12/12/2024

AC 306: TOPIC 2

AUDIT SAMPLING

To be discussed

❑ Definition and features

❑ Sampling criteria
❑ Statistical vs. non-sampling sampling
❑ Probabilistic vs non-probabilistic
❑ Basic requirements of all audit samples
❑ Factors leading to non-representative sample
❑ Sampling for tests of controls, attribute sampling
❑ Nonstatistical and statistical audit sampling for
substantive tests of details
❑ Procedures that may not involve audit sampling

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Definition and features

Objectives of sampling
❑ To gather sufficient appropriate evidence
❑ To obtain a sample whose characteristics are the same
as those of the population. (aka ‘representative’ sample).
Why sample?
❑ Impracticability of auditing 100%
❑ To minimise cost of the audit

Definition and features

✓Audit sampling: the application of an audit procedure to

less than 100% of the items within a population to obtain
audit evidence about particular characteristics of the
population.
✓Audit sampling is important because it provides information
on:
i. How many items to examine
ii. Which items to select
iii. How sample results are evaluated and extrapolated to the
population in order to tell something about the population (e.g.
level of misstatement).
✓Population – The entire set of data from which a sample is
selected and about which the auditor wishes to draw
conclusions. 4

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Definition and features

✓ Stratification – The process of dividing a population into

subpopulations, each of which is a group of sampling units
which have similar characteristics (often monetary value).
✓ Sampling risk – The risk that the auditor’s conclusion
based on a sample may be different from the conclusion if
the entire population were subjected to the same audit
procedure. It can lead to 2 types of errors:
i. In the case of a ToC, that controls are more effective than they
actually are, or in the case of a ToD, that a MM does not exist
when in fact it does.
ii. In the case of a ToC, that controls are less effective than they
actually are, or in the case of a ToD, that a MM exists when in
fact it does not.
✓ Anomaly – A misstatement or deviation that is
demonstrably not representative of misstatements or
deviations in a population. 5

✓ Sampling unit – The individual items constituting a

Sampling criteria

• When sampling, the auditor identifies a particular characteristic

of the population to focus upon.
i. For tests of control, the characteristic of interest is the rate
of deviation from an internal control policy or procedure.
ii. For substantive tests, the characteristic of interest is
monetary misstatement in the balance.
• Various means of gathering audit evidence
i. 100% examination: this is not a sampling method.
ii. Selecting specific items: e.g. high value or high risk — this
is not a sampling method. Items selected will not
necessarily be representative of the population.

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Probabilistic vs non-probabilistic
• Probabilistic sampling: random selection
Random sample: every possible combination of items in
population have equal chance of being selected.
Common random selection methods:
i. Use of random number tables:
Will need to consider discards, documentation and replacement v.
non-replacement sampling.
ii. Use of computer software.
iii. Systematic sampling:
Advantage: it is easy to use, sample can be drawn quickly, and
documentation is easy.
Disadvantage: may cause bias (not preferred by some audit
firms).

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Probabilistic vs non-probabilistic

• Non-probabilistic sampling: non-random selection

Common approaches are:
i. Judgmental methods: -
NB. random sampling may not give a representative
sample when sample sizes are small.
ii. Haphazard selection: -
Has no regard to size, source, or other distinguishing
characteristics. Pseudo random; but difficult to remain
unbiased.
iii. Block sampling (Cluster sampling):
The selection of several items sequentially.
Selection of blocks, then all items in block are chosen.
Is acceptable only if a reasonable number of blocks are
used.

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Statistical vs. non-sampling sampling

Statistical sampling: an approach to sampling that

has the following characteristics:
i. Random sample selection
ii. Use of probability theory to evaluate sample results

- Use of mathematical techniques to calculate

formal statistical results
- Ideal for large population items with ready access
to each item.
• Major advantage is defensibility, thorough
quantification of sampling risk.

Statistical vs. non-sampling sampling

Non-statistical sampling: sampling approaches that do not
have all the characteristics of statistical sampling.
• Is a more subjective approach to inference: mathematical
techniques not consistently used to determine sample size,
selecting sample items, or evaluating results
• Relies heavily on the auditor’s professional judgment
• Ideal for smaller populations, or populations with items not
so readily accessible by the auditor for sampling
• Does not quantify sampling risk

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Statistical and non-sampling sampling

Parts of statistical/non-statistical sampling methods
i. Sample size determination (deciding how many items
to select).
ii. Sample selection (deciding how to select the items).
Methods are:
❑ Probabilistic: each population item has a known chance
of being selected.
❑ It is the required method for statistical evaluation; non-
statistical evaluation is acceptable.
❑ Non-probabilistic (judgmental): auditor decides which
items to select.
iii. Performing the tests.
iv. Sample evaluation: drawing conclusions based on
audit tests. 11

Basic requirements of all audit samples

Whenever an auditor uses audit sampling (statistical or non-
statistical) the following requirements apply:
i. Planning and design: The auditor considers the
relationship of the sample to the relevant specific audit
objective or control objective and considers certain other
factors that should influence sample size.
ii. Selection: Sample items are selected in such a way that
the sample can be expected to be representative of the
population.
iii. Performing the procedure and evaluating results: The
auditor performs the required audit procedures on the
items selected, projects the results of the audit
procedures undertaken on the sample to the population
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and considers sampling risk.

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Basic requirements of all audit samples

Q.How can the auditor improve representativeness?
• A. The likelihood of a sample being a representative one
can be increased by using care in its design, selection,
and evaluation.
Since the need is to gather sufficient appropriate
evidence, consider:
• Is the sample large enough to represent the population?
• Is sampling relevant in the circumstances of this
population?
• Are the selection procedures representative enough to
make the sample suitable for assessing the reliability of
the population?

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Planning and designing the sample

Auditor must consider:

• Objectives of the audit test (usually related to an
audit assertion of interest)
• Population from which to sample
• Possible use of stratification
• Definition of the sampling unit.

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Planning and designing the sample

Auditor must consider:
1. Objectives of the audit test (usually related to an audit
assertion of interest)
✓ Once the audit objective is specified, such as reliance
on controls or misstatement of account balance, the
auditor must consider what conditions would
constitute an error.
✓ The auditor must ensure that the population from
which the sample is to be selected is complete and
appropriate to the audit objective.
2. Population from which to sample.

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Planning and designing the sample

3. Possible use of stratification
✓ Stratification: occurs when the auditor divides the
population into a series of sub-populations, each of
which has an identifying characteristic, such as dollar
value
✓ Can assist with audit efficiency as it allows the auditor
to reduce the sample size by reducing variability
without increasing the sampling risk.
✓ Can direct auditor’s attention to areas of audit
interest, especially risky or material items.
4. Definition of the sampling unit - Transactions or balances
making up the account balance
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Determining sample size

• Sample size is affected by the degree of sampling risk the
auditor is willing to accept.
• Auditor's major consideration in determining sample size is
whether, given expected results from examining sample,
sampling risk will be reduced to an acceptably low level

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Determining sample size

Factors that influence sample size for tests of controls-
Appendix 2 to ISA 530 outlines the factors that influence
sample size for tests of controls as follows:
i. The extent to which the auditor’s risk assessment takes
into account relevant controls (control risk assessment).
ii. The tolerable rate of deviation – highest amount of error
that an auditor can accept in a sample.
iii. The expected rate of deviation- rate of mistakes
anticipated by an auditor based on his/her prior
knowledge or assumptions.
iv. The auditor’s desired level of assurance
v. The number of sampling units in the population.
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Determining sample size

Factors that influence sample size for substantive testing.
Appendix 3 to ISA 530 outlines the factors that influence sample
size for substantive testing as follows:
1. The auditor’s assessment of risk of material misstatement
2. The use of other substantive procedures directed at the same
assertion
3. The auditor’s desired level of assurance that actual
misstatement is not greater than tolerable misstatement
4. The tolerable misstatement - If errors surpass the limit, the
auditor may need to investigate and request corrections.
5. The amount of misstatement the auditor expects to find in the
population (expected misstatement)
6. Stratification
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7. The number of sampling units in the population.

Selecting the sample

• To draw conclusions about population or stratum, the
sample needs to be typical of characteristics of
population or stratum.
• Sample needs to be selected without bias so that all
sampling units in the population or stratum have a
chance of selection.
• Common sampling techniques are:
✓ Random selection — random number generation
✓ Systematic selection
✓ Haphazard selection — select without conscious
bias.
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Selecting the sample

Steps in systematic selection
• For example, suppose the sample size is 20 and the
number of items in the population is :
▪ Step 1: Calculate the sample interval, (say 500 i.e.
10,000/20)
▪ Step 2: Give every item in population chance of
selection by choosing a random number (random start)
within range of 1 and sampling interval (in this example,
500), e.g. 217.
▪ Step 3: Continue to add sampling interval to random
start, and identify items to be sampled, e.g. item nos.
217, 717, , 9717.
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Selecting the sample

Unacceptable sample selection methods
• Block selection: the auditor selects all items of a specified
type processed on a particular day, week or month.
• Judgmental selection (based on sample item
characteristics): the auditor selects large or unusual items
from the population or uses some other judgmental
criterion for selection. This method has a conscious bias
and cannot be considered representative.

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Performing the audit procedures

Evaluating sample results
• To evaluate sample results, auditor determines the level of
misstatement found in sample and directly projects this
misstatement to relevant population.
• For example: sample 20%, find misstatement of $ Therefore
projected misstatement = $ ($10 000/20%).
• Projected misstatement is then compared with tolerable
misstatement for the audit procedure to determine if
characteristic of interest can be accepted or rejected.
• Auditor should consider both the nature and cause of any
misstatement or deviations identified.

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Factors leading to non-representative sample:

• Sampling error- An inherent part of sampling resulting
from testing less than 100%. Sampling error is always there
even with zero non-sampling error (there is always a
chance that a sample is not representative). A.k.a.
sampling risk,
❑ Inadequate Definition of Population: Incorrectly defining the
population or excluding parts of it.
❑ Auditor Judgment Errors: Relying too heavily on judgment, leading
to a biased selection.
❑ Failure to Recognize Exceptions: Missing exceptions due to lack of
knowledge or oversight.
❑ Inappropriate Audit Procedures: Using incorrect or ineffective
methods for testing.
• Can be reduced by
- increasing sample size, or
- using appropriate method of selecting sample items from the
population (e.g. Probabilistic techniques). 24

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Factors leading to non-representative sample:

• Non-sampling error- occurs when the audit does not
uncover exceptions in the sample. A.k.a. non-sampling risk,
can be eliminated by careful design of audit procedures
and proper supervision and instruction of audit staff.
Caused by:
❑ Inadequate Definition of Population: Incorrectly defining the
population or excluding parts of it.
❑ Auditor Judgment Errors: Relying too heavily on judgment, leading
to a biased selection.
❑ Failure to Recognize Exceptions: Missing exceptions due to lack of
knowledge or oversight.
❑ Inappropriate Audit Procedures: Using incorrect or ineffective
methods for testing.

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Sampling for tests of controls, attribute sampling

• Audit sampling is useful for tests of controls, especially
involving inspection of source documentation for specific
attributes such as evidence of authorisation (attribute
sampling).
• Involves examination of documents for particular attributes
related to controls (e.g. authorisation).
• Results of attribute sampling can be used to support or
refute an initial assessment of control risk.

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Sampling for tests of controls, attribute sampling

In planning and designing sample for tests of controls,
auditor should consider:
• Audit objectives (assertions of audit interest)
• Control risk assessment and tolerable deviation rate
• Allowable risk of over-reliance — allowable risk of
assessing control risk too low
• Expected error — amount of error the auditor expects to
find in the population.

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Sampling for tests of controls, attribute sampling

Audit objectives
• A sampling technique that is suitable for tests of controls is
attribute sampling. The following steps are necessary in
considering the relationship between the sample and the
objective of the test:
i. Identify relevant control objectives, policies and
procedures that are relevant to restricting substantive
tests of the related account balances.
ii. Identify population and sample unit.
iii. Define the characteristic of interest – so that an
attribute either exists or does not exist which means
that a control activity has either been complied with or
not complied with. 28

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Sampling for tests of controls, attribute sampling

Selection of sample items for tests of controls
• After determined the appropriate sample size, it is then a
matter of determining which sample items to select.
• The representative selection methods of random selection
and systematic selection generally apply to both tests of
controls and substantive tests.
• However, stratification is not usually applicable to tests of
controls.
• Systematic selection is often useful for tests of controls
because it helps to achieve the auditor’s internal control
objective of testing continuity of controls by ensuring
sampling is continuous throughout the year.
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Nonstatistical and Statistical Audit Sampling for

Substantive Tests of Details
Considers the following factors
i. Assessed risks of material misstatement
ii. Characteristics of the population
iii. Tolerable misstatement
iv. Expected misstatement
v. Audit risk and sampling risk (that is, that actual misstatement
exceeds tolerable misstatement)
vi. Audit evidence obtained from other substantive procedures related
to the same assertion
vii. Selection of a sample that can be expected to be representative
viii. Projection of the sample results to the population
ix. Consideration of an allowance for sampling risk (precision

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Nonstatistical and Statistical Audit Sampling for

Substantive Tests of Details
Considering the Completeness of the Population
Identifying Individually Significant Items - the auditor uses
judgment to identify the items and test them separately from
the remainder
Defining the Sampling Unit - t might be a customer account
balance, an individual transaction, or an individual entry
within a transaction. t depends on the audit objective and the
nature of the audit procedures to be applied.
Choosing an Audit Sampling Technique – statistical or non
statistical

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Factors Influencing Sample Sizes for a

Substantive Test of Details in Sample Planning
Related Factor for
Small large
Factor Substantive
Sample Size sample size
Sample Planning
Allowable risk of incorrect
Assessment of inherent risk Low High
acceptance
Allowable risk of incorrect
Assessment of control risk Low High
acceptance
Assessment of risk related to
other substantive Allowable risk of incorrect
Low High
procedures directed at the same acceptance
assertion
Measure of tolerable
misstatement for a specific Larger Smaller Tolerable misstatement
account
Expected size and frequency of
misstatements, Assessment of population
Smaller Larger
or the estimated variance of the characteristics
population
Number of items in the
Virtually no effect on sample size unless population
population 32

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Procedures That May Not Involve Audit Sampling

1. Inquiry and Observation

• Interviewing management and employees
• Obtaining an understanding of the internal controls
• Observing the behavior of personnel and the functioning of
business operations
• Observing cash-handling activities
• Observing the operation of controls
• Performing walkthrough procedures
• Observing the existence of land and buildings
• Obtaining written representations from management
2. Analytical Procedures - do not result in projecting
3. Procedures Applied to Every Item in a Population
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Procedures That May Not Involve Audit Sampling

4. Some Tests of Controls May Not Involve Audit Sampling - For

example, tests of automated application controls or determning
appropriate segregation of duties
5. Tests of Controls When Extrapolation Is Not Intended - auditor
does not intend to extend the resulting conclusion to the
remaining items. E.g. trace several transactions through an
entity's accounting system to obtain an understanding of the
design of the entity's internal control
6. Untested balances due to for example low RoMM
7. Test of automated IT controls - when IT general controls are
tested and determined to be effective, a single test of an
automated control for each type of control operation may be
sufficient
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Food for thought

• Can a statistical sampling approach use both
probabilistic and non-probabilistic techniques?
With no fewer than five credible references,
argue why or why not.

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❑ Probabilistic vs. Non-Probabilistic focuses on sample

selection methods (whether each item has a known
probability of selection).
❑ Statistical vs. Non-Statistical focuses on both selection
and evaluation (whether probability theory is used to select
and assess the results).
❑ In practice, statistical sampling is typically probabilistic by
nature. Non-statistical sampling can be either probabilistic or
non-probabilistic but does not involve statistical inference.

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THE END!
THANK YOU!

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