Slide 10A.

Audit Sampling and Other Selective Testing

Procedures
Principles of Auditing: An Introduction to
International Standards on Auditing - Ch. 10
Appendix

Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,
Philip Wallage

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.2

Audit Sampling

Audit sampling (sampling) involves the application

of audit procedures to less than 100% of items within
an account balance or class of transactions such that
all sampling units have a chance of selection.
From the sample the auditor forms a conclusion
about the population from which the sample is drawn.
Audit sampling can use either a statistical or a non-
statistical approach.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.3

Sampling Terms
Population means the entire set of data from
which a sample is selected and about which the
auditor wishes to draw conclusions.
For example, all of the items in an account
balance or a class of transactions constitute a
population.
Error means either control deviations, when
performing tests of control, or misstatements,
when performing substantive procedures.
Sampling risk arises from the possibility that
the auditors conclusion, based on a sample may
be different from the conclusion reached if the
entire population were subjected to the same
audit procedure.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.4

Types of Sampling Risk

There are two types of sampling risk:

The risk the auditor will conclude, in the test of control,
that control risk is lower than it actually is, or in the
case of a substantive test, that a material error does
not exist when in fact it does.
The risk the auditor will conclude, in a test of control,
that control risk is higher than it actually is, or in the
case of a substantive test, that a material error exists
when in fact it does not.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.5

Terms: Statistical Sampling

% Statistical sampling means any approach to

sampling that has the following characteristics:
%(a) Random selection of a sample; and
%(b) Use of probability theory to evaluate sample
results, including measurement of sampling risk.
% A sampling approach that does not have
characteristics (a) and (b) is considered non-
statistical sampling.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.6

More Sampling Terms

Sampling unit means the individual items

constituting a population, for example checks
listed on deposit slips, credit entries on bank
statements, sales invoices or debtors balances,
or a monetary unit.
Stratification is the process of dividing a
population into subpopulations, each of which is
a group of sampling units which have similar
characteristics (often monetary value).
Tolerable error means the maximum error in a
population that the auditor is willing to accept.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.7

Audit Testing
Audit sampling is used for both tests of controls (attributes
sampling) and for substantive procedures (usually, variables
sampling)
For control sampling the auditor identifies
the characteristics or attributes that indicate
performance of a control
possible deviations which indicate in-adequate
performance.
presence or absence of attributes by testing
Substantive procedures audit sampling is used to verify
assertions about a financial statement amount (for example,
the existence of accounts receivable), or to make an
independent estimate of some amount (for example, the
value of obsolete inventories).

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.8

Non-sampling risk

Includes all aspects of audit risk that are not

due to sampling
Examples are:
The failure to select appropriate audit
procedures
The failure to recognize misstatements in
documents examined
Misinterpreting the results of audit tests.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.9

Sampling Risk

It is the risk that the auditors conclusion, based

on a sample, might be different from the
conclusion that would be reached if the test
were applied in the same way to the entire
population
Tests of controls risks include the risk of
assessing control risk too high or too low
Substantive test risks include incorrect
rejection and incorrect acceptance

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.10

Sampling risk and non-sampling risk

When performing tests of control, the auditor may find

no errors in a sample and conclude that control risk is
low, when the rate of error in the population is, in fact,
unacceptably high (sampling risk). Or there may be
errors in the sample which the auditor fails to
recognize (non-sampling risk).

For example, the auditor may choose an inappropriate

analytical procedure (non-sampling risk) or may find
only minor misstatements in a test of details when, in
fact, the population misstatement is greater than the
tolerable amount (sampling risk).
Sampling risk can be reduced by increasing sample
size, while non-sampling risk can be reduced by proper
engagement planning, supervision, and review.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.11

Appropriate Tests of Control

Audit sampling for tests of control is generally

appropriate when application of the control
leaves evidence of performance (for example,
initials of the credit manager on a sales
invoice indicating credit approval, or evidence
of authorization of data input to a
microcomputer based data processing
system).

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.12

Substantive Tests of Details

When performing substantive tests of details, audit

sampling and other means of selecting items for
testing and gathering audit evidence may be used to:
verify one or more assertions about a financial
statement amount (for example, the existence of
accounts receivable), or
to make an independent estimate of some amount (for
example, the value of obsolete inventories).

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.13

In obtaining evidence, the auditor should use professional

judgment to assess audit risk and design audit procedures to
ensure this risk is reduced to an acceptably low level

Since detection risk covers all substantive

procedures, the acceptable level of sampling risk
is dependent on the amount of audit evidence
obtained from substantive procedures as well as
the assessments of inherent and control risk.
There is no clear-cut formula that determines an
exact level of acceptable sampling risk based on
the risk assessments. It is generally accepted
that audit evidence obtained from other
procedures will increase the acceptable level of
sampling risk,
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.14

Selection of Items for Testing

Appropriate means of selecting items for testing

are:
Selecting all items (100% examination)
Rarely done only for substantive tests
Selecting specific items
(next slide)
Audit sampling
Audit sampling can be applied using either
non-statistical or statistical sampling methods.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.15

Specific Items (Judgmental) Sampling

A judgmental sample is selected from a
population based on such factors as knowledge
of the clients business, preliminary assessments
of inherent and control risks, and the
characteristics of the population being tested.
Specific items selected may include:
High value or key items
All items over a certain amount
Items to obtain information
Items to test procedures
This does not constitute audit sampling because
it cannot be projected to the entire population.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.16

statistical or non-statistical sampling

approach?

Non-statistical sampling used in tests of control

where the nature and cause of errors will often
be more important than the statistical analysis of
the mere presence or absence (the count) of
errors.
When applying statistical sampling, the sample
size can be determined using either probability
theory or professional judgment, but the items
selected must be at random to make the sample
statistically valid.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.17

Design of the Sample

Consider the specific objectives
to be achieved and the
combination of audit
procedures used
Definite what constitutes an
error and what population to
use for sampling.
When performing tests of
control, the auditor generally
makes a preliminary
assessment of the rate of error
the auditor expects to find in the
population to be tested and the
level of control risk.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.18

Sample Population: Appropriate and

Complete
Appropriate to the objective of the sampling
procedure, which will include consideration of the
direction of testing. For example:
to test for overstatement of accounts payable, the
population could be defined as the accounts payable
listing.
to test for understatement of accounts payable, the
population is subsequent disbursements, unpaid
invoices, suppliers statements, unmatched receiving
reports, etc.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.19

Sample Population: Appropriate and

Complete

Complete. For example,

if the auditor intends to select payment vouchers
from a file, conclusions cannot be drawn about all
vouchers for the period unless the auditor is
satisfied that all vouchers have in fact been filed.
Similarly, if the auditor intends to use the sample
to draw conclusions about the operation of an
accounting and internal control system during the
financial reporting period, the population needs to
include all relevant items from throughout the
entire period.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.20

Stratification

Audit efficiency may be improved if the auditor

stratifies a population by dividing it into discrete
sub-populations which have an identifying
characteristic.
In substantive procedures, an account balance or
class of transactions is often stratified by monetary
value.
A population may be stratified according to a
particular characteristic that indicates a higher risk
of error, for example, when testing the valuation of
accounts receivable, balances may be stratified by
age.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.21

Value Weighted Selection

It will often be efficient in

substantive testing to identify the
sampling unit as the individual
monetary units (e.g. dollars) that
make up an account balance or class
of transactions.

Monetary unit sampling is the most efficient and effective

sampling technique in the auditors toolbox. It is particularly
useful when testing for overstatements, and it is advisable to
use it in cases where the population is available in machine-
readable format.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.22

Sample Size

Sample size is affected by the level of sampling

risk that the auditor is willing to accept. The lower
the risk the auditor is willing to accept, the
greater the sample size will need to be.
The tolerable rate is the maximum rate of
deviation from policy that an auditor will accept
without modifying the planned assessed level of
control risk.
When the planned assessed level of control risk is
low, and the degree of assurance desired from the
sample is high, the tolerable rate should be low.
(Especially when other tests of controls are not
done)
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.23

Examples of Factors Influencing Sample Size for Tests of

Control

FACTOR EFFECT ON
SAMPLE SIZE
An increase in the auditors intended reliance on Increase
accounting and internal control systems
An increase in the rate of deviation from the prescribed Decrease
control procedure that the auditor is willing to accept
An increase in the rate of deviation from the prescribed Increase
control procedure that the auditor expects to find in the
population
An increase in the auditors required confidence level (or Increase
conversely, a decrease in the risk that the auditor will
conclude that the control risk is lower than the actual
control risk in the population)
An increase in the number of sampling units in Negligible effect
the population

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.24

Examples of Factors Influencing Sample Size for Substantive

Procedures

FACTOR EFFECT ON
SAMPLE SIZE
An increase in the auditors assessment of Increase
inherent risk

An increase in the auditors assessment of Increase

control risk

An increase in the use of other substantive Decrease

procedures directed at the same financial
statement assertion
An increase in the auditors required confidence Increase
level (or conversely, a decrease in the risk that the
auditor will conclude that a material error does not
exist, when in fact it does exist)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.25

Examples of Factors Influencing Sample Size for Substantive

Procedures

FACTOR EFFECT ON
SAMPLE SIZE
An increase in the total error that the auditor Decrease
is willing to accept (tolerable error)

An increase in the amount of error the Increase

auditor expects to find in the population

Stratification of the population when Decrease

appropriate

The number of sampling units in the Negligible Effect

population

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.26

Selecting the Sample

The auditor should select items for the sample

with the expectation that all sampling units in the
population have a chance of selection.
Statistical sampling requires that sample items
are selected at random so that each sampling
unit has a known chance of being selected. The
sampling units might be physical items (such as
invoices) or monetary units. With non-statistical
sampling, an auditor uses professional judgment
to select the items for a sample.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.27

Sample Selection Methods

Use of a computerized random number generator
or random number tables.
Systematic selection, in which the number of
sampling units in the population is divided by the
sample size to give a sampling interval.
Haphazard selection, in which the auditor selects
the sample without following a structured
technique. Haphazard selection is not
appropriate when using statistical sampling.
Block selection involves selecting a block(s) of
contiguous items from within the population.
Block selection cannot ordinarily be used in audit
sampling.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.28

Performing the Audit Procedure

If a selected item is not appropriate for the

application of the procedure, the procedure is
ordinarily performed on a replacement item.
Example another check substituted for voided
check
Sometimes however, the auditor is unable to
apply the planned audit procedures to a selected
item because, for instance, documentation
relating to that item has been lost.
If suitable alternative procedures cannot be
performed on that item, the auditor ordinarily
considers that item to be in error.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.29

Nature and Cause of Errors

The auditor should consider the sample results, the nature and
cause of any errors identified, and their possible effect on the
particular test objective and on other areas of the audit.

When conducting tests of control and errors are identified,

the auditor needs to consider matters such as:
a. the direct effect of identified errors on the financial
statements; and
b. the effectiveness of the accounting and internal control
systems and their effect on the audit approach when, for
example, the errors result from management override of
an internal control.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.30

Analyzing Errors Discovered

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 time.
In such circumstances, the auditor may decide to
identify all items in the population that possess
the common feature, and extend audit
procedures in that stratum.
In addition, such errors may be intentional, and
may indicate the possibility of fraud.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.31

Projecting Errors

For substantive procedures, the auditor should project monetary

errors found in the sample to the population, and should consider
the effect of the projected error on the particular test objective
and on other areas of the audit.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.32

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.33

Evaluation of Sample Results

The auditor should consider the sample
results, the nature and cause of any
errors identified, and their possible effect
on the particular test objective and on other
areas of the audit.
For substantive procedures, the auditor
should project monetary errors found in
the sample to the population, and should
consider the effect of the projected error.
The auditor projects the total error for
the population to obtain a broad view of
the scale of errors, and to compare this
to the tolerable error.
Tolerable error is will be an amount less
than or equal to the auditors
preliminary estimate of materiality.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.34

Evaluating the Sample

Results

The auditor should evaluate the sample results to

determine whether the preliminary assessment of
the relevant characteristic of the population is
confirmed or needs to be revised.
In test of controls, an unexpectedly high sample
error rate may lead to an increase in the assessed
level of control risk.
In a substantive procedure, an unexpectedly high
error amount in a sample may cause the auditor to
believe that an account balance or class of
transactions is materially misstated.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 10A.35

Thank You for Your Attention

Any Questions?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007