Auditing Theory

RAYMUND FRANCIS A. ESCALA, CPA, MBA

AUDIT SAMPLING
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.
Audit sampling is designed to enable
conclusions to be drawn about an entire
population on the basis of testing a sample
drawn from it.
Objective of the Auditor when Sampling is
Used

Design and select audit sample

Perform audit procedures on the sample

items Evaluate the results from the

sample

Provide an appropriate basis to draw

conclusions about the population from which the
sample is drawn
Audit Sampling

Requirements Conclusion Reached

Test of Controls The control to be testedWhether controls

are leaves documentary effective
or ineffective evidence or audit trail

The auditor applies test

Whether the account
of details (either test of
balance tested is fairly
Substantive
use required to
d transactions and events
be
stated or additional Testing or test of balances
performed
is
procedures are
RISKS INVOLVED WHEN
GATHERING EVIDENCE
Sampling Risks and Its Possible Effects

Sampling risk refers to 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.
The mathematical compliment of sampling
risk is known as confidence level or
reliability level.
Sampling Risks and Its Possible Effects

As a TEST OF CONTROL
procedures
Risk of Affects
assessing Risk of Type 1 risk and
control
auditor’s
UNDER Alpha risk
risk TOO reliance efficiency
HIGH
Risk of Affects
assessing Risk of Type 2 risk and
control OVER
auditor’s
Beta risk
risk TOO reliance effectiveness
LOW
Sampling Risks and Its Possible Effects

As a SUBSTANTIVE TEST
procedures
Risk of Affects Type 1 error
incorre auditor’s and Alpha
ct efficiency error
rejectio
n
Risk of Affects
Type 2 error
incorrect auditor’s
acceptanc and Beta error
effectiveness
e
Managing Sampling Risks

Examination of the entire population (100%) or

selecting specific items would ELIMINATE sampling
risks.
Only exposed to sampling risks when applying
Audit Sampling.

Auditors control sampling risk by:

Increasing the sample size

Using an appropriate sample

selection method
Methods of Selecting Samples

Random-number selection
 Under this method, every sampling unit has the same probability of
being selected
 Applied through random number generators, for example, random
number tables or computer programs
 Documents must be pre-numbered

Systematic selection
Applied through calculation of sampling interval by dividing the
population with the sample size
Using the calculated sampling interval, 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)
 Must be applied on a surprise basis
Methods of Selecting Samples

Haphazard
 Auditor selects the sample without following a structured
technique.
 Although no structured technique is used, the auditor would
nonetheless avoid any conscious bias or predictability (for
example, avoiding difficult to locate items, or always choosing
or avoiding the first or last entries on a page) and thus attempt
to ensure that all items in the population have a chance of
selection.
Block or cluster selection
 It involves selecting a block/s of contiguous items from
within the population.
 It cannot ordinarily be used in audit sampling because most
populations 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
Non-Sampling Risks

Pertains to the risk that the auditor reaches an

erroneous conclusion for any reason not related
to sampling risk.
It is also defined as the possibility that the auditor does
Definition 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 sample.
Examples:
 Inappropriate selection of audit procedures
 Misinterpretation of results of audit tests
 Failure to recognize misstatements or deviations in sample
tested
Managing Non-Sampling Risks

Adequate Planning

Proper direction, supervision and review

of audit team

Adherence to firm’s quality control

standards
GENERAL APPROACHES TO
AUDIT SAMPLING
General Approaches to Audit Sampling

Statistical sampling pertains to an approach to sampling that

has the
following characteristics:
 Random selection of the sample items; and
 The use of probability theory to evaluate sample results,
including measurement of sampling risk.
Statistical sampling helps the auditor to:
 Design an efficient sample that would meet given
objectives
 Measure the sufficiency of the evidence
 Evaluate the sample result
Statistical sampling applies the laws of probability in
determining the sample size. This allows the auditor to
quantify sampling risk to limit it to an acceptable level.
General Approaches to Audit Sampling

Non-statistical sampling is any approach to sampling

that does not have the characteristics of statistical
sampling.

Non-statistical sampling exclusively relies on

judgment to determine the sample size and
evaluate sample results.
SAMPLING PLANS
Sampling Plan

Attribute Sampling
Plan

Variable Sampling
Plan
ATTRIBUTE SAMPLING
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
 This is performed during test of controls to estimate
the rate of deviations from prescribed internal
control policies or procedures.
 Generally used when there is a trail of
documentary evidence.
Steps in Attribute Sampling Plan

Determine the objective of the test

The auditor should clearly state what is to be
accomplished or
the specific objectives to be attained.
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.
Steps in Attribute Sampling Plan

Define the attribute and deviation conditions

An auditor should identify characteristics or attributes
that would indicate operations of the internal control is
operating effectively. A deviation is the absence of an
attribute.
Determine the sample size
Sample size is determined by considering the following
factors:
 Acceptable level of sampling risk
 Risk of assessing control risk too low
 Tolerable deviation rate
 Expected deviation rate
Steps in Attribute Sampling Plan

Summary of relationship of the different factors to be

considered in determining sample size
Risk of Tolerable Expected Acceptable Sample
assessing deviation deviation sampling size
too low rate rate risk
HIGH HIGH LOW HIGH SMALL
LOW LOW HIGH LOW LARGE
Steps in Attribute Sampling Plan

Determine the method of selecting the sample

The sample to be selected should be
representative of the population. All items in the
population should have an opportunity to be
selected.
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.

Deviations may be an isolated or recurring type of

Steps in Attribute Sampling Plan

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 since the auditor was unable to
determine whether the control has been properly
performed.

If in the early stage of the sampling process enough

deviations had been found, the auditor need not
continue the tests.
Steps in Attribute Sampling Plan

Evaluate the sample results

Once audit procedures have been performed on all
samples, the sample result must be evaluated.

Procedures performed include:

 Determining the sample deviation rate
 Determining the maximum population
deviation rate (achieved upper deviation limit)
and the allowance for sampling risk (achieved
precision)
 Consider the qualitative aspects of the
deviation.

Steps in Attribute Sampling Plan

Document the sampling procedures

Each of the prior steps, as well as the basis for
overall
conclusions, should be documented in the working
papers.
OTHER ATTRIBUTES SAMPLING TECHNIQUES

Sequential sampling
 The sampling plan is performed in several steps
 Every after each step, the auditor decides whether
to stop or
to go on to the next step.
 This method is used when the auditor expects zero
or very few deviations within the population.
Discovery sampling
 This method is used when the auditor expects near
zero
deviations within the population.
 If the auditor discovers at least one deviation, no
VARIABLE SAMPLING
Variable Sampling Plan (Used in Substantive
Testing)

A. This is a sampling plan used to estimate

numerical
measurement of a population such as peso
value.
B. This is generally performed in substantive
testing to estimate the amount of
misstatements in the financial statements of
the entity under audit.
Steps in Variable Sampling Plan

Determine the objective of the substantive procedure

The auditor’s objective is to test the reasonableness of a
recorded account balance in the financial statements.

Define the population and sampling unit

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.
Selecting an audit sampling technique
 The auditor may use either statistical or non-statistical
sampling.
 If statistical is used, probability-proportional-to-size sampling
(PPS) or classical variable techniques are appropriate.
Steps in Variable Sampling Plan

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:
• Acceptable level of risk
• Variation within the population
• Tolerable misstatement or error
• Expected misstatement or error
Determine the sample size

Summary of relationship of the different factors to be

considered in determining sample size
Risk of Risk of Tolerable Expected Variation Acceptable Sample size
incorrect incorrect Misstatement Misstatement (standard sampling risk
acceptance rejection deviation)
HIGH HIGH HIGH LOW LOW HIGH SMALL
LOW LOW LOW HIGH HIGH LOW LARGE
Steps in Variable Sampling Plan

Determine the method of selecting the sample

When selecting a sample for substantive testing, the
auditor may use any one of the sample selection
methods discussed in attribute sampling plan.
Determine the method of selecting the
sample
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).
• The strata must be explicitly defined so that each
sampling unit can belong to only one stratum.
• 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.

Value weighted selection

• Under this method, the probability of an item to be selected
is directly proportional to the monetary value of such item.
Steps in Variable Sampling Plan

Test the sample item

The auditor shall perform audit procedures appropriate to the
particular audit objective on each item selected.

 If the audit procedure is not applicable to the selected item,

the auditor shall perform the procedure on a replacement
item (e.g., the item is properly voided)
 If the auditor is unable to apply the designed audit procedures,
or suitable alternative procedures, to a selected item the auditor
shall treat that item as a misstatement, in the case of tests of
details (e.g., missing documents)
Steps in Variable Sampling Plan

Evaluate the sample results

Once audit procedures have been performed on all samples,
the sample
result must be evaluated. This step would include the
following:
 Project the misstatements to the population
 Considering sampling risk
 Considering qualitative information
 Reaching an overall conclusion

Document the sampling procedures

OTHER VARIABLE SAMPLING PLAN TECHNIQUES

Classical Variable Sampling Techniques

Mean-per-unit Estimation is a classical variable sampling technique that
projects the sample average to the total population by multiplying the
sample average by the number of items in population.
Difference Estimation is a classical variable sampling technique that uses
the average difference between audited amounts and individual recorded
amounts to estimate the total audited amount of a population and an
allowance for sampling risk.
Difference estimation is more appropriate when there is little or no
relationship
between the absolute amounts of the differences and the book values.
Ratio Estimation is a classical variable sampling technique that uses the
ratio of audited amounts to be recorded amounts in the sample to
estimate the total peso amount of the population and an allowance for
sampling risk.
Ratio estimation is more appropriate to use when the difference is
OTHER VARIABLE SAMPLING PLAN TECHNIQUES

Conditions for using difference and ratio estimation:

 Each population item must have a recorded value
 Total population book value must be known
 Expected difference between audited and
recorded book values must not be too rare.
OTHER VARIABLE SAMPLING PLAN TECHNIQUES

Probability-Proportional-to-Size Sampling (PPS) / Dollar-unit sampling

 This method uses attributes sampling theory to

express a conclusion in peso amounts.
 Being a statistical method, it gives each individual
peso in the population an equal chance of selection.
 Generally useful for verifying “existence” assertions
since, in this method, the higher the amount, the
more likely that it will be selected.
 This method is primarily applicable in testing
account balances and transactions for
overstatement.