1. What is audit sampling?

It 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 to provide the auditor with a reasonable basis on which to draw
conclusions about the entire population. Audit sampling can use either a
statistical or a non-statistical approach.
2. Define the following terms:
a. Error in the context of tests of controls- is the difference between what
was expected, based on the documentation of controls, and what actually
occurred. Deviations are stated in percentages. Also, in projection there is
no explicit projection of errors is necessary since the sample error rate is
also the projected rate of error for the population as a whole.
b. Error in the context of substantive tests- o is the difference between
the amount computed by the auditor and the amount actually recorded or
reflected in the accounting records. Misstatements are presented in terms
of monetary amount. In addition, in this context, the auditor should project
monetary errors found in the sample to the population and should consider
the effect pf the projected error on the particular audit objective on other
areas of audit. The auditor projects the error for the population to obtain a
broad view of the scale of errors and to compare this to the tolerable error.
3. What are the two components of detection risk? Explain each component briefly.
Detection risk may be further subdivided into:
a. Sampling Risk- uncertainties related to sampling. Sampling risk arises from
the possibility 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.
b. Non-sampling Risk- the risk that the auditor reaches an erroneous
conclusion for any reason not related to sampling risk.
4. Can you eliminate sampling risk? Explain.
Sampling risk cannot be eliminated rather it can be reduced. It can be reduced by
simply increasing sample size, sampling risk varies inversely with sample size:
the greater the sample size, the smaller the sampling risk. This relationship is
quite logical, because if sample size were increased to include all the items in a
population, there would be no sampling and therefore no sampling size.
5. Describe the relationship between sampling risk and sample size.
Since sampling risk can be reduced simply by increasing sample size, sampling
risk varies inversely with sample size: the greater the sample size, the smaller
the sampling risk. This relationship is quite logical, because if sample size were
 increased to include all items in a population, there would be no sampling and
therefore no sampling risk.
6. How is non-sampling risk reduced?
Several factors can serve to reduce non-sampling risk, including proper planning
and supervision and encouraging effective firm-wide quality control.
7. In tests of controls, there are two types of sampling risk. For each type, give a
short description and identify whether it affects audit efficiency or audit
effectiveness.
The are two types of sampling risk in test of controls:
a. Risk of assessing control risk too high (or the risk of under reliance)-
this is the risk that a sample deviation rate supports assessing control risk
at the maximum when, unknown to the auditor, the true deviation rate in
the population supports assessing control risk below the maximum.
Assessing control risk to high results in over-auditing (doing more
substantive tests than necessary). Mainly, it affects the efficiency (time,
effort, and cost) of the audit. Normally, assessing control risk too high
corresponds with a lower acceptable detection risk and expands the scope
of substantive test to compensate for the perceived control deficiency. If
the expanded scope of substantive test is unjustified, the audit will be
less efficient since more substantive test will be performed than
necessary.
b. Risk of assessing control risk too low (or the risk of over reliance)-
this is the risk that a sample does support assessing control risk below the
maximum when, unknown to the auditor, the true deviation rate in the
population supports assessing control risk at the maximum. Assessing
control risk too low results in under-auditing (doing less substantive test
than necessary). Mainly, it affects the effectiveness of the audit (i.e.,
errors in the financial statements may remain undetected) because the
scope of substantive tests will be restricted under the erroneous
assumption that the control is effective and control risk in low, Thus, the
substantive test may be ineffective in detecting material misstatements.
8. In substantive tests, there are two types of sampling risk. For each type, give a
short description and identify whether it affects audit efficiency or audit
effectiveness.
There are two type of sampling risk in substantive tests:
a. Risk of incorrect rejection- is the risk that a sample supports the
conclusion that a recorded account balance is materially misstated when,
unknown to the auditor, the account is not materially misstated. Like the
risk of assessing control risk too high in attribute sampling the risk of
incorrect rejection relates to the efficiency of an audit, because an
initially erroneous conclusion that an account balance is misstated would
 ordinarily be revised when the auditor considers other evidence or
performs additional audit procedures.
b. Risk of incorrect acceptance- in contrast, is the risk that a sample
supports the conclusion that a recorded account balance is not material
misstated when, unknown to the auditor, the account is materially
misstated. Like the risk of assessing control risk too low in attribute
sampling, the risk of incorrect acceptance relates to audit effectiveness
and is particularly critical to an auditor because incorrectly accepting
misstated account balance could result in financial statements that are
materially misstated and therefor misleading.
9. Which one is of greater concern to the auditor: risk affecting audit effectiveness
or risk affecting audit efficiency? Explain.
The auditor is more likely concerned with the risk affecting audit effectiveness
because of its more significant impact on the overall audit, the risk affecting audit
effectiveness is more likely lead to an auditor’s inappropriate opinion which is
misleading for the users of the audited financial statements, unlike with risk
affecting audit which only gives additional audit workload for the auditing team.
10. What are the risk considerations in obtaining audit evidence?
Sampling risk and non-sampling risk can affect the components of material
misstatement. For example, when performing tests of controls, the auditor may
find no error in a sample and conclude that controls are operating effectively,
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). With respect to substantive procedures, the auditor may use
a variety of methods to reduce detection risk to an acceptable level.

11. Enumerate the different means of selecting items for testing.

The means available to the auditor for selecting items for testing are:
(a) Selecting all items (100% examination);
(b) Selecting specific items; and
(c) Audit sampling.

The application of any one or combination of these means may be appropriate

depending on the particular circumstances, for example, the risks of material
misstatement related to the assertion being tested, and the practicality and
efficiency of the different means.

12. What are the two general approaches to audit sampling? Explain briefly.
There are two general approaches to audit sampling:
 a. Statistical Sampling- it applies the laws of probability to aid an auditor in
designing an efficient sample in measuring the sufficiency of evidence
obtained, and in evaluating the sample results. It is a mathematically
derived tool that provides the auditor with an objective basis for
expressing conclusions about a population characteristic based upon a
sample of items from the population.
b. Non-Statistical Sampling- rely exclusively on subjective judgement to
determine sample size and evaluate sample results. It is an auditor-
derived tool for examining a sample of items from a population.

13. What are the advantages and disadvantages of statistical sampling?

Advantages of Statistical Sampling
a. It aids an auditor in determining the sample size required to meet given
objectives
b. It provides more objective and audit evidence
c. It allows an auditor to measure precision, reliability, and sampling error
Disadvantage of Statistical Sampling
a. There is a danger of accepting statistical evidence at face value, without
sufficient skepticism.
b. The cost of statistical sampling could exceed the benefits
c. Statistical sampling may be less appropriate in some cases than non-
statistical sampling or other audit procedures for gathering evidence.
14. Explain the following sample selection methods:
a. Random number sampling- this method utilizes random-number tables
or computer-generated random numbers to select sampling units from a
population. Random-number tables contain columns and rows of randomly
generated digits. An auditor begins at any digit in the table – a random
start – and proceeds along a column or row or diagonally, selecting digits
corresponding to identification numbers on the sampling units (e.g.,
invoice numbers or check numbers). If the sampling units do not have
identifying numbers, the audit assigns numbers to each population items.
b. Systematic-sampling- this involves selecting every nth item from a
population of sequentially ordered items. Systematic sampling eliminates
the need to establish correspondence between the population items and
random digits, and therefore is useful when population items lack
identification numbers.
 c. Block selection- this method involves selecting a group of items arranged
contiguously within larger grouping a sampling units. For example, a block
sample could consist of all invoices processed during the months of
January to March. Block sampling often results in excessively high
sampling risk. Although a block sample could be designed with enough
blocks to minimize sampling risk, testing large number of blocks is likely to
inefficient.
d. Haphazard sampling- it consists of sampling units selected without
special reasons, but also without conscious bias. Although it may be
useful for non-statistical sampling, hazard sampling is not appropriate for
statistical sampling.
15. What is stratification?
The process of dividing a population into sub-populations, each of which is a
group of sampling units which have similar characteristics (often monetary
value). Audit efficiency may be improved if the auditor stratifies a population by
dividing it into discrete sub-populations which have an identifying characteristic.
The objective of stratification is to reduce the variability of items within each
stratum and therefore allow sample size to be reduced without increasing
sampling risk.
16. What is value-weighted selection?
It will often be efficient in performing tests of details, particularly when testing for
overstatements, to identify the sampling unit as the individual monetary units (for
example, pesos) that make up a class of transactions or account balance This
approach to defining the sampling unit ensures that audit effort is directed to the
larger value items because they have greater chance of selection, and can result
in smaller sample sizes.
17. Give the steps involved in an attributes sampling plan.
The procedures for attributes sampling are presented below:
a. Determine the objective(s) of the test.
b. Define the attribute (characteristics of a control) and deviation (absence of
an attribute) conditions.
c. Define the population
d. Choose an audit sampling approach/ technique
e. Determine the sample size and the sample selection method
f. Perform the sampling plan
g. Evaluate sample results
h. Comply with documentation requirements
18. Give at least three determinants of the sample size for tests of controls. Relate
each determinant to sample size.
a. The rate of deviation from the prescribed control activity the auditor
is willing to accept (tolerable error)- the lower the rate of deviation that
the auditor is willing to accept, the larger the sample size needs to be. It will
have a decreasing effect on the sample size.
b. The auditor’s required confidence level- the greater the degree of the
confidence that the auditor requires that the results of the sample are in
fact indicative of the actual incidence of error in the population, the larger
the sample size needs to be. It will have an increasing effect on the sample
size.
c. The number of sampling units in the population- for large population,
the actual size of the population has little, if any, effect sample size. For
small populations however, audit sampling is often not as efficient as
alternative means. It will have a negligible effect.
19. Give the steps involved in a variables sampling plan.
The procedures for variables sampling are presented below:
a. Determine the objective(s) of the test
b. Define “fair presentation” and “material misstatement”.
c. Define population
d. Choose an audit sampling approach/ technique
e. Determine the sample size and the sample selection method
f. Perform the sampling plan
g. Evaluate sample results
h. Comply with documentation requirements
20. Give at least three determinants of the sample size for substantive tests. Relate
each determinant to sample size.
a. An increase in the auditor’s assessment of inherent risk. This normally
increases the sample size, the higher the auditor’s assessment of the risk
of material misstatement, the larger the sample size needs to be.
b. An increase in the auditor’s assessment of control risk (or a decrease in
reliance on internal controls). Naturally, this increases sample size
c. An increase in the use of other substantive procedures directed at the
same financial statement assertion. This usually decrease the sample
size.
 d. An increase in the total error that the auditor is willing to accept (tolerable
error). This generally decreases the sample size. The lower the total error
that the auditor is willing to accept, the larger the sample size needs to be.
e. Stratification of the population when appropriate. This normally decreases
the sample size. When there is a wide range (variability) in the monetary
size of items in the population. It may be useful to group items of similar
size into separate sub-populations or strata.

21. What are other sampling considerations mentioned in PSA 530?

a. Sequential sampling – is used when the auditor expects very few
deviations within the population being tested. Under this method, the
auditor has no fixed sample size. After testing a sample, the auditor makes
a decision whether to stop testing or to continue with the sampling plan
(hence the name stop-or-go sampling).
b. Discovery sampling – is most appropriate when no deviations are
expected within the population (thus, even a single deviation is a cause for
reason). This is normally used when the auditor suspects fraud. This
involves the determination of a sample size which is sufficient to discover
at least one deviation to confirm whether fraud has occurred.
22. When is projection necessary?
In the tests of controls, no explicit projection of errors is necessary since the
sample error rate is also the projected rate of error for the population. For tests of
details, the auditor should project monetary errors found in the sample to the
population and should consider the effect of the projected error on the audit
objective and on other areas of the audit. The auditor projects the total error and
for the population to obtain a broad view of the scale of errors, and to compare
this to the tolerable error.
23. Discuss the following projection techniques:
a. Difference estimation- is used to measure the estimated total
misstatement amount in amount in a population when there is both a
recorded value and audited value for each item in the sample. This
method frequently results in smaller sample sizes than any other method,
and it is relatively easy to use. The use of difference estimation is
appropriate when the misstatement in account is not affected by the book
value.
b. Ratio estimation- is like difference estimation except that the point
estimate of the population misstatement is determined by multiplying the
portion of sample amount misstated times the toral recorded population
book value. The ratio estimates result in even smaller sample sizes than
difference estimation if the size of the misstatements in the population is
proportionate to the recorded value of the population items. The use of
 ratio estimation is appropriate when the misstatement in an account is
directly proportional to its book value.
c. Mean-per-unit estimation- the auditor is concerned with the audited
value rather than the misstatement amount of each item in the sample.
Except for the definition of what is being measured, this method is
calculated in exactly the same manner as the difference estimate.
24. What is probability-proportional-to-size (PPS) sampling?
Is a sampling technique that uses attribute a sampling theory to evaluate the
results when a large number of transactions are captured within a single account.
In PPS sampling, the auditor randomly selects individual pesos from a population
and audits the balances, transaction, or documents – called logical units – that
include the pesos selected.