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Audit Sampling
PAS 530 defines audit sampling as the application of audit procedures to
less than 100% of the items within an account balance or class of transactions such that all sampling units have a chance of selection.
Audit sampling is performed on the assumption that the sample
selected for testing is representative of the population. Not all testing procedures performed by auditors involve audit sampling. The author may decide to apply audit procedures only to those items which have particular significance (selective testing).
Risks in Sampling
- Sampling Risk refers to the possibility that the auditor’s conclusion,
based on a sample, may be different from the conclusion reached if the entire population were subjected to the same audit procedures. - This exists because the sample selected for testing may not be truly representative of a population.
2 Types
Alpha Risk is the risk the auditor will conclude:
• in the case of tests of control, the internal control is not reliable when in fact it is effective and can be relied upon (risk of under reliance).
• in the case of substantive test, that material misstatement exists in
an account balance or transaction class when in fact such misstatement does not exist (risk of incorrect rejection).
This type of sampling risk results in an auditor performing audit procedures
more than what is necessary, thus affecting audit efficiency.
Beta Risk is the risk that the auditor will conclude,
• in the case of tests of control, that internal control ds reliable when in
fact it is not effective and cannot be relied upon (risk of over reliance).
• in the case of substantive test, that material misstatement does not
exist when in fact material misstatement does exist (risk of incorrect acceptance).
This type of sampling risk results in an auditor performing audit procedures
less than what is necessary, thus affecting audit effectiveness. - Non-sampling Risk refers to the risk that the auditor may draw incorrect conclusions about the account balance or class of transactions because of human errors such as application of inappropriate audit procedures, failure to recognize errors in the sample tested, and misinterpretation of evidence obtained.
Controlling the Risks
Auditors do not normally attempt to eliminate sampling risks. Instead,
auditors control sampling risk by:
- Increasing the sample size
- Using an appropriate sample selection method
On the other hand, non-sampling risk can be minimized by:
- Proper planning - Adequate direction, review, and supervision of the audit team.
General Approaches to Audit Sampling
Statistical Sampling is a sampling approach that
- Uses random based selection of sample
- Uses statistics (law of probability) to measure sampling risk and evaluate sample results.
Non-statistical sampling is a sampling approach that purely uses auditor’s
judgement in estimating sampling risks, determining sample size, and evaluating sample results.
The only difference between the two methods is that statistical sampling allows auditor to measure or quantify the sampling risk by using mathematical formula.
Audit Sampling Plans
Attribute Sampling used to estimate the frequency of occurrence of a
certain characteristics in a population (occurrence test). It is generally used when performing tests of control to estimate the rate of deviations from prescribed internal control policies or procedures.
Variable Sampling used to estimate a numerical measurement of a
population such as peso value. It is generally used in performing substantive test to estimate the amount of misstatements in the financial statements. Basic Steps in Audit Sampling
1. Define the objective of the test. The audit objective largely
determines the audit procedures to be applied. 2. Determine the audit procedures to be performed. This step involves defining the population and the characteristics to be tested. 3. Determine the sample size. The auditor must decide how many sampling units to include in the sample. 4. Select the sample. A sample selection technique must be designed to such a way that all items in the population will have an opportunity to be selected. 5. Apply the procedures. After the sample items have been selected, the auditor applies the planned audit procedures to the sample. 6. Evaluate the sample results. The sample results must be evaluated to determine whether sufficient evidence has been obtained to satisfy the objective.
Sampling for Tests of Control
Audit sampling for tests of control is generally appropriate when application
of the control leaves evidence of performance.
Determination of sample size
Acceptable sampling risk. Sampling risk is inherent in an audit sampling
application. A sample drawn can only be expected to be representative of the population. The size of the sample is affected by the level of sampling risk the auditor is willing to accept.
The smaller the sampling risk the author is willing to accept, the larger the sample size would be (vice versa)
Tolerable deviation risk is the maximum rate of deviations the auditor is
willing to accept, without modifying the planned degree of reliance on the internal control.
A decrease in the tolerable deviation rate will cause the sample size to increase
Expected deviation rate is the rate of deviation rate the auditor expects to find in the population before testing begins. The auditor can develop this expectations based on the prior years results or by examining few items in the population (pilot sample). The larger the expected population deviation rate, the larger the sample size would be
Remember: the expected population deviation rate should not exceed the tolerable deviation rate.
Sample Selection Method
Random Number Selection. The auditor selects the sample by matching
random numbers, generated by a random number table or a computer software generator, with the population numbering system such as document number.
Systematic Selection. This method involves determining w constant
sampling interval and then selects the sample based on the size of that interval.
Haphazard Selection. The sample is selected without following an
organized or structured technique. It is useful for non-statistical sampling, but it is not used for statistical sampling because the auditor cannot measure the probability of an item being selected when using this method.
In selecting, the sample and applying the appropriate audit procedures, the auditor may encounter the ff:
- Voided documents. If the document has been properly voided, such
document should be replaced by another sample. - Missing documents. If the auditor encounters missing documents and he is unable to determine whether the control has been properly performed, such item should be treated as a deviation for the purpose of evaluating sample results.
