Audit Sampling

Scope and objective of Audit sampling

The scope of sampling is determined by audit objectives, audit evidence and audit
procedures. The purpose of this standard is to establish standards on the design and
selection of an audit sample and the evaluation of the sample results. This AAS applies
equally to both statistical and non statistical sampling methods. The application of either
of the methods provides sufficient appropriate audit evidence.

Meaning of audit sampling

Audit sampling means the application of audit procedures to less than 100% of the items
within an account balance or class of transactions to enable the auditor to obtain and
evaluate audit evidence about some characteristic of the items selected in order to form or
assist in forming a conclusion concerning the population.

Need and Importance Of Sampling

The need for audit sampling arises from

 The increasing complexities in business,

 Auditor’s time involved and
 The volume of transactions involved in the business

The purpose of audit sampling is

 to obtain an evidence,
 to fulfill the audit objectives set by the auditor
 which enables the auditor to test the validity and accuracy of the transactions.

Design of the Sample

The following should be considered in the design of the sample.
1. Audit Objectives
 2. Population
3. Stratification
4. sample size
5. sampling risk

Audit objectives
 The specific audit objectives and audit procedures to accomplish those objectives
should be determined.

Population
 The population is the entire set of data from which the auditor wishes to sample in
order to reach a conclusion. The auditor will need to determine that the population
from which the sample is drawn is appropriate for the specific audit objective.
 For eg. If the auditor’s objective were to test for overstatement of accounts
receivable, the population could be defined as accounts receivable testing. On
the other hand, when testing for understatement of accounts payable the
population would not be the accounts payable listing, but rather subsequent
disbursements, unpaid invoices, suppliers statements, unmatched receiving
reports or other populations that would provide audit evidence of
understatement of accounts payable.

Stratification
 Stratification is the process of dividing a population into subpopulations, each of
which is a group of sampling units, which have similar characteristics
 The strata need to be explicitly defined so that each sampling unit can belong to
only one stratum. This process reduces the variability of the items within each
stratum. Stratification therefore, enables the auditor to direct audit efforts towards
the items which for example contain the greatest potential monetary error.
 For eg, the auditor may direct attention to larger value items for accounts
receivable to detect overstated material misstatements.
Sample Size
 While determining the sample size the auditor should consider sampling risk the
tolerable error and the expected error.
 Sampling size is affected by the level of sampling risk the auditor is willing to
accept from the results of the sample. The lower the risk the auditor is willing to
accept, the greater the sample size will need to be

Sampling risk
It arises from the possibility that the auditor’s conclusion, based on a sample, may be
different from the conclusion that would be reached if the entire population were
subjected to the same audit procedure.
The auditor is faced with sampling risk in both tests of control and substantive procedures
as follows;
Tests of control:
o Risk of under reliance: the risk that although the sample result does not
support the auditors assessment of control risk, the actual compliance rate
would support such an assessment
o Risk of over reliance: the risk that, although the sample result supports
the auditor’s assessment of control risk, the actual compliance rate would
not support such an assessment.
Substantive procedures
o Risk of incorrect rejection: the risk that although the sample result
supports the conclusion that a recorded account balance or class of
transactions is materially misstated in fact it is not materially misstated
o Risk of incorrect acceptance: the risk that although the sample result
supports the conclusion that a recorded account balance or class of
transactions is not materially misstated, in fact it is materially misstated
 The risk of audit reliance and the risk of incorrect rejection affect audit efficiency
as they would ordinarily lead to additional work being performed by the auditor
or the entity which would establish that the initial conclusions were incorrect.
  The risk of over reliance and the risk of incorrect acceptance affect audit
effectiveness and are more likely to lead to an erroneous opinion on the financial
statements than either the risk of under reliance or the risk of incorrect rejection

Tolerable error
It is the maximum error in the population that the auditor would be willing to accept and
still concludes that the result from the sample has achieved the audit objective. Tolerable
error is considered during the planning stage and for substantive procedures is related to
the auditor’s judgment about materiality. The smaller the tolerable error the greater the
sample size will need to be

In tests of control, the tolerable error is the maximum rate of deviation from a prescribed
control procedure that the auditor would be willing to accept, based on the preliminary
assessment of control risk.
In substantive procedures, the tolerable error is the maximum monetary error in an
account balance or class of transactions that the auditor would be willing to accept so that
when the results of all audit procedures are considered, the auditor is able to conclude
with reasonable assurance, that the financial statements are not materially misstated

Expected error
If the auditor expects error to be present in the population, a larger sample than when no
error is expected ordinarily needs to be examined to conclude that the actual error in the
population is not greater than the planned tolerable error. Smaller sample sizes are
justified when the population is expected to be error free. In determining the expected
error in a population, the auditor would consider such matters as error levels identified in
previous audits, changes in the entity’s procedures, and evidence available from other
procedures
Selection of the sample
The selection of sample items should be in such a way that it can be expected to be
representative of the population. This requires that all items in the population have an
opportunity of being selected.

Following are the three methods of selection

1. Random Selection
 Random selection, which ensures that all items in the population have an equal
chance of selection
 Random number tables are used for selection
 For example, out of 10000 items, 50 items should be selected. The range will be
fixed based on the characteristic of sample to be tested. Out of the range, either by
using software or random number tables, the 50 items will be selected. Random
selection, which ensures that all items in the population have an equal chance of
selection for example b use of random number tables.
2. Systematic Selection
 It is also called as interval sampling.
 A systematic selection of the sample items is made based on a fixed sampling
interval.
 For example, assume that a sample size (n) of 50 items of retail inventory are to
be selected from a population (N) of, say, 600 items. The sampling interval is
equal to N/n or 12. The first item chosen in the population is determined by
reference to random number tables (based on the first random number selected
between 1 and 12) and then after that, every 12th item is selected
3. Haphazard Selection
 The sample is selected haphazardly.
 No systematic procedures are applied while selecting sample
 For example, ‘Play-win Lottery’

Evaluation of sample results

Having carried out, on each sample item, those audit procedures that are appropriate to
the particular audit objective, the auditor should:
 Analyze any errors detected in the sample
 Project the errors found in the sample to the population and
 Reassess the sampling risk
Analysis of errors in the sample

In deciding the sample, the auditor will have defined those conditions that constitute an
error by reference to the audit objectives. For example, in a substantive procedure
relating to the recording of accounts receivable, a misposting between customer accounts
does not affect the total accounts receivable. Therefore, it may be inappropriate to
consider this an error in evaluating the sample results of this particular procedure, even
though it may have an effect on other areas of the audit such as the assessment of
doubtful accounts.

When the expected audit evidence regarding a specific sample item cannot be obtained,
the auditor may be able to obtain sufficient appropriate audit evidence through
performing alternative procedures. For eg, if a positive account receivable confirmation
has been requested and no reply was received, the auditor may be able to obtain sufficient
appropriate audit evidence that the receivable is valid by reviewing subsequent payments
from the customer. If the auditor does not or is unable to perform satisfactory alternative
procedures or if the procedures performed do not enable the auditor to obtain sufficient
appropriate audit evidence, the item would be treated as an error
In analyzing the errors discovered the auditor may observe that many have a common
feature for example, type of transaction, location, product line or period of item. In such
circumstances, the auditor may decide to identify all items in the population which
possess the common feature, thereby producing a sub population and extend audit
procedures in this area, the auditor would then perform a separate analysis based on the
items examined for each sub population.

Projection of errors
The auditor projects the error results of the sample to the population from which the
sample was selected. These are several acceptable methods of projecting error results.
However, in all the cases, the method of projection will need to be consistent with the
method used to select the sampling unit. When projecting error results, the auditor needs
to keep in mind the qualitative aspects of the errors found. When the population has been
divided into sub population, the projection of errors is done separately for each sub
population and the results are combined

Reassessing sampling Risk

The auditor needs to consider whether errors in the population might exceed the tolerable
error. To accomplish this, the auditor compares the projected population error to the
tolerable error taking into account the results of other audit procedures relevant to the
specific control or financial statement assertion. The projected population error used for
the comparison in the case of substantive procedures is net of adjustments made by the
entity. When the projected error exceeds tolerable error, the auditor reassesses the
sampling risk and if that risk is unacceptable would consider extending the audit
procedure or performing alternative audit procedures.

Sampling In CIS /ERP Environment

Nature of Transaction
 Huge voluminous data for verification
 Large number of similar kind of transaction
 Transactions are clearly identifiable can be classified
Verification process
 Determining the Size of the sample
 Use of CAAT’s and Statistical technique for determining the samples.
 Fixing up Materiality levels
 Evaluation of Sample results
 Based on the such evaluation results, either increase the substantive procedure or
conclude reliance to be placed on the Internal control.

“Sampling” Legal Frame work

“ We have conducted our audit in accordance with auditing standards generally accepted
in India. Those Standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements “
- Introductory paragraph of Audit Report under Sec 227 of the companies act

AAS-15 Audit Sampling

“The purpose of this Auditing & Assurance Standard is to establish standards on the
design & selection of an audit sample & the evaluation of the sample results.”

When Not To Sample

There are many audit procedures which do not involve sampling.

Inquiry and Observation

 Observing accounting procedures
 Discussing methods of accounting and reporting .

Analytical Review Procedures

 Comparing records reports and other information
 Recomputing or estimating amounts
  Reviewing trends in reporting
 Comparing similar businesses

One Hundred Percent Examination

 Reviewing all fixed asset purchases, where appropriate
 Examining all contracts, where there are a small number

Zero Percent Examination

This occurs when the auditor determines that a type of receipt, deduction, exemption or
other item does not need to be tested.