AUDIT SAMPLING

A. APPROACHES OF GATHERING EVIDENCE

When designing tests of controls and tests of details, the auditor shall determine means of selecting items for testing that
are effective in meeting the purpose of the audit procedure.

An effective test provides appropriate audit evidence to an extent that, taken with other audit evidence obtained or to be
obtained, will be sufficient for the auditor's purposes. In selecting items for testing, the auditor is required to determine the
relevance and reliability of information to be used as audit evidence; the other aspect of effectiveness (sufficiency) is an
important consideration in selecting items to test.

The means available to the auditor for selecting items for testing are:

1. Selecting all items (100% examination)

- The auditor may decide that it will be most appropriate to examine the entire population of fitems that make up a class
of transactions or account balance (or a stratum within that population). 100% examination is unlikely in the case of tests
of controls; however, it is more common for tests of details

100% examination may be appropriate when, for example:

- The population constitutes a small number of large value items;

- There is a significant risk and other means do not provide sufficient appropriate audit evidence; or
- The repetitive nature of a calculation or other process performed automatically by an information system makes
a 100% examination cost effective

2. Selecting specific items

The auditor may decide to select specific items from a population. In making this decision, factors that may be relevant
include the auditor's understanding of the entity, the assessed risks of material misstatement, and the characteristics of
the population being tested. The judgmental selection of specific items is subject to non-sampling risk.

Specific items selected may include:

- High value or key items.

- All items over a certain amount.
- Items to obtain information. –
- Items to test process or procedure.

3. Audit sampling

Audit sampling is designed to enable conclusions to be drawn about an entire population on the basis of testing a sample
drawn from it.

B. BASIC CONCEPTS OF AUDIT SAMPLING

1. Objective of the Auditor

The objective of the auditor when using audit sampling is to design and select the audit sample, perform audit procedures
on the sample items, and evaluate the results from the sample in a manner that will provide and appropriate basis for the
auditor to draw conclusions about the population from which the sample is drawn.

2. Definition

Audit sampling involves the application of audit procedures to less than 100% of items within a population of audit ‹
relevance such that all sampling units have a chance of selection.

Population means the entire set of data from which a sample is selected and about which the auditor wishes to draw
conclusions. A population may be divided into strata, or sub-populations, with each stratum being examined separately.

Sampling unit refers to individual item constituting a population.

3. Sampling is essential throughout audit as auditors attempt to gather sufficient evidence in a cost-efficient manner.

Sampling is used for both test of controls and for test of details of transaction and balances.

The following do not involve sampling:

- Inquiry and observation

- Analytical procedures
- Procedures applied to every item in a population
- Test of controls where application is not documented

Auditing and Assurance Principles

 - Procedures from which the auditor does not intend to extend the remaining items in the account
- Untested balances

C. RISKS IN GATHERING EVIDENCE

1. Sampling risk

The risk 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 procedure.

The mathematical complement of sampling risk is termed confidence levels

Sampling risk can lead to two types of erroneous conclusions:

a. In the case of a test of control, that controls, are more effective than they actually are, or in the case of a test of
details, that a material misstatement does not exist when in fact it does. Because it affects the audit effectiveness
and is more likely to lead to an inappropriate audit opinion, the auditor is primarily concern with this type of
erroneous conclusion.
b. In the case of a test of control, that controls are less effective than they actually are, or in the case of a test of
details, that a material misstatement exists when in fact ft does not. This type of erroneous conclusion affects
audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.

Sampling risk can be either eliminated or controlled by:

- Increasing the sample size

- Using an appropriate sample selection method.

2. Non-sampling Risk

Non-sampling risk is the risk that the auditor does not recognize misstatements or deviations included in the sample for
what they are. It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to
the size of the samples.

Examples:

- Inappropriate selection of audit procedures.

- Failure to recognize misstatements in sample tested.
- Misinterpretation of results of audit tests.

Can be minimized by:

- Adequate planning
- Proper direction, supervision and review of audit team
- Adherence to firm's quality control standards

D. STEPS IN SAMPLING

1. Determine the objective of sampling

2. Define the population

Population is the class of transactions being tested. This would involve defining the period covered by the test, defining
the sampling unit, and consideration of the completeness of the population.

a. ATTRIBUTE SAMPLING PLAN (Used in Test of Controls)

This is a sampling plan used to estimate) the rate or frequency of occurrence of a certain characteristic in a population.

Generally used when there is a trail of documentary evidence.

b. VARIABLE SAMPLING PLAN (Used in Substantive testing)

This is a sampling plan used to estimate numerical measurement of a population such as peso value. This is generally
platformed to substantive testing to estimate the amount of misstatements in the financial statements of the entity under
audit.

3. Determine the sample size

After determining the items to be tested, sample size should be determined. Sample size is determined by considering
the following factors:

a. Acceptable level of sampling risk

b. Risk of assessing control risk too low.

Auditing and Assurance Principles

 c. Tolerable deviation rate - A rate of deviation from prescribed by the auditor in respect of which the auditor seeks
to obtain an appropriate level of assurance that is not exceeded by the actual rate of deviation. (Tolerable
misstatement)
d. Expected population deviation rate - A rate of deviation the auditor expects to find in the population prior to
testing. This should not exceed tolerable deviation rate before testing. (Expected amount of misstatement).

ATTRIBUTE SAMPLING PLAN (Used in Test of Controls)

Factors Sample Size

Acceptable Sampling Risk Inverse
TDR Inverse
EDR Direct
Population Negligible
Increase in auditor’s reliance on internal control Direct

VARIABLE SAMPLING PLAN (Used in Substantive testing)

Factors Sample Size

Inherent risk Direct
Control risk Direct
Allowance for Sampling Risk Inverse
TM Inverse
Variation in the population Direct
EM Direct
Population Negligible

3. Determine the methods of selecting sample size

ATTRIBUTE SAMPLING PLAN (Used in Test of Controls)

a. Random-number sampling

Every sampling unit has the same probability of being selected.

The auditor selects the sample by matching random numbers with the population numbering system such as document
number.

Random numbers re generated from a random number table or computer program.

b. Systematic selection

Every nth item is selected after a random start.

A random starting point gives all items in the population an equal opportunity to be selected

The items in the population do not have to be consecutively numbered.

When using systematic selection, the auditor would need to determine that sampling units within the population are not
structured in such a way that the sampling interval corresponds with a particular pattern in the population.

c. Haphazard sampling

When using this method, the sample is selected without following an organized or structured technique.

It is not used in statistical sampling because the auditor cannot measure the probability of an item being selected.

d. Block selection

This method involves selecting block(s) of contiguous items from within the population.

Under this method, there is an ease of selecting samples.

This is the least desirable method because samples drawn may not be representative of the entire population.

Most population are structured such that items in sequence can be expected to have similar characteristics to each other,
but different characteristics from items elsewhere in the population.

VARIABLE SAMPLING PLAN (Used in Substantive testing)

a. Stratification

This method involves dividing a population into subpopulations, each of which is a group of sampling units which have
similar characteristics (often monetary value)

Auditing and Assurance Principles

This method enables the auditor to direct his efforts towards the items he considers would potentially contain the greater
monetary error.

It decreases the effect of variance in the population.

b. Value-weighted selection

Under this method, the probability of an item to be selected is directly proportional to the monetary value of such item.

Also, each peso is treated as one sampling unit.

4. Test the sample item.

The auditor shall apply the appropriate audit procedures to all items in the sample to determine if there are any deviations
from the prescribed controls procedures.

- In case of properly voided, unused, or inapplicable documents selected as samples can be replaced.
- In case of missing documents, it should be considered as a deviation/misstatement since the auditor was unable
to determine whether the control has been properly performed or in case of test of details.
- If in the early stage of the sampling process enough deviations had been found, the auditor need not continue
the test.

5. Evaluate sampling result

6. Document the sampling procedures.

Auditing and Assurance Principles