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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 in order to provide the auditor with a
reasonable basis on which to draw conclusions about the entire population (Philippine Standard on Auditing
530, para. 5)
There are two (2) types of sampling:
1. Statistical Sampling – an approach to sampling that has the following characteristics:
a. Random selection of the sample items; and
b. The use of probability theory to evaluate sample results, including measurement of sampling risk
2. Non-Statistical Sampling – a sampling approach that does not have characteristics (a) and (b) above
(PSA 530, para. 5).
Audit risk includes both uncertainties due to sampling and uncertainties due to factors other than sampling.
These aspects of audit risk are sampling risk and non-sampling risk, respectively (AU Section 350, para. 9).

Sampling Risk
The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire
population was subjected to the same audit procedures (PSA 530, para. 5).
The auditor is concerned with two (2) aspects of sampling risk in performing tests of controls when sampling
is used (AU Section 350, para. 12):
1. The risk of assessing control risk too low (Risk of overreliance/Beta risk/Type II risk)
• It is the risk that the assessed level of control risk based on the sample is less than the
actual/true operating effectiveness of the control.
• It affects audit effectiveness and is more likely to lead to an inappropriate opinion.
2. The risk of assessing control risk too high (Risk of underreliance/Alpha Risk/Type I risk)
• It is the risk that the assessed level of control risk based on the sample is greater than the
actual/true operating effectiveness of the control.
• It affects audit efficiency as it would usually lead to additional work to establish that initial
conclusions were incorrect.
In performing substantive tests of details, the auditor is concerned with two (2) aspects of sampling risk:
1. The risk of incorrect acceptance (Beta risk/Type II risk)
• It is the risk that the sample supports the conclusion that the recorded account balance is not
materially misstated when it is materially misstated.
• It affects audit effectiveness and is more likely to lead to an inappropriate opinion.
2. The risk of incorrect rejection (Alpha risk/Type I risk)
• It is the risk that the sample supports the conclusion that the recorded account balance is
materially misstated when it is not materially misstated.
• It affects audit efficiency as it would usually lead to additional work to establish that initial
conclusions were incorrect.

Non-Sampling Risk
This includes all the aspects of audit risk that are not due to sampling. An auditor may apply a procedure to all
transactions or balances and still fail to detect a material misstatement. It includes the possibility of selecting
audit procedures that are not appropriate to achieve a specific objective.

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Non-sampling risk also arises because the auditor may fail to recognize misstatements included in documents
that s/he examines, which would make that procedure ineffective even if s/he were to examine all items.
For example, confirming recorded receivables cannot be relied on to reveal unrecorded receivables. This risk
can be reduced to a negligible level through such factors as adequate planning and supervision and proper
conduct of a firm’s audit practice (AU Section 350, para. 11)

Audit Sampling Plan

It refers to the procedures an auditor applies to accomplish a sampling application. It aids an auditor in forming
conclusions about one (1) or more characteristics of either a particular class of transactions or a particular
account balance. See Figure 1 for an overview of the audit sampling plan for tests of controls and substantive
tests of details.

Figure 1. Audit Sampling Plan

ATTRIBUTES SAMPLING
• Applicable to tests of controls
• Used to test an entity’s rate of deviation (or rate of occurrence) from a prescribed control procedure
• Example: An auditor uses attributes sampling plan to test controls for billing systems, disbursement
processing, inventory pricing, and depreciation, among other things.

Steps in Attributes Sampling

1. Define the objectives of the plan. The auditor should clearly state what is to be accomplished.
2. Define the population and the sampling unit. The auditor should determine that the population from
which the sample is selected is appropriate for the audit objective.
• Population – The entire set of data from which a sample is selected and about which the
auditor wishes to draw conclusions
• Sampling unit – The individual items constituting a population
3. Define the attribute and deviation conditions. An attribute is a characteristic of control that provides
evidence that an internal control procedure was actually performed. Deviation is the absence of an
attribute and occurs when a sample item does not have one (1) or more of the identified attributes.
4. Determine the sample size. The sample size is determined by considering the following factors:
a. Risk of assessing control risk too low
• There is an inverse relationship between this risk and the sample size. The higher the
acceptable risk, the smaller the sample size.

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• Since the risk of assessing control risk too low relates to the effectiveness of the audit,
it is kept at a relatively low level by the auditor.
b. Tolerable deviation rate (tolerable error)
• This is the maximum deviation rate that the auditor is willing to accept.
• The lower the rate of deviation that the auditor is willing to accept, the larger the
sample size needs to be.
c. Expected population deviation rate (expected error)
• The rate of deviation from the prescribed control procedure that the auditor expects
to find in the population.
• The higher the rate of deviation that the auditor expects, the larger the sample size
needs to be so as to be in a position to make a reasonable estimate of the actual rate
of deviation.
PSA 530 illustrates the factors that the auditor considers when determining the sample size:
Factor Effect on Sample Size Reason
An increase in the extent Increase The more assurance the auditor intends
to which the auditor’s risk to obtain from the operating
assessment takes into effectiveness of controls, the lower the
account relevant controls auditor’s assessment of the risk of
material misstatement will be, and the
larger the sample size will need to be.
When the auditor’s assessment of the risk
of material misstatement at the assertion
level includes an expectation of the
operating effectiveness of controls, the
auditor is required to perform tests of
controls. Other things being equal, the
greater the reliance the auditor places on
the operating effectiveness of controls in
the risk assessment, the greater is the
extent of the auditor’s tests of controls
(and, therefore, the sample size is
increased).
An increase in the tolerable Decrease The lower the tolerable rate of deviation,
rate of deviation the larger the sample size needs to be.
An increase in the Increase The higher the expected rate of deviation,
expected rate of deviation the larger the sample size needs to be so
of the population to be that the auditor is in a position to make a
tested reasonable estimate of the actual rate of
deviation. Factors relevant to the
auditor’s consideration of the expected
rate of deviation include the auditor’s
understanding of the business (in
particular, risk assessment procedures
undertaken to obtain an understanding of
internal control), changes in personnel or
internal control, the results of audit

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Factor Effect on Sample Size Reason

procedures applied in prior periods and
the results of other audit procedures.
High expected control deviation rates
ordinarily warrant little, if any, reduction
of the assessed risk of material
misstatement.
An increase in the auditor’s Increase The greater the level of assurance that
desired level of assurance the auditor desires that the results of the
that the tolerable rate of sample are, in fact, indicative of the
deviation is not exceeded actual incidence of deviation in the
by the actual rate of population, the larger the sample size
deviation in the population needs to be.
An increase in the number Negligible Effect For large populations, the actual size of
of sampling units in the the population has little, if any, effect on
population sample size. For small populations
however, audit sampling may not be as
efficient as alternative means of obtaining
sufficient appropriate audit evidence.
Table 1. Factors influencing sample sizes for test of controls

5. Determine the method of sample selection. Some commonly used methods are as follows:
a. Random Sampling
• Each item in the population has an equal chance and nonzero probability of selection.
• It is applied through random number generators (e.g., random number tables).
• It is appropriate for both statistical and non-statistical sampling.

b. Systematic Selection
• The number of sampling units in the population is divided by the sample size to give
a sampling interval, for example 100, and having determined a starting point within
the first 100, each 100th sampling unit thereafter is selected.
• Although the starting point may be determined haphazardly, the sample is more likely
to be truly random if it is determined by the use of a computerized random number
generator or random number tables.
• When using systematic selection, the auditor would need to determine that sampling
units within the population are not structured in such a way that the sampling interval
corresponds with a particular pattern in the population.

c. Monetary Unit Sampling

• It is a type of value-weighted selection in which sample size, selection, and evaluation
result in a conclusion in monetary amounts.

d. Haphazard Selection
• The 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.

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• Haphazard selection is not appropriate when using statistical sampling.

e. Block Selection
• It involves the selection of a block(s) of contiguous items from within the population.
• It cannot be used ordinarily in audit sampling because most populations are
structured such that items in a sequence can be expected to have similar
characteristics to each other but different characteristics from items elsewhere in the
population.
• Although, in some circumstances, it may be an appropriate audit procedure to
examine a block of items, it would rarely be an appropriate sample selection
technique when the auditor intends to draw valid inferences about the entire
population based on the sample.

f. Stratified Random Sampling

• This involves subdividing a population into subpopulations or strata, i.e., a group of
sampling units that have similar characteristics (often monetary value). For example,
when testing the allowance for doubtful accounts in the valuation of accounts
receivable, balances may be stratified by age.
• The strata must be explicitly defined so that each sampling unit can belong to only
one (1) stratum.
• This method enables the auditor to direct his efforts toward the items.
6. Perform the sampling plan/audit procedures. The sampling units selected should be examined for
the attributes of interest. Each item will be classified whether it contains deviations from the
prescribed internal control procedure.
7. Evaluate and document the sample results. These include the following:
a. Determining the sample deviation rate.
Number of deviations observed
Sample deviation rate =
Sample size
b. Determining the maximum population deviation rate (achieved upper deviation limit) and the
allowance for sampling risk (achieved precision).
• The maximum deviation rate is based on the sample size and the number of deviations
discovered. There are standard tables that yield maximum population deviation rates
at specified risks of assessing control risk too low.
Allowance for sampling risk = Maximum population deviation rate – Sample deviation rate
or
Maximum population deviation rate = Allowance for sampling risk + Sample deviation rate

c. For statistical sampling, comparing the maximum population deviation rate and the tolerable
deviation rate and evaluate the effectiveness of control accordingly.
• If maximum deviation rate ≤ tolerable deviation rate, it is implied that control is
effective and the sample results support the auditor’s preliminary assessment of
control risk.
• If maximum deviation rate > tolerable deviation rate, the auditor can conclude that
control is not effective and the sample results do not support the auditor’s preliminary
assessment of control risk. Therefore, the scope of substantive tests should be
increased.

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For non-statistical sampling, comparing the sample deviation rate with tolerable deviation
rate or expected deviation rate.
• If sample deviation rate ≤ tolerable deviation rate or expected deviation rate,
internal control is considered effective and would support the auditor’s preliminary
assessment of control risk below maximum.
• If sample deviation rate > tolerable deviation rate or expected deviation rate, it can
be concluded that controls are not effective, and the auditor would assess control risk
at the maximum level.
d. Considering qualitative information.
The auditor considers each of the deviation’s nature, importance, and probable cause.
e. Reaching an overall conclusion.
In assessing control risk, the auditor considers all available quantitative and qualitative
information. The auditor must relate the assessed control risk to detection risk for each
financial assertion.

Commonly Used Attributes Sampling Techniques

1. Attribute estimation sampling
• A statistical sampling plan for tests of controls
• This is appropriate when an auditor wishes to estimate a true but unknown population
deviation rate.
• Uses a fixed sampling plan, i.e., the auditor tests a single sample.

2. Sequential or stop-or-go sampling

• The sampling plan is performed in several steps.
• Following each step, the auditor decides whether to stop or go onto the next step.
• Appropriate when the auditor expects zero or very few deviations.

3. Discovery sampling
• Appropriate when the expected deviation rate is near zero and when the auditor’s objective
is to find at least one (1) deviation (exception) in a sample if the actual population deviation
rate exceeds or equals a predetermined critical rate (tolerable deviation rate).

VARIABLES SAMPLING
• Applicable to substantive tests
• Most commonly used to test whether recorded account balances are fairly stated
• For example, an auditor might use variables sampling to test recorded peso amounts of receivables.

Steps in Variables Sampling

1. Determine the objectives of the test. The objectives of the sampling technique must relate to the
audit procedure being performed. For example, a sampling plan applied to substantive tests of details
is designed to:
a. Estimate an account balance that is not recorded within an entity’s accounts (peso-value
estimation)
b. Test the reasonableness of a recorded account balance (hypothesis testing).

2. Define the population and the sampling unit.

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3. Choose an audit sampling technique.

a. Statistical vs. Non-statistical
b. Probability-Proportional-to-Size (PPS) sampling vs. Classical variables sampling

Probability-Proportional-to-Size (PPS) Sampling

• It applies the theory of attributes sampling to estimate the total peso amount of misstatement
in a population. Population is defined by the individual peso comprising the population’s book
value (P1 = 1 item).
• PPS sampling gives each peso in the population an equal chance of selection.
• It is only useful for tests of overstatements (such as assets) since the sample selection method
dictates that the larger the transaction or amount, the more likely it will be selected.
• PPS is inappropriate for testing liabilities because understatement is the primary audit
consideration.
• The amount of misstatement in a physical unit should not exceed the recorded book value of
the item.
The sample size for PPS is computed as follows:
𝐵𝐵𝐵𝐵 𝑥𝑥 𝑅𝑅𝑅𝑅
𝑛𝑛 =
𝑇𝑇𝑇𝑇 − (𝐸𝐸𝐸𝐸 𝑥𝑥 𝐸𝐸𝐸𝐸)
where:
BV = Book value of the population being tested
RF = Reliability factor for risk of overstatement
TM = Tolerable misstatement
EM = Expected misstatement
EF = Expansion factor for expected misstatement

• Reliability factor for risk of overstatement. This is based on the level of risk of incorrect
acceptance.
• Tolerable misstatement. It is the auditor’s planned level of materiality for an account balance or
class of transaction.
• Expected misstatement. It is the auditor’s preliminary estimate of the amount of misstatement
contained in the population.
• Expansion factor for expected misstatement. It is only used when the auditor expects finding
misstatements in the sample.
The table for reliability factors and expansion factors is shown in the illustration on Page 13.
Classical Variables Sampling Techniques
Classical variables sampling techniques use the normal distribution theory to evaluate selected
characteristics of a population based on the sample items. Here are the following methods used:
• Mean-Per-Unit Estimation. It is a technique that projects the sample average to the total
population by multiplying the sample average to the number of items in the population.
• Difference Estimation. It is a technique that uses the average difference between the audited
amounts and individual recorded amounts to estimate the total audited amount of a
population and the allowance for sampling risk.
• Ratio Estimation. It is a technique that uses the ratio of the audited amounts to the recorded
amounts in the sample to estimate the total amount of the population and the allowance for
sampling risk.

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4. Determine the sample size. The auditor considers the following:

a. Variation within the sample size
• Sample size varies in the same direction as the variation in population amounts. As
population variation increases, so does the sample size.
• An estimate of population variation is made by determining the population standard
deviation.
b. Acceptable risk of incorrect rejection
c. Acceptable risk of incorrect acceptance
𝐴𝐴𝐴𝐴 = 𝑅𝑅𝑅𝑅𝑅𝑅 𝑥𝑥 𝐴𝐴𝐴𝐴 𝑥𝑥 𝑇𝑇𝑇𝑇
where:
AR= Audit risk
RMM = Risk of material misstatement (i.e., inherent risk x control risk)
AP = Analytical procedures
TD = Risk of incorrect acceptance
d. Tolerable error – the maximum monetary error that may exist in an account balance without
causing the financial statements to be materially misstated.
PSA 530 shows the examples of factors influencing sample size for substantive tests of details:
Factor Effect on Sample Size Reason
An increase in the auditor’s Increase The higher the auditor’s assessment of
assessment of the risk of the risk of material misstatement, the
material misstatement larger the sample size needs to be. The
auditor’s assessment of the risk of
material misstatement is affected by
inherent risk and control risk. For
example, if the auditor does not perform
tests of controls, the auditor’s risk
assessment cannot be reduced for the
effective operation of internal controls
with respect to the particular assertion.
Therefore, in order to reduce audit risk to
an acceptably low level, the auditor needs
a low detection risk and has to rely more
on substantive procedures. The more
audit evidence that is obtained from tests
of details (that is, the lower the detection
risk), the larger the sample size will need
to be.
An increase in the use of Decrease The more the auditor is relying on other
other substantive procedures substantive procedures (tests of details or
directed at the same substantive analytical procedures) to
assertion reduce to an acceptable level of detection
risk regarding a particular population, the
less assurance the auditor will require
from sampling and, therefore, the smaller
the sample size can be.

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An increase in the auditor’s Increase The greater the level of assurance that
desired level of assurance the auditor requires that the results of
that tolerable misstatement the sample are, in fact, indicative of the
is not exceeded by actual actual amount of misstatement in the
misstatement in the population, the larger the sample size
population needs to be.
An increase in tolerable Decrease The lower the tolerable misstatement,
misstatement the larger the sample size needs to be.
An increase in the amount of Increase The greater the amount of misstatement
misstatement the auditor the auditor expects to find in the
expects to find in the population, the larger the sample size
population needs to be in order to make a
reasonable estimate of the actual amount
of misstatement in the population.
Factors relevant to the auditor’s
consideration of the expected
misstatement amount include the extent
to which item values are determined
subjectively, the results of risk
assessment procedures, the results of
tests of control, the results of audit
procedures applied in prior periods, and
the results of other substantive
procedures.
Stratification of the Decrease When there is a wide range (variability) in
population when appropriate the monetary size of items in the
population, it may be useful to stratify the
population. When a population can be
appropriately stratified, the aggregate of
the sample sizes from the strata generally
will be less than the sample size that
would have been required to attain a
given level of sampling risk, had one
sample been drawn from the whole
population.
The number of sampling Negligible Effect For large populations, the actual size of
units in the population the population has little, if any, effect on
sample size. Thus, for small populations,
audit sampling is often not as efficient as
the alternative means of obtaining
sufficient appropriate audit evidence.
(However, when using monetary unit
sampling, an increase in the monetary
value of the population increases sample
size, unless this is offset by a proportional
increase in materiality for the financial
statements as a whole [and, if applicable,
materiality level or levels for particular

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classes of transactions, account balances

or disclosures].)
Table 2. Factors influencing sample sizes for substantive test of details

5. Determine the method of sample selection. When selecting a sample, the auditor may use any of the
sample selection methods mentioned in the attributes sampling.
6. Perform the sampling plan/audit procedures.
7. Evaluate the sample results. The following procedures are performed in evaluating the sample results:

a. Projecting the sample error to the population using any of the following:
• Mean-per-unit estimation
• Difference estimation
• Ratio estimation
• Probability-proportional-to-size sampling
b. Considering sampling risk
c. Considering qualitative information
d. Reaching an overall conclusion
To reach a conclusion, the auditor compares the computed upper misstatement limit to the
tolerable misstatement. If the upper limit is less than or equal to the tolerable misstatement, the
sample results support the conclusion that the population is not misstated by more than tolerable
misstatement at a specified level of sampling risk. On the other hand, if the upper limit on
misstatement exceeds the tolerable misstatement, it can be concluded that the sample results do
not provide the auditor with an assurance that the misstatement in the population is less than the
tolerable misstatement, i.e., the recorded value may be misstated.

ILLUSTRATION (PPS Sampling)

Jerone Gatdula, a senior auditor of Ocampo & Associates, CPAs, has been assigned the responsibility of
auditing trade accounts receivable as of December 31, 201A that amounts to P1,200,000 and consists of 400
accounts. He tested the controls relating to the existence of ABC Corporation’s trade accounts receivable
during November 201A.
After reviewing the work, the audit manager agreed with Jerone’s assessment that assessing control risk at
80% was appropriate. The manager also indicated that the planned audit risk should be limited to 5%, inherent
risk should be assessed to be 100%, and the risk that analytical procedures will not detect material
misstatements should be assessed to be 60%. The manager decided that P50,000 should be used as tolerable
misstatement to confirm accounts receivable.
During last year’s audit, the auditors found misstatements amounting to P5,000, which the manager suggested
that it should also be used this year as an estimate of misstatement to determine the sample size. A review of
the listing of accounts indicates that there are no accounts that have credit balances or zero balances.

Step 1. Determine the objectives of the test.

The objectives of the test are (1) to estimate an accounts receivable balance that is not recorded and (2) to
test the reasonableness of a recorded accounts receivable balance.
Step 2. Define the population and sampling unit.
For ABC Corporation, the population is the 400 customer accounts with debit balance and the recorded book
value of the accounts is P1,200,000. The audit manager decided that the customers’ accounts are to be

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confirmed instead of individual invoices. Accounts receivable has 1,200,000 sampling units and 400 logical
sampling units*.
*Logical sampling unit is the account, document, transaction, etc., with which an individual dollar unit selected for inclusion in the
sample is associated.)

Step 3. Choose an audit sampling technique.

For this illustration, the PPS sampling technique is used.

Step 4. Determine the sample size.

𝐵𝐵𝐵𝐵 𝑥𝑥 𝑅𝑅𝑅𝑅
𝑛𝑛 =
𝑇𝑇𝑇𝑇 − (𝐸𝐸𝐸𝐸 𝑥𝑥 𝐸𝐸𝐸𝐸)
Where:
n = Sample size
BV = Book value of the population being tested
RF = Reliability factor for risk of overstatement (this is based on the level of risk of
incorrect acceptance)
TM = Tolerable misstatement
EM = Expected misstatement
EF = Expansion factor for expected misstatement

As mentioned earlier, there are factors to be considered in determining the sample size. For ABC Corporation,
the overall audit risk is 5%, inherent risk is 100%, control risk is 80%, and the risk of analytical procedures not
detecting material misstatement is 60%. The formula for risk of incorrect acceptance (TD) can be derived from
the audit risk formula below:
𝐴𝐴𝐴𝐴 = 𝑅𝑅𝑅𝑅𝑅𝑅 𝑥𝑥 𝐴𝐴𝐴𝐴 𝑥𝑥 𝑇𝑇𝑇𝑇

𝐴𝐴𝐴𝐴
𝑇𝑇𝑇𝑇 =
𝑅𝑅𝑅𝑅𝑅𝑅 𝑥𝑥 𝐴𝐴𝐴𝐴

. 05
𝑇𝑇𝑇𝑇 =
1 𝑥𝑥 .80 𝑥𝑥 .60

. 05
𝑇𝑇𝑇𝑇 =
. 48

𝑻𝑻𝑻𝑻 = . 𝟏𝟏𝟏𝟏𝟏𝟏 𝒐𝒐𝒐𝒐 𝟏𝟏𝟏𝟏. 𝟒𝟒%

The reliability factor and expansion factor are dependent on the specified risk of incorrect acceptance.
In this case, the TD or risk of incorrect acceptance is rounded off to 10%.

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Number of Risk of Incorrect Acceptance (TD)

Overstatement 1% 5% 10% 15% 20% 25% 30% 37% 50%
Misstatements
0 4.61 3.00 2.31 1.90 1.61 1.39 1.21 1.00 0.70
1 6.64 4.75 3.89 3.38 3.00 2.70 2.44 2.14 1.68
2 8.41 6.30 5.33 4.72 4.28 3.93 3.62 3.25 2.68
3 10.05 7.76 6.69 6.02 5.52 5.11 4.77 4.34 3.68
4 11.61 9.16 8.00 7.27 6.73 6.28 5.90 5.43 4.68
5 13.11 10.52 9.28 8.50 7.91 7.43 7.01 6.49 5.68
6 14.57 11.85 10.54 9.71 9.08 8.56 8.12 7.56 6.67
7 16.00 13.15 11.78 10.90 10.24 9.69 9.21 8.63 7.67
8 17.41 14.44 13.00 12.08 11.38 10.81 10.31 9.68 8.67
9 18.79 15.71 14.21 13.25 12.52 11.92 11.39 10.74 9.67
10 20.15 16.97 15.41 14.42 13.66 13.02 12.47 11.79 10.67
Table 3. Reliability factors for overstatements
Source: Auditing and Other Assurance Services, 2017, p. 275

Risk of Incorrect Acceptance (TD)

1% 5% 10% 15% 20% 25% 30% 37% 50%
Expansion factor 1.9 1.6 1.5 1.4 1.3 1.25 1.2 1.15 1.0
Table 4. Expansion factor for expected misstatements
Source: Auditing and Other Assurance Services, 2017, p. 275

The reliability factor and expansion factor for ABC Corporation is 2.31 and 1.5, respectively. The sample size
can now be computed as follows:

𝐵𝐵𝐵𝐵 𝑥𝑥 𝑅𝑅𝑅𝑅
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 (𝑛𝑛) =
𝑇𝑇𝑇𝑇 − (𝐸𝐸𝐸𝐸 𝑥𝑥 𝐸𝐸𝐸𝐸)

𝑃𝑃1,200,000 𝑥𝑥 2.31
𝑛𝑛 =
𝑃𝑃50,000 − (𝑃𝑃5,000 𝑥𝑥 1.5)

𝒏𝒏 = 𝟔𝟔𝟔𝟔

Step 5. Determine the method of sample selection.

Assume that the auditor made use of systematic sampling. It means that the auditor selects every nth item for
inclusion in the population. In this case, a sampling interval is computed first:

𝐵𝐵𝐵𝐵
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 (𝑆𝑆𝑆𝑆) =
𝑛𝑛

𝑃𝑃1,200,000
𝑆𝑆𝑆𝑆 =
65

𝑆𝑆𝑆𝑆 = 18,462

The auditor must now identify customer account numbers (also called logical sampling units), including the
cumulative peso totals.

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Customer Recorded Account Cumulative Peso Selected

Account Number Balance Peso Total
1001 P260 P260
1012 4,242 4,502
1030 394 4,896
1041 4,155 9,051 P4,905
1052 274 9,325
1056 14,419 23,744 23,367
1075 178 23,922
1080 37,179 61,101 41,829
1091 20 61,121

2089 1,198,394
2894 1,200,000

In this case, if the auditor selects P4,905, the first item in the sample is the account balance containing a
cumulative total 4905 or customer account number 1041. The second item in the sample would be customer
account number 1056 because the cumulative peso total of P23,367 (P4,905 + P18,462) is contained in this
account number. The third item would be customer account no. 1080 with cumulative peso total of P41,829
(P23,367 + P18,462).

Step 6. Perform the sampling plan/audit procedures.

After the sample has been selected, the auditor shall perform audit procedures on the logical units containing
the selected sample units. For example, if the audit procedures involve confirmation of accounts receivable,
the auditor must perform all procedures involved in confirming accounts receivable, including following up
requests for which no response was received.

Step 7. Evaluate the sample results.

To evaluate the results of a PPS sample, calculate the upper misstatement limit or the upper error limit, which
is an estimate of the maximum amount of misstatement in the account. Upper misstatement limit has two (2)
components: the projected misstatement and the allowance for sampling risk. The formula is as follows:

𝑈𝑈𝑈𝑈𝑈𝑈 = 𝑃𝑃𝑃𝑃 + 𝐵𝐵𝐵𝐵 + 𝐼𝐼𝐼𝐼

Allowance for sampling risk

where:
UML = Upper misstatement limit
PM = Projected misstatement
BP = Basic precision
IA = Incremental allowance

• Projected misstatement. The auditor’s best estimate of the amount of misstatement in the
population.
If the logical sampling units is less than the sampling interval:
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 − 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 = � � 𝑥𝑥 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 (𝑆𝑆𝑆𝑆)
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣

Tainting percentage

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If the logical sampling units is more than or equal to the sampling interval:
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 − 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
The procedures for evaluating results depends on whether overstatement errors are found in the
sample. If no errors are found in the sample, the projected misstatement is zero and the allowance
for sampling risk is no more than tolerable error.
• Allowance for sampling risk. This is the sum of the basic precision and incremental allowance for
sampling risk.
• Basic Precision. It is a measure of the closeness of the estimate of projected misstatement to the
population misstatement.
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = 𝑆𝑆𝑆𝑆 𝑥𝑥 𝑅𝑅𝑅𝑅
• Incremental allowance for sampling risk. It is an allowance to incorporate risk arising from not
auditing the entire sampling interval. These are the steps in computing for incremental allowance:
o Rank in descending order the projected misstatements for logical sampling units less than
the sampling interval.
o Multiply the ranked projected misstatements by the incremental change in reliability
factor.
o Subtract the projected misstatement for logical sampling units that are less than the
sampling interval.
For ABC Corporation, three (3) errors were found. Customer accounts 1091 and 1194 have book values less
than the sampling interval and customer account 1225 is larger than the sampling interval. After evaluating
the sample results, the auditor obtained the following information:
Total projected misstatement = P2,966
Basic precision = P42,647
Incremental allowance =P1,477
𝑈𝑈𝑈𝑈𝑈𝑈 = 𝑃𝑃𝑃𝑃 + 𝐵𝐵𝐵𝐵 + 𝐼𝐼𝐼𝐼

𝑈𝑈𝑈𝑈𝑈𝑈 = 𝑃𝑃2,966 + 𝑃𝑃42,627 + 𝑃𝑃1,477 = 𝑷𝑷𝑷𝑷𝑷𝑷, 𝟎𝟎𝟎𝟎𝟎𝟎

Here are the supporting computations:

a b c d e f g
Account Book Audited Difference Tainting Sampling Projected
Number Value Value (b – c) Percentage Interval Misstatement (e
(d/b) x f)

Logical sampling units < Sampling interval:

1091 P20 P18 P2 10% P18,462 P1,846
1194 2,000 1,900 100 5% P18,462 923
P2769
Logical sampling units ≥ Sampling interval:
1225 P18,929 18,465 197 - - 197
Total Projected Misstatement P2,966

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = 𝑆𝑆𝑆𝑆 𝑥𝑥 𝑅𝑅𝑅𝑅

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = 𝑃𝑃18,462 𝑥𝑥 2.31
𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 = 𝑷𝑷𝑷𝑷𝑷𝑷, 𝟔𝟔𝟔𝟔𝟔𝟔

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a b c d e f
Tainting Customer Projected Reliability Increase in Incremental
percentage account misstatement factor reliability allowance
(Ranked) number factor (c x e)

2.31 1.58 P2,917

10% 1091 P1,846 3.89

5% 1194 923 5.33 1.44 1,329

P2,769 P4,246
2,769
Incremental allowance for sampling risk P1,477

For the reliability factors (RF), refer to Page 13.

From the results of the audit of ABC Corporation, the auditor may conclude with a 5% risk that the P1,200,000
book value is not overstated by more than P47,090. In the sampling plan, it is indicated that the auditor
established a tolerable misstatement of P50,000. In this case, the upper limit (P47,090) is less than the
tolerable misstatement (P50,000). Thus, the sample results support the conclusion that the population/
recorded book value is not misstated by more than tolerable misstatement at a specified level of sampling
risk.

ILLUSTRATION: Ratio Estimation and Difference Estimation

Carl Garcia obtained the following data while auditing the inventory of Santos Company, a manufacturer of
bags:
Items in the population 11,500
Items in the sample 121
Book value of the population P1,800,000
Audited value of the sample items P18,095
Book value of the sample items P18,700
Required: Compute the estimated audited value using the following:
a. Ratio estimation
𝑃𝑃18,095
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 =
𝑃𝑃18,700
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = .968
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 (𝐴𝐴𝐴𝐴) = 𝑃𝑃1,800,000 𝑥𝑥 .968
𝑨𝑨𝑨𝑨 = 𝑷𝑷𝑷𝑷, 𝟕𝟕𝟕𝟕𝟕𝟕, 𝟒𝟒𝟒𝟒𝟒𝟒

b. Difference estimation

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 − 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 =
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
𝑃𝑃18,700 − 𝑃𝑃18,095
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 =
121
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 = 𝑃𝑃5

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𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 (𝐴𝐴𝐴𝐴) = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑡𝑡ℎ𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 − (𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑥𝑥 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑)
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 (𝐴𝐴𝐴𝐴) = 𝑃𝑃1,800,000 − (11,500 𝑥𝑥 𝑃𝑃5)
𝑨𝑨𝑨𝑨 = 𝑷𝑷𝑷𝑷, 𝟕𝟕𝟕𝟕𝟕𝟕, 𝟓𝟓𝟓𝟓𝟓𝟓

References:
Auditing Standards and Practices Council. (n.d.). Philippine Standard on Auditing 530: Audit Sampling. Retrieved,
October 9, 2019, from https://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-530-Redrafted.pdf
Cabrera, M. E. (2015). Auditing theory. Manila: GIC Enterprises & Co., Inc.
Salosagcol, J. G., Tiu, M. F., & Hermosilla, R. (2018). Auditing theory: A guide in understanding PSA. Manila: GIC
Enterprises & Co., Inc.

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