AUDITING THEORY L. R.

CABARLES
AT.114-Audit Sampling 1st Sem. SY 2013-14

LECTURE NOTES
Means of Selecting Items for Testing procedure. Sampling risk can lead to two types of
erroneous conclusions, such as:
When designing tests of controls and tests of details, the
auditor’s means of selecting items for testing are: Alpha Risk Beta Risk
 Selecting all items (100% examination), (Type I (Type II
 Selecting specific items, and Misstatement) Misstatement)
 Audit sampling. Test of Controls
Sampling risks Assessing control Assessing control
These approaches are described in further detail below. risk too high risk too low
Controls are: less effective more effective than
Selecting All Items than they they actually are
100% examination is unlikely in the case of tests of actually are
controls; however, it is more common for tests of details. Reliance on Underreliance Overreliance
100% examination may be appropriate when, for example: internal control
 The population constitutes a small number of large Test of Details
value items; Sampling risks Incorrect Incorrect Acceptance
 There is a significant risk and other means do not Rejection
provide sufficient appropriate audit evidence; or Material exists when in does not exist when
 Cost effective by using CAATs. misstatement: fact it does not in fact it does
Affects audit: Efficiency Effectiveness
Selecting Specific Items
The auditor is more concerned with beta risk. The
Specific items selected may include: mathematical complements of these two risks are termed
 High value or key items. confidence levels.
 All items over a certain amount.
 Items to obtain information about matters such as the Dealing with sampling risks
nature of the entity or the nature of transactions. The auditor can eliminate sampling risks by through
This does not constitute audit sampling. The results of examining the entire population. However, examining the
audit procedures applied to items selected in this way entire population is normally not possible for the auditor.
cannot be projected to the entire population; accordingly, Instead, the auditor usually manages or controls sampling
selective examination of specific items does not provide risk by making the sample more representative of the
audit evidence concerning the remainder of the population. population by:
 Increasing the sample size
Audit Sampling  Using appropriate method of selecting sample items

Audit sampling is the application of audit procedures to Non-sampling Risks

less than 100% of items within a population of audit
relevance such that all sampling units have a chance of Non-sampling risk is the risk that the auditor reaches an
selection in order to provide the auditor with a reasonable erroneous conclusion for any reason not related to
basis on which to draw conclusions about the entire sampling risk. Non-sampling risk is also an aspect of audit
population. Audit sampling enables the auditor to obtain risk not attributable to sampling such as human error due
and evaluate audit evidence about some characteristic of to:
the items selected in order to form or assist in forming a  Use or application of inappropriate audit procedures
conclusion concerning the population from which the  Failure to recognize errors (misstatements or
sample is drawn. This is the case when it is not efficient to deviations) in the samples tested
review 100% of the records or other circumstances make  Misinterpretation of evidence obtained
reviewing all of the records difficult.
Dealing with non-sampling risks
Representative Sample
Non-sampling risks cannot be totally eliminated in audit.
A representative sample is one in which the characteristics There is always human error in audit as the auditor’s
in the sample of audit interest are approximately the same judgment may not always be correct. However, the auditor
as those of the population. However, the two things that can manage non-sampling risks through:
cause a sample to be non-representative of the population  Proper planning
are sampling risk and non-sampling risk. These could also  Adequate direction and supervision of the audit team
be the two aspects of audit risk, i.e., [Audit risk = (f) and timely review of their work
Sampling risk x Non-sampling risk].
The Two Sampling Approaches
Sampling Risks
Audit sampling can be applied using either non-statistical
Sampling risk is the risk that the auditor’s conclusion or statistical sampling approaches. These two approaches
based on a sample may be different from the conclusion if involve the use of auditor’s professional judgment in
the entire population were subjected to the same audit planning and performing the sampling procedure and
evaluating the results of the sample.

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The table below summarizes the comparison between the two sampling approaches:
Statistical Sampling Non-statistical Sampling
Basic concepts  Random selection of the sample items  A sampling approach that does not have
 Apply the laws or theory of probability to: characteristics of statistical sampling (i.e., no
o Design efficient sample random selection of sample items and does not
o Measure sufficiency of sample apply laws of probability)
o Evaluate sample results  Cannot measure sampling risk quantitatively,
o Measure sampling risk quantitatively only based on the auditor’s judgment.

Advantages  More defendable  Easy to apply

 Free from bias  Less costly

Disadvantages  Overvalue the evidence it provides  Relies exclusively on professional judgment to

 Reduces auditor skepticism o Determine sample size
 Increased cost o Evaluate sample results
o Train auditors
o Design samples

Audit Sampling Process

Population means the entire set of data from which a
When designing and performing audit sampling, the sample is selected and about which the auditor wishes to
auditor normally observes the following 10 steps: draw conclusions. For example, all of the items in an
Step 1: Define the purpose (objective) of the audit test. account balance or a class of transactions constitute a
Step 2: Define the deviation or misstatement. population. The auditor needs to identify the relevant
Step 3: Identify and understand the relevant population. population and consider its characteristics from which the
Step 4: Determine the relevant sampling unit. sample will be drawn. Considering the characteristics of
Step 5: Select an appropriate approach of sampling. the population would include:
Step 6: Determine the sample size.  Preliminary assessment of expected rate of deviation
Step 7: Select the sample items. or misstatement and the auditor’s tolerable rate of
Step 8: Examine and evaluate the evidence for the sample. deviation or misstatement.
Step 9: Evaluate the tests results.  Determining whether stratification or value-weighted
Step 10: Document the audit sampling performed. selection is appropriate.
The steps above are the same regardless of, the sampling  Ascertaining the completion of population.
approach selected whether statistical or non-statistical, the In addition, it is important that the population is
type of audit sampling technique utilized and whether the appropriate to satisfy the established objective of the audit
test is the performance of test of controls or test of details. procedures by considering the direction of the test.
Step 1: Define the purpose (objective) of the audit Assessment of Expected Rate of Deviation or Misstatement
test and Tolerable Rate of Deviation or Misstatement
When designing an audit sample, the auditor shall consider
For test of controls, the auditor makes a preliminary
the purpose (objective) of the audit procedure. The
assessment of the expected rate of deviation based on the
auditor’s consideration includes the specific purpose (test
auditor’s understanding of the relevant controls or on the
of controls or test of details) to be achieved and the
examination of a small number of items from the
combination of audit procedures that is likely to best
population (‘pilot testing’). This assessment is made in
achieve that purpose.
order to design an audit sample and to determine sample
Step 2: Define a deviation or misstatement size. For example, if the expected rate of deviation is
unacceptably high than the auditor’s tolerable rate of
The auditor considers what conditions constitute a
deviation, the auditor will normally decide not to perform
deviation or misstatement by reference to the objectives of
tests of controls. Similarly, for test of details, the auditor
the test.
makes an assessment of the expected misstatement in the
Deviations for Tests of Controls population. If the expected misstatement is high, 100%
examination or use of a large sample size may be
For example, suppose that a control requires support for
appropriate when performing tests of details. This is
every disbursement to include an invoice, a voucher, a
normally the case when the auditor’s expected
receiving report, and a purchase order; all stamped “Paid.”
misstatement is approximately or higher than tolerable
The auditor believes that the existence of an invoice and a
misstatement. Tolerable deviation rate or misstatement is
receiving report, both stamped “Paid,” is necessary to
the rate of deviation or monetary amount the auditor is
indicate adequate performance of the control. Therefore, in
willing to accept on the population.
this case, a deviation may be defined as “a disbursement
not supported by an invoice and a receiving report that has Stratification and Value-Weighted Selection
been stamped ‘Paid.’”
Stratification
Misstatement for Tests of Details
Audit efficiency may be improved if the auditor stratifies a
For example, in a test of details relating to the existence of population by dividing it into discrete sub-populations
accounts receivable, such as confirmation, payments made which have an identifying characteristic. Stratification
by the customer before the confirmation date but received reduces the variability of items within each stratum and
shortly after that date by the client, are not considered a allow sample size to be reduced without increasing
misstatement. sampling risk. For example, 20% of the items in a
population may make up 90% of the value of an account
Step 3: Identify and understand the relevant
balance. The results of audit procedures applied to a
population

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sample of items within a stratum can only be projected to The auditor shall determine a sample size sufficient to
the items that make up that stratum. reduce sampling risk to an acceptably low level. The
sample size can be determined by the application of a
Value-Weighted Selection
statistically-based formula or through the exercise of
When performing tests of details it may be efficient to professional judgment (non-statistical).
identify the sampling unit as the individual monetary units The tables below list the factors affecting sample size for
that make up the population. This is discussed further test of controls and test of details.
below under ‘Monetary Unit Sampling’.
Test of Controls (Attribute Sampling)
Completeness of the population
Factor Relationship
The population used to make a sample selection needs to Tolerable deviation rate Inverse
contain all sampling units that are to be subjected to Allowable risk of assessing control risk Inverse
sampling procedures. The totality of the population may too low/Sampling risk (beta risk)
be verified by: Expected population deviation rate Direct
 Footing the population items and comparing the total Population size Negligible effect
obtained to that of the population
Test of Details (Variables Sampling)
 Accounting for numerical sequence of prenumbered
documents or records. Factor Relationship
Tolerable misstatement Inverse
Direction of the Test, Appropriate to Test Objective
Allowable risk of incorrect Inverse
For test of controls acceptance/Sampling risk (beta risk)
Expected amount of misstatement Direct
If the auditor wishes to test the operating effectiveness of
Assessed level of control risk Direct
a prescribed control designed to ensure that all shipments
are billed, the auditor would not detect deviations by Population size Negligible effect
sampling billed items because that population would not be Step 7: Select the sample items
expected to contain items that were shipped but not billed.
An appropriate population for detecting such deviations is The auditor shall select items for the sample in such a way
usually the population of all shipped items. that each sampling unit in the population has a chance of
selection. It is important that the auditor selects a
For test of details representative sample, so that bias is avoided.
When understanding the risks of material misstatement Sample Selection Methods
the direction in which the population may be misstated
may need to be considered. The principal methods of selecting samples are the use of
random selection, systematic selection and haphazard
When testing for overstatement, items to be examined are selection. Sample selection methods are classified into
selected directly from the population of audit interest. probabilistic (statistical) and non-probabilistic (non-
When testing for understatement, items to be examined statistical).
are selected from a reciprocal or independent population. Probabilistic Sample Selections
Populations on which we may perform audit sampling to a. Random-number Selection
test for understatement and examples of appropriate  Every sampling unit has the same probability of
reciprocal populations may include:
being selected as every other sampling unit in the
Population of audit Example of a potential population.
interest reciprocal population  Uses computer-generated numbers to select
Accounts payable Subsequent disbursements sampling units.
Sales Shipping documents  Match number to prenumbered documents.
Step 4: Determine the relevant sampling unit  Appropriate for both statistical and nonstatistical
Sampling unit is the individual items constituting a sampling.
population. The sampling units might be physical items b. Systematic Selection
(for example, checks listed on deposit slips, credit entries  The number of sampling units in the population is
on bank statements, sales invoices or debtors’ balances) or divided by the sample size to give a sampling
monetary units. The total population of the sampling units interval, for example 50, and having determined a
could be manually prepared documents or lists, documents starting point within the first 50, each 50th
generated from computer systems, or an electronic file sampling unit thereafter is selected. Starting point
provided by the entity. may be determined haphazardly or randomly.
 Determine that sampling units within the
Step 5: Select an appropriate approach of sampling population are not structured in such a way that
The decision whether to use a statistical or non-statistical the sampling interval corresponds with a particular
sampling approach is a matter for the auditor’s judgment; pattern in the population.
in making that judgment the auditor consider the  Useful when identification numbers lacking
following:  Appropriate for both statistical and nonstatistical
 The choice is based on relative costs and benefits sampling
 Effectiveness c. Stratified Selection
 Need for quantitative estimate of sampling risk  Stratification is the process of dividing a population
into sub-populations, each of which is a group of
However, sample size is not a valid criterion to distinguish sampling units which have similar characteristics
between statistical and non-statistical approaches and the (often monetary value).
choice between the two approaches is independent of audit  Subdivide population into homogeneous strata
procedures to be performed.  Select separate sample for each strata by on of
Step 6: Determine the sample size prior methods

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Non-probabilistic Sample Selections

Projecting Deviations for Tests of Controls
a. Block Selection
 Involves selection of a block(s) of contiguous items For tests of controls, no explicit projection of deviations is
from within the population. necessary since the sample deviation rate (SDR) is also the
 Inefficient & not generalizable projected deviation rate (PDR) for the population as a
 Should not be used for statistical or nonstatistical whole. SDR is the rate of deviation in the operation of
sampling without care in controlling sampling risk controls detected in the sample by performing tests of
b. Haphazard Selection controls. SDR = # of sample deviations / sample size.
 The auditor selects the sample without following a PDR, a.k.a., upper deviation or precision limit, is the rate
of deviation that the auditor estimates to be in the
structured technique.
population. PDR = SDR + allowance for sampling risk
 Sampling units selected without special reason or
(Beta risk). An allowance for sampling risk can only be
conscious bias
calculated where the auditor has used statistical sampling.
 Inappropriate for statistical sampling
 Useful for nonstatistical sampling Projecting Misstatements for Tests of Details
c. Direct sample selection
For tests of details, the auditor shall project misstatements
 Auditor selects items based on judgmental criteria
found in the sample to the population. Sample
such as likelihood of misstatement, characteristics misstatement is the monetary misstatement detected in
such as different time periods, or large amounts. the sample by performing tests of details.
Step 8: Examine and evaluate the evidence for the Projected misstatement is the monetary misstatement that
sample the auditor estimates to be in the population, and is
The auditor shall perform audit procedures, appropriate to calculated by adjusting the sample misstatement by an
the purpose, on each item selected. allowance for sampling risk. An allowance for sampling risk
can only be calculated where the auditor has used
Voided Sample statistical sampling. The methods for calculating an
The auditor shall perform the procedure on a replacement allowance for sampling risk and projecting the sample
item. If the auditor is satisfied that the sample has been error differ between classical variables sampling and
properly voided such that it does not constitute a Monetary Unit Sampling (MUS). This is discussed below.
deviation, and the chosen replacement is examined. When a misstatement has been established as an anomaly,
Missing or Lost Sample it may be excluded when projecting misstatements to the
population.
If the auditor is unable to apply the designed audit
procedures, or suitable alternative procedures, to a Evaluate Sample Results and Reach an Overall Conclusion
selected item, the auditor shall treat that item as a Overall Conclusion for Tests of Controls
deviation from the prescribed control, in the case of tests
of controls, or a misstatement, in the case of tests of There are two generally accepted approaches for
details. evaluating the sample results for tests of controls:
 Compare PDR to tolerable deviation rate. If the PDR <
Stopping the Test Before Completion tolerable deviation rate = the control is operating
Occasionally the auditor might find a large number of effectively. If the PDR = or > tolerable deviation rate =
deviations in auditing the first part of a sample. As a the control is not operating effectively as designed.
result, the auditor might believe that even if no additional  Compare SDR to expected deviation rate. If the SDR <
errors were to be discovered in the remainder of the expected deviation rate = control is operating
sample, the results of the sample would not support the effectively. If the SDR = or > expected deviation rate
planned assessed level of control risk. = control is not operating effectively as designed.

Step 9: Evaluate the tests results Overall Conclusion for Tests of Details

The auditor uses judgment in evaluating the results and When the projected misstatement plus anomalous
reaching an overall conclusion. In evaluating the sample misstatement, if any, exceeds tolerable misstatement, the
results, the auditor: sample does not provide a reasonable basis for conclusions
 Considers the nature and causes of deviations and about the population that has been tested. The closer the
misstatements, projected misstatement plus anomalous misstatement is to
 Calculates and projects the sample deviations and tolerable misstatement, the more likely that actual
misstatements, and misstatement in the population may exceed tolerable
 Reaches an overall conclusion. misstatement.
If the auditor concludes that audit sampling has not
Nature and Cause of Deviations and Misstatements
provided a reasonable basis for conclusions about the
The auditor shall investigate the nature and cause of any population that has been tested, the auditor may:
deviations or misstatements identified, and evaluate their  Request management to investigate misstatements
possible effect on the purpose of the audit procedure and identified and the potential for further misstatements
on other areas of the audit. and to make any necessary adjustments; or
In the extremely rare circumstances the auditor considers  Tailor the nature, timing and extent of those further
a misstatement or deviation discovered in a sample to be audit procedures to best achieve the required
an anomaly (not representative of population). The auditor assurance.
shall obtain a high degree of certainty that such Step 10: Document the Audit Sampling Performed
misstatement or deviation is not representative of the
population. For example is an error that is found to be The auditor should document the sampling application and
caused by use of an incorrect formula in calculating all related audit procedures.
inventory values at one particular branch.
Types of Statistical Sampling
Projecting Sample Deviations and Misstatements

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The two commonly used statistical sampling used in audited amount for all items in the sample and
auditing are: multiplying that average amount by the number of
1. Attributes sampling–generally used for tests of controls items constituting the population.
 Tests rate of deviation from a prescribed control  Difference approach – The auditor calculates the
procedure average difference between audited and recorded
 Estimate frequency of errors in population based amounts of the sample items and projects that
on frequency in sample average difference to the population.
 Determine whether or not estimated error rate  Ratio approach – The auditor calculates the ratio
indicates control is working effectively between the sum of the audited amounts and the
 Attribute – a characteristic of control sum of the recorded amounts of the sample items
 Deviation – absence of the attribute and projects this ratio to the population. The
2. Variables Sampling–generally used for tests of details auditor estimates the total population amount by
 Tests whether recorded account balances are fairly multiplying the total recorded amount for the
stated population by the same ratio.
 Estimate value of population based on value of
Using normal distribution theory based on the
items in sample
variability of the audited amounts in the sample, the
Attributes Sampling auditor also calculates an allowance for sampling risk.
a. Traditional (Classical) attributes sampling
b. Monetary unit sampling (a.k.a., Probability Proportional
 This has been already discussed above under the
to Size (PPS) or Value-weighted selection)
steps of audit sampling.
 Under traditional attribute sampling, sample size is  Uses attributes sampling theory to express a
determined and sample tested to estimate error conclusion in amounts rather than as a rate of
rate in population occurrence.
b. Stop-or-go (Sequential) sampling  Probability of selecting an item is proportional to
 Performed in stages its recorded amount.
 Auditor decides to stop or continue sampling after  Automatically stratifies an audit population
each stage  Appropriate for testing for overstatement and few
 Appropriate when expected deviation rate is low or no errors are expected
 Sample selected in steps Useful for testing assets and revenues
 Each step is based on results of previous step  Advantages over classical variables sampling
 No fixed sample size and may result in lower o Items with larger amounts have a greater
sample if few or no errors detected probability of being selected
c. Discovery sampling o An item that is individually material will
 Sample size is very small automatically be selected
 Appropriate when expected deviation rate is o Sample size may be reduced as the same item
extremely low or zero may be selected more than once
 Sample large enough to detect at least one error if o The sample distribution does not have to be
it exists close to the distribution in the population for
 Any errors in sample results in rejection the sample to be valid
o Sampling can be initiated prior to year-end
Variables Sampling more easily
a. Traditional (Classical) variables sampling – The  Disadvantages of PPS
procedures the auditor follows to apply this sampling  Understated items have a lower probability of
have been discussed above under the steps of audit being selected
sampling. There are three approaches to classical  Items with zero or negative balances are not
variables sampling for auditing applications that differ generally included in the sample
in the way the misstatement is projected to the  A high frequency of misstatements results in
population are: an increase in sample size
 Mean-per-unit approach – The auditor estimates a
total population amount by calculating an average
- done -

MULTIPLE CHOICE
Selecting Items for Testing units have a chance of selection, identifies two general
1. Evaluate whether each of the following statements approaches to audit sampling. They are
qualifies as sampling: a. Random and nonrandom
1.1 – Test performed on 100% of the items within a b. Statistical and nonstatistical
population c. Precision and reliability
1.2 – Selecting items over a certain amount d. Risk and nonrisk
1.3 – Selecting items for the total population on the 3. An advantage of statistical sampling over nonstatistical
basis that was expected to be representative sampling is that statistical sampling helps an auditor to
a. 1.1, 1.2, 1.3 qualify a. Minimize the failure to detect errors and
b. 1.1 and 1.2 qualify; 1.3 does not qualify irregularities.
c. 1.1 and 1.2 do not qualify; 1.3 qualifies b. Eliminate the risk of nonsampling errors.
d. 1.1, 1.2, 1.3 do not qualify c. Reduce the level of audit risk and materiality to a
relatively low amount.
Basic Concepts of Audit Sampling
d. Mathematically measures sampling risk.
2. Audit sampling, which involves the application of audit
procedures to less than 100 percent of items within a 4. A nonstatistical sampling plan can:
population of audit relevance such that all sampling a. Overstate the estimate of sampling risk

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b. Misdirect an auditor to unreliable sampling units

Audit Sampling Process
c. Replicate the results of a statistical sampling plan
13. Which of the following is not one of the basic phases in
d. Understate the degree of audit assurance desired
audit sampling?
5. The risk that the auditor’s conclusion based on a a. Planning the sample
sample may be different from the conclusion if the b. Evaluating the results of the sample
entire population were subjected to the same audit c. Selecting the sample and performing the tests
procedure d. Each of the above is a phase in audit sampling.
a. Sampling risk
14. Sampling unit is
b. Confidence levels
a. A process that divides population into sub-
c. Statistical sampling
populations which have an identifying
d. Tolerable rate and the expected rate of deviation
characteristic and reduces the variability of items
6. Which of the following best illustrates the concept of within each stratum and allows sample size to be
sampling risk? reduced without increasing sampling risk
a. A randomly chosen sample may not be b. A selection that treats each sampling unit as the
representative of the population as a whole on the individual monetary units that make up the
characteristic of interest. population.
b. An auditor may select audit procedures that are c. The individual items constituting a population.
not appropriate to achieve the specific objective.
d. The entire set of data from which a sample is
c. An auditor may fail to recognize errors in the
selected and about which the auditor wishes to
documents examined for the chosen sample.
draw conclusions.
d. The documents related to the chosen sample may
not be available for inspection. Sample Size: Test of Controls
15. When sampling for attributes, which of the following
7. At times a sample may indicate in the case of a test of
would decrease sample size?
controls, that controls are more effective than they
a b c d
actually are. This situation illustrates the risk of
Operating Increase Decrease Increase Decrease
a. Over-reliance. c. Incorrect precision.
effectiveness
b. Under-reliance. d. Incorrect rejection.
of controls
8. At times a sample may indicate in the case of a test of Tolerable rate Decrease Increase Increase Increase
details that a material misstatement does not exist of deviation
when in fact it does. This situation illustrates the risk Expected Increase Decrease Decrease Decrease
of control
a. Incorrect rejection c. Over reliance deviation
Risk of over Decrease Increase Increase Decrease
b. Incorrect acceptance d. Under reliance
reliance
9. The risk likelihood of assessing control risk too low
16. To determine the sample size for a test of control, an
(risk of over reliance) and risk of incorrect acceptance
auditor should consider the tolerable rate of deviation,
relate to the
the allowable risk of assessing control risk too low, and
a. Efficiency of the audit the
b. Effectiveness of the audit a. Expected deviation rate
c. Preliminary estimates of materiality levels b. Upper precision limit
d. Allowable risk of tolerable misstatements c. Risk of incorrect acceptance
10. The risk that the auditor does not recognize d. Risk of incorrect rejection
misstatements or deviations included in the sample for
17. The tolerable rate of deviations for a test of controls is
what they are
generally
a. Sampling risk c. Statistical sampling
a. Lower than the expected rate of errors in the
b. Confidence levels d. Nonsampling risk
related accounting population.
11. Which of the following is not an element of b. Higher than the expected rate of errors in the
nonsampling risk? related accounting records.
a. The auditor uses inappropriate procedures in c. Identical to the expected rate of errors in the
auditing accounts receivable related accounting records.
b. The use of unreasonable small sample size d. Unrelated to the expected rate of errors in the
c. Misinterpretations of audit evidence related accounting records.
d. Auditor fails to recognize the error in the sample
18. Which of the following statements is correct concerning
12. Which of the following would be an example of statistical sampling in tests of controls?
sampling error? a. The population size has little or no effect on
a. The auditor chose a random sample, calculated a determining sample size except for very small
sample error rate of 4%, and concluded that the population.
population error rate was 4%. The true population b. The expected control deviation has little or no
error rate was 6%. effect on determining sample size except for very
b. The auditor selected a non-random sample and small populations.
generalized the sample results to the population c. As the population size doubles, the sample size
using statistical methods. also should double.
c. The auditor chose a non-random sample to focus d. A large sample size should be selected as the
on transactions for only 2 months of the year. expected control deviation decreases.
d. The auditor chose a random sample and divided
19. Which of the following statements is correct concerning
the number of errors in the sample by the number
statistical sampling in tests of controls?
of accounts in the sample to calculate the sample
error rate.
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a. There is an inverse relationship between the client’s internal control procedures. One of the
sample size and the expected control deviation purchase orders in the chosen sample of 20 cannot be
rate. found, and the auditor is unable to use alternative
b. As the population size doubles, the sample size procedures to test whether that purchase order was
should also double. properly approved. The auditor should
c. The qualitative aspects of deviations are not a. Chose another purchase order to replace the
considered by the auditor. missing purchase order in the sample.
d. There is an inverse relationship between the b. Consider this test of control invalid and proceed
sample size and the tolerable rate of deviation. with substantive tests since internal control cannot
be relied upon.
Sample Size: Test of Details
c. Treat the missing purchase order as a deviation for
20. In substantive testing, which of the following would
the purpose of evaluating the sample.
increase sample size?
d. Select a completely new set of 20 purchase orders.
a b c d
Assessment Increase Increase Increase Decrease 27. An auditor is testing internal control procedures that
of control risk are evidenced on an entity’s vouchers by matching
Reliance on Increase Decrease Decrease Increase random numbers with voucher numbers. If a random
other number matches the number of a voided voucher, that
substantive voucher ordinarily should be replaced by another
procedures voucher in the random sample if the voucher
Tolerable Decrease Increase Decrease Increase
a. Constitutes a deviation.
misstatement
b. Has been properly voided.
Expected Increase Decrease Increase Decrease
c. Cannot be located.
amount of
misstatement d. Represents an immaterial peso amount.
Risk of Decrease Increase Decrease Increase 28. Anomalous error means
incorrect a. An error (deviation or misstatement) that arises
acceptance from an isolated event that has not recurred other
21. Determine which of the following would lead to a larger than on specifically identifiable occasions and is
sample size for substantive test of details of an therefore not representative of errors in the
account balance. Assume all other factors being equal. population.
a. Smaller measure of tolerable misstatement b. An deviation or misstatement (error) that the
b. Greater reliance of analytical procedures auditor expects to be present in the population.
c. Greater reliance on internal controls c. Rate of deviation from prescribed internal control
d. Smaller expected frequency of errors procedures set by the auditor in respect of which
the auditor seeks to obtain an appropriate level of
Sample Selection Methods assurance that the rate of deviation set by the
22. Identify the sample selection method used, following auditor is not exceeded by the actual rate of
the same order: deviation in the population.
I. Selecting items using a constant interval between d. Monetary amount set by the auditor in respect of
selections; the first interval having a random start. which the auditor seeks to obtain an appropriate
II. Selecting items from the entire population with no level of assurance that the monetary amount set
intention to include or exclude specific units by the auditor is not exceeded by the actual
III. All items in the population or within each stratum misstatement in the population.
have a known chance of selection
a. Systematic, random, haphazard. Attributes Sampling
b. Systematic, haphazard, random. 29. Which of the following sampling methods is most
c. Haphazard, systematic, random. useful to auditors when performing tests of controls?
d. Random, systematic, haphazard. a. Discovery sampling.
b. Attribute estimation/sampling.
23. An underlying feature of random-based selection of c. Variable sampling.
items is that each d. Unrestricted random sampling with replacement.
a. Stratum of the accounting population be given
equal representation in the sample. 30. Which of the following statistical sampling plans does
b. Item in the accounting population be randomly not use a fixed sample size for tests of controls?
ordered. a. Ratio estimation sampling c. MUS sampling
c. Item in the accounting population should have an b. Sequential sampling d. Variables sampling
opportunity to be selected. 31. If the auditor is concerned that a population may
d. Item must be systematically selected using contain exceptions, the determination of a sample size
replacement. sufficient to include at least one such exception is a
24. If certain forms are not consecutively numbered characteristic of
a. Selection of a random sample probably is not a. Discovery sampling. c. Random sampling.
possible. b. Variables sampling. d. PPS sampling.
b. Systematic sampling may be appropriate.
c. Stratified sampling should be used. 32. An auditor desired to test credit approval on 10,000
d. Random number tables cannot be used. sales invoices processed during the year. The auditor
designed a statistical sample that would provide 1%
25. Which of the following statistical selection techniques is risk of assessing control risk too low (99% confidence)
least desirable for use by an auditor? that not more than 7% of the sales invoices lacked
a. Systematic selection c. Block selection approval. The auditor estimated from previous
b. Stratified selection d. Sequential selection experience that about 2 ½% of the sales invoices
Nature and Cause of Error lacked approval. A sample of 200 invoices was
26. An auditor plans to examine a sample of 20 purchase examined and 7 of them were lacking approval. The
orders for proper approvals as prescribed by the
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auditor then determined the achieved upper precision c. Accounts with negative balances.
limit to be 8%. The allowance for sampling risk was d. Accounts with small recorded balances that are
a. 5 ½% c. 3 ½% significantly understated.
b. 4 ½% d. 1%
38. In statistical sampling methods used in substantive
33. In the evaluation of this sample, the auditor decided to testing, an auditor most likely would stratify a
increase the level of preliminary assessment of control population into meaningful groups if
risk (CR is high) because the a. Probability proportional to size (PPS) sampling is
a. Tolerable rate (7%) was less than the achieved used
upper precision limit (8%). b. The population has highly variable recorded
b. Expected deviation rate (7%) was more than the amounts
percentage of errors in the sample (3 ½%). c. The auditor’s estimated tolerable misstatement is
c. Achieved upper precision limit (8%) was more than extremely small.
the percentage of error in the sample 3-1/2%). d. The standard deviation of recorded amount is
d. Expected deviation rate (2 - ½ %) was less than relatively small.
the tolerable rate (7%).
39. An auditor is evaluating the results of a variables
34. An auditor who uses statistical sampling for attributes sampling plan. Which of the following is not relevant to
in testing internal controls should increase the the auditor's judgment about the sample?
assessed level of control risk (CR is high) when the a. Management's explanations for why errors in the
a. Sample rate of deviation is less than the expected sample occurred.
rate of deviation used in planning the sample. b. Projecting the sample error to the population.
b. Tolerable rate less the allowance for sampling risk c. Considering the effects of sampling risk.
exceeds the sample rate of deviation. d. Qualitative information that lends insight into
c. Sample rate of deviation plus the allowance for errors found.
sampling risk exceeds the tolerable rate.
d. Sample rate of deviation plus the allowance for 40. Using statistical sampling to assist in verifying the
sampling risk equals the tolerable rate. year-end accounts payable balance, an auditor has
accumulated the following data:
Variables Sampling Number Book Balance
35. Which of the following sampling methods would be of balance determined
used to estimate a numerical measurement of a accounts by the
population, such as a peso value? auditor
a. Attributes sampling c. Variables sampling
Population 4,100 P5,000,000 ?
b. Stop-or-go sampling d. Random sampling
Sample 200 P 250,000 P300,000
36. The following are the classical variables techniques,
except: Using the ratio estimation technique, the auditor's
a. Ratio estimation c. Value weighted selection estimate of year-end accounts payable balance would
b. MPU estimation d. Difference estimation be
37. Which of the following is not a problem with monetary- a. P6,150,000 c. P5,125,000
unit selection? b. P6,000,000 d. P6,025,000
a. Population items with a zero recorded balance.
b. Population items that should have a zero balance
 - end of AT.114 - 
but do not.

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