample size
b. allow the auditor to decrease the sample size
c. have negligible effect
d. none of the above
Answer
1.Tolerable 1 Sample
error  Size

2.Expected  Sample
error Size

3.Sampling 1 Sample
Risk  Size
 Question

7. Which of the following factors is (are) considered in

determining the sample size for tests of control?
a. Projected error
b. Tolerable error
c. Expected error
d. Both (b) and (c)
Answer
 Question

2. Which of the following is source of Non-Sampling

risk?
a. Human Mistakes
b. Applying audit procedures not appropriate to the
objectives of audit
c. Misinterpreting the sample results
d. All of the above
Answer
• Comment on this statement with reference to SA 530 on Audit
Sampling.
• [Nov. 10 (8 Marks)]
• Or
• While planning the audit of S Ltd., you want to apply sampling
techniques. What are the risk factors you should keep in mind?
• [RTP-Nov. 18, MTP-April 19]
• Or
• "Sampling risk can lead to erroneous conclusion". Justify.
• [May 19 (4 Marks), MTP-April 21]
• Discuss the following: Factors that should be considered for
deciding upon the extent of checking on a sampling plan.
• [Nov. 18 (5 Marks), RTP-Nov. 20]
• Or
• Discuss the factors that should be considered for deciding
upon the extent of checking on a sampling plan.
• [RTP-May 19]
Explain the following terms with reference to Audit Sampling:
Stratification
Tolerable misstatement
Tolerable rate of deviation
[RTP - May 21]
• Stratification - The process of dividing a population into sub-populations,
each of which is a group of sampling units which have similar
characteristics (often monetary value).
• Tolerable misstatement - A monetary amount set by the auditor in respect
of which the auditor seeks to obtain an appropriate level of assurance that
the monetary amount set by the auditor is not exceeded by the actual
misstatement in the population.
• Tolerable rate of deviation - A rate of deviation from prescribed internal
control procedures set by the auditor in respect of which the auditor seeks
to obtain an appropriate level of assurance that the rate of deviation set by
the auditor is not exceeded by the actual rate of deviation in the population.
 Question

4. A monetary amount set by the auditor in respect of

which the auditor seeks to obtain an appropriate level of
assurance that the monetary amount set by the auditor is
not exceeded by the actual misstate¬ment in the population
is known as:
a. Tolerable Misstatement
b. Tolerable Rate of Deviation
c. Performance Materiality
d. Value Weighted Selection
Answer
 Question

5. As per the requirement of SA 530, if the audit procedure

is not applicable to the selected item, the auditor
a. shall perform the procedure on a replacement item
b. shall treat that item as a deviation from the pre¬scribed
control, in the case of tests of controls
c. shall treat that item as a misstatement, in the case of
tests of details
d. none of the above
Answer
 Question
6. As per the requirement of SA 530, if the auditor is unable to apply the designed audit
procedures, or suitable alternative procedures, to a selected item, the auditor
a. shall treat that item as a deviation from the pre¬scribed control, in the case of tests of details,
or a misstatement, in the case of tests of controls.
b. shall treat that item as a deviation from the pre¬scribed control, in the case of tests of controls
and tests of details.
c. shall treat that item as a misstatement in the case of tests of controls and tests of details.
d. shall treat that item as a deviation from the pre¬scribed control, in the case of tests of
controls, or a misstatement, in the case of tests of details
Answer
 Question

Q.2 The extent of the checking to be undertaken is

primarily a matter of judgment of the auditor.
It is in the interest of the auditor that if he decides to
form his opinion on the basis of a part checking, he
should adopt standards and techniques which are widely
followed. Explain.
[RTP-Nov. 19]
 Answer

Ans : Adopting Standards while using Sampling:

• Auditor is required to express his opinion on the true and fair view of financial
statements. For this purpose, auditor is required to decide the extent of checking to be
performed. The extent of checking to be undertaken is primarily a matter of judgment of the
auditor, there is nothing statutorily stated anywhere which specifies what work is to be
done, how it is to be done and to what extent
• It is also not obligatory that the auditor must adopt the sampling technique.
• To ensure good and reasonable standard of work, auditor should adopt standards
and techniques that can lead him to an informed professional opinion. On a consideration
of this fact, it can be said that it is in the interest of the auditor that if he decides to form his
opinion on the basis of a part checking, he should adopt standards and techniques which
are widely followed and which have a recognised basis.
• Since statistical theory of sampling is based on a scientific law, it can be relied upon
to a greater extent than any arbitrary technique which lacks in basis and acceptability.