Arens Aud16 Inppt17

AUDIT SAMPLING
FOR TESTS OF
DETAILS OF BALANCES
CHAPTER 17
Copyright © 2017 Pearson Education, Ltd. 17-1

CHAPTER 17 LEARNING OBJECTIVES
17-1 Differentiate audit sampling for tests of details of balances and

for tests of controls and substantive tests of transactions.
17-2 Apply nonstatistical sampling to tests of details of balances.
17-3 Apply monetary unit sampling.
17-4 Describe variables sampling.
17-5 Use difference estimation in tests of details of balances.

OBJECTIVE 17-1
Differentiate audit sampling for
tests of details of balances and for
tests of controls and substantive
tests of transactions.

COMPARISONS OF AUDIT SAMPLING FOR TESTS OF
DETAILS OF BALANCES AND FOR TESTS OF CONTROLS
AND SUBSTANTIVE TESTS OF TRANSACTIONS
The main differences among tests of controls, substantive tests of
transactions, and tests of details of balances are in what the
auditor wants to measure.

OBJECTIVE 17-2
Apply nonstatistical sampling to
tests of details of balances.

NONSTATISTICAL SAMPLING

NONSTATISTICAL SAMPLING (CONT.)
1. State the Objectives of the Audit Test: Auditors sample for tests of details of
balances to determine whether the account balance is fairly stated.
2. Decide Whether Audit Sampling Applies: Audit sampling applies whenever
the auditor plans to reach conclusions about a population based on a
sample.
3. Define a Misstatement: Because audit sampling for tests of details of
balances measures monetary misstatements, a misstatement exists
whenever a sample item is misstated.
4. Define the Population: The items making up the recorded dollar
population. The auditor may separate the population into subpopulations
before applying audit sampling. Table 17-1 is an illustrative sample of an
accounts receivable population.

5. Define the Sampling Unit: For nonstatistical audit sampling in tests of
details of balances, the sampling unit is almost always the items
making up the account balance.
6. Specify the Tolerable Misstatement: The application of performance
materiality to a particular sampling procedure.
7. Specify Acceptable Risk of Incorrect Acceptance: The acceptable risk
of incorrect acceptance (ARIA) is the risk that the sample supports
the conclusion that the recorded account balance is not materially
misstated when it is materially misstated.
Figure 17-1 shows the effect of ARO and ARIA on substantive testing.
The relationships affecting ARIA are summarized in Table 17-2.

8. Estimate Misstatements in the Population: Auditor typically makes
this estimate based on prior experience with the client and by
assessing inherent risk, considering the results of tests of controls,
substantive tests of transactions, and analytical procedures already
performed.
9. Determine the Initial Sample Size: When using nonstatistical
sampling, auditors determine the initial sample size by considering
the factors that are summarized in Table 17-3.
Figure 17-2 presents a simple formula for computing sample size based
on the AICPA Audit Sampling Audit Guide.
10.Select the Sample: Auditing standards permit the auditor to use any
of the selection methods discussed in Chapter 15.

11.Perform the Audit Procedures: The auditor applies the appropriate
audit procedures to each item in the sample to determine whether it
contains a misstatement.
12.Generalize from the Sample to the Population and Decide the
Acceptability of the Population: The auditor should generalize the
sample to the population by (1) projecting misstatements from the
sample to the population and (2) considering sampling risk (ARIA).
This starts with calculating a point estimate, which is usually done by
assuming that the misstatement in the population is proportional to
the misstatement in the sample.
13.Analyze the Misstatement: The auditor must evaluate the nature and
cause of each misstatement found in the tests of details of balances.

14.Action When a Population Is Rejected: When the auditor concludes
that the misstatement in a population may be larger than tolerable
misstatement after considering sampling risk, the auditor has
several courses of action.
• Take no action until tests of other audit areas are complete.
• Perform expanded audit tests in specific areas.
• Increase the sample size.
• Adjust the account balance.
• Request the client to correct the population.
• Refuse to give an unmodified opinion.

OBJECTIVE 17-3
Apply monetary unit sampling.

MONETARY UNIT SAMPLING
Monetary unit sampling is the most common statistical method of
sampling for tests of details of balances because it has the statistical
simplicity of attributes sampling yet provides a statistical result expressed
in dollars.
Difference Between Monetary Unit Sampling and Nonstatistical
Sampling:
• The definition of the sampling unit is an individual dollar.
• The population size is the recorded dollar population.
• Sample size is determined using a formula.
• Sample selection is done using PPS (probability proportional to size
sample selection). A typical accounts receivable population is shown in
Table 17-4.
• The auditor generalizes from the sample to the population using MUS.

MONETARY UNIT SAMPLING (CONT.)
Decide the Acceptability of the Population Using MUS: The auditor
compares the calculated misstatement bound to tolerable
misstatement. If the bound exceeds the tolerable misstatement, the
population is not considered acceptable.
Determining Sample Sizes Using MUS: The following factors are
used in computing sample size:
• Acceptable Risk of Incorrect Acceptance (ARIA)—This is dependent
on the audit risk factors.
• Recorded Population Value—The dollar value of the population
taken from the client’s records.
• Tolerable Misstatement—Generally the same as performance
materiality.

Determining Sample Size Using MUS: The following factors are

used in computing sample size (cont.):
• Tolerable Misstatement as a Percentage of Population Value
• Estimated Population Misstatement—This is usually based on the
sample results for the prior year.
• Ratio of Estimated Population Misstatement to Tolerable
Misstatement
• Confidence Factor—The auditor uses Table 17-5 to determine the
appropriate confidence factor based on the auditor’s judgment of
ARIA and the ratio of expected misstatement to tolerable
misstatement.

Determining Sample Sizes Using MUS: The following factors are

used in computing sample size (cont.):
• Sample Size—Example calculated as follows:
• Sampling Interval—The population recorded amount divided by the

sample size.
Table 17-6 summarizes the steps to calculate sample size in MUS.

Generalizing from the Sample to the Population When No

Misstatements Are Found Using MUS: If the entire sample is
audited and no misstatements are found in the sample, the auditor
may conclude that the recorded amount of the population is not
overstated by more than the tolerable misstatement at the
specified risk of incorrect acceptance.
The upper limit when no misstatements are found is the
confidence factor for no misstatements multiplied by the length of
the sampling interval. The upper limit is also referred to as basic
precision.
Table 17-7 shows the confidence factors for MUS sample
evaluation.

Generalizing from the Sample to the Population When Misstatements

Are Found Using MUS: Assume that the auditor tested the sample and
found the three overstatements included in Table 17-8. Calculating
the upper misstatement bound involves three steps:
1. Calculate the percentage misstatement for each misstatement.
2. Project the sample misstatements by multiplying the percentage
misstatement by the length of the sampling interval.
3. Add an allowance for sampling risk based on the confidence factors
for the actual number of misstatements and acceptable risk of
incorrect acceptance.


Are Found Using MUS (cont.):
• Calculate Percentage Misstatement Assumption (Tainting): When
misstatements are found, the auditor calculates a projected
misstatement and an allowance for sampling risk. This is illustrated
in Table 17-8.
• Project Sample Misstatements: The projected misstatement is the
percentage misstatement times the sampling interval. The
calculation of projected misstatement for the three actual sample
misstatements is shown in Table 17-9.

Are Found Using MUS (cont.):
• Calculate the Allowance for Sampling Risk: The projected
misstatement is increased by the allowance for sampling risk, which
is calculated as basic precision plus an incremental allowance for
sampling risk for each misstatement found in sampling units that
are smaller than the sampling interval. Table 17-10 provides an
example of the incremental changes in the confidence factor for five
misstatements and a 5% ARIA.
• Relationship of the Audit Risk Model to Sample Size for MUS:
Auditors must understand the relationships of the three
independent factors in the audit risk model.

Audit Uses of Monetary Unit Sampling: MUS appeals to auditors for at
least four reasons:
1. MUS automatically increases the likelihood of selecting high dollar
items from the population.
2. MUS often reduces the cost of doing the audit testing because several
sample items are tested at once
3. MUS is easy to apply. Samples can be evaluated by the application of
simple tables.
4. MUS provides a statistical conclusion rather than a nonstatistical
one, providing better and more defensible decisions.

Audit Uses of Monetary Unit Sampling: There are two main
disadvantages of MUS:
1. The total misstatement bounds resulting when misstatements are
found may be too high to be useful to the auditor. To overcome this
problem, larger samples may be required.
2. It may be cumbersome to select PPS samples from large populations
without computer assistance.
For all of these reasons, auditors commonly use MUS when zero or
few misstatements are expected, a dollar result is desired, and the
population data are accessible in electronic format.

OBJECTIVE 17-4
Describe variables sampling.

VARIABLES SAMPLING
Like MUS, variables sampling is a statistical sampling method.

Differences Between Variable and Nonstatistical Sampling: These
methods share many similarities.
Sampling Distribution: It is useful to understand sampling
distributions and how they affect auditor’s statistical conclusions.
• The auditor does not know the mean value of misstatements
in the population, the distribution of the misstatement
amounts, or the audited values.
• These population characteristics must be estimated from
samples.

VARIABLES SAMPLING (CONT.)
Sampling Distribution (cont):
The auditor calculates the mean value of items in the sample as follows:

After this calculation of each sample, the auditor plots them into a
frequency distribution. As long as the sample size is sufficient, the
frequency distribution will appear much like that shown in Figure 17-3.
The distribution of the sample means such as this is normal and has all
the characteristics of the normal curve:
1. The curve is symmetrical
2. The sample means fall within known portions of the sampling
distribution around the average mean of those means.
Furthermore, the mean of the sample means is equal to the population
mean.

With this information, the auditors can make the tabulation of the
sampling distribution as shown in Table 17-11.
To summarize, three things shape the results of the experiment of
taking a large number of samples from a known population:
1. The mean value of all the samples is equal to the population mean.
2. The shape of the frequency distribution of the sample means is that of
a normal distribution, as long as the sample size is sufficiently large,
regardless of the distribution of the population, as illustrated in Figure
17-4.
3. The percentage of sample means between any two values of the
sampling distribution is measurable.

Statistical Inference:
When samples are taken from a population in an actual audit, the
auditor does not know the population’s characteristics, and ordinarily,
only one sample is taken from the population.
But the knowledge of sampling distributions enables auditors to draw
statistical conclusions, or statistical inferences, about the population.
An example of this process is shown on pages 585 and 586.
Auditors can state the conclusions drawn from a confidence interval
using statistical inferences in different ways, taking care to avoid
incorrect conclusions because the true population value is always
unknown.

Variables Methods: Auditors use the preceding statistical inference
process for all of the variable sampling methods.
The three variables methods include:
• Difference Estimation—Auditors use difference estimation to measure
the estimated total misstatement amount in a population when both the
recorded value and an audited value exist for each item in the sample.
• Ratio Estimation—Similar to difference estimation except the auditor
calculates the ratio between the misstatements and their recorded value
and projects this to the population to estimate the total population
misstatement.
• Mean-per-Unit Estimation—The auditor focuses on the audited value
rather than the misstatement amount of each item in the sample.

Stratified Statistical Methods: As with other stratified methods, the

population is divided into two or more subpopulations. Each is
independently tested and evaluated, and the results combined. This can be
used with any of the variables methods, but is most commonly used with
mean-per-unit estimation.
Sampling Risks: In addition to acceptable risk of incorrect acceptance
(ARIA), auditors use acceptable risk of incorrect rejection (ARIR) for
variables sampling.
• ARIA—The risk that the auditor accepts a population that is materially
misstated.
• ARIR—The risk that the auditor has concluded that a population is materially
misstated when it is not.
These are illustrated in Tables 17-12 and 17-13.

OBJECTIVE 17-5
Use difference estimation in tests of
details of balances.

ILLUSTRATION USING DIFFERENCE ESTIMATION
Plan the Sample and Calculate the Sample Size Using Difference
Estimation: Accounts Receivable consists of 4,000 accounts with a
recorded value of $600,000. Tolerable misstatement is $21,000.
Specify Acceptable Risk—The auditor specifies two risks:
1. Acceptable risk of incorrect acceptance (ARIA)—10%
2. Acceptable risk of incorrect rejection (ARIR)—25%
Estimate Misstatements in the Population:
1. Estimate an expected point estimate.
2. Make an advance population standard deviation estimate—
variability of the population.

ILLUSTRATION USING DIFFERENCE ESTIMATION
(CONT.)
Plan the Sample and Calculate the Sample Size Using Difference
Estimation (cont):
Calculate the Initial Sample Size: The calculation of the sample size is
shown on page 589. Sample size is 100.
Evaluate the Results:
Generalize from the Sample to the Population: The calculations are
illustrated in Table 17-14 on pages 590–591.

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AUDIT SAMPLING

Copyright © 2017 Pearson Education, Ltd. 17-1

17-1 Differentiate audit sampling for tests of details of balances and

17-3 Apply monetary unit sampling.

17-4 Describe variables sampling.

17-5 Use difference estimation in tests of details of balances.

Copyright © 2017 Pearson Education, Ltd. 17-2

Copyright © 2017 Pearson Education, Ltd. 17-3

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Determining Sample Size Using MUS: The following factors are

Copyright © 2017 Pearson Education, Ltd. 17-21

Determining Sample Sizes Using MUS: The following factors are

• Sampling Interval—The population recorded amount divided by the

Copyright © 2017 Pearson Education, Ltd. 17-23

Generalizing from the Sample to the Population When No

Copyright © 2017 Pearson Education, Ltd. 17-25

Generalizing from the Sample to the Population When Misstatements

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Generalizing from the Sample to the Population When Misstatements

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Like MUS, variables sampling is a statistical sampling method.

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Stratified Statistical Methods: As with other stratified methods, the

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