CHAPTER 10

Audit sampling

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 Learning objectives
Sampling theory
10.1 Define audit sampling and its objectives and describe the
requirements that apply to all audit samples—statistical and non-
statistical.
10.2 Identify the various means of gathering audit evidence.
10.3 Identify planning and design considerations for sampling,
including defining audit objectives and the appropriate population,
the potential use of stratification and potential alternative definitions
of the sampling unit, including dollar-unit sampling.
10.4 Identify factors influencing the determination of sample size.
10.5 Understand the appropriate methods of selecting sample
items.
10.6 Appreciate the application of audit procedures to a selected
sample, and the evaluation of sample results. Continued

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 Learning objectives (continued)
Sampling techniques
10.7 Consider sampling approaches to tests of
controls, in particular attribute sampling.
10.8 Consider sampling approaches to
substantive tests, in particular dollar-unit
sampling.
10.9 Consider other statistical sampling
approaches to substantive tests.

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 Figure 10.1 Flowchart of audit
sampling for a financial report audit

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 LO 10.1: Definition and features
• Audit sampling: the application of an audit
procedure to less than 100% of the items within
a population to obtain audit evidence about
particular characteristics of the population.
• Audit sampling is important because it provides
information on:
– how many items to examine
– which items to select
– how sample results are evaluated and extrapolated
to the population in order to tell us something about
the population (e.g. level of misstatement).

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 Sampling risk
• Sampling risk: the probability that the auditor
has reached an incorrect conclusion because
audit sampling was used rather than 100%
examination (ASA/ISA 530.05).
• Non-sampling risk: arises from factors, other
than sample size, that cause an auditor to reach
an incorrect conclusion, such as the possibility
that:
– the auditor will fail to recognise misstatements
included in examined items
– the auditor applies a procedure that is not
effective in achieving a specific objective.

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 Characteristic of interest
• When sampling, the auditor identifies a
particular characteristic of the population to
focus upon.
• For tests of control, the characteristic of
interest is the rate of deviation from an
internal control policy or procedure.
• For substantive tests, the characteristic of
interest is monetary misstatement in the
balance.

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 LO 10.2: Various means of
gathering audit evidence
• 100% examination: this is not a
sampling method.
• Selecting specific items: e.g. high risk:
this is not a sampling method. Items
selected will not necessarily be
representative of the population.
• Audit sampling.

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 Non-statistical versus
statistical audit sampling
• Statistical sampling: an approach to sampling that has the
following characteristics:
– random sample selection
– use of probability theory to evaluate sample results
 major advantage is defensibility, thorough quantification of
sampling risk.
 Refer ASA/ISA 530.5(g)
• Non-statistical sampling: sampling approaches that do not
have all the characteristics of statistical sampling.
– major advantage is greater application of audit experience
– the basic principles and essential procedures identified in
ASA/ISA 530 apply equally to both statistical and non-
statistical sampling.

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Current practice in Australia
and business risk assessment
• In Australia, there are some disparities with
regard to the practice of sampling within the large
audit firms.
• Firms will usually use an unbiased approach but
the size of the sample they select will usually be
determined with the help of decision aids within
the firm.
• Sample sizes that are commonly used in practice
are around 20 items where a moderate level of
testing is required, or 30 items where more
extensive levels of testing are undertaken.
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Figure 10.2 Sampling phases

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 Basic requirements of all
audit samples
Whenever an auditor uses audit sampling (statistical
or non-statistical) the following requirements apply:
– Planning and design: The auditor considers the relationship
of the sample to the relevant specific audit objective or
control objective and considers certain other factors that
should influence sample size.
– Selection: Sample items are selected in such a way that the
sample can be expected to be representative of the
population.
– Performing the procedure and evaluating results: The
auditor performs the required audit procedures on the items
selected, projects the results of the audit procedures
undertaken on the sample to the population and considers
sampling risk.

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 LO 10.3: Planning and
designing the sample
Auditor must consider:
•objectives of the audit test (usually related to
an audit assertion of interest)
•population from which to sample
•possible use of stratification
•definition of the sampling unit.

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Specifying the audit objective
and defining the population

• Once the audit objective is specified, such as

reliance on controls or misstatement of
account balance, the auditor must consider
what conditions would constitute an error.
• The auditor must ensure that the population
from which the sample is to be selected is
complete and appropriate to the audit
objective.
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 Stratification
• Stratification is the process of dividing the
population into a series of sub-populations, each
of which has an identifying characteristic, such
as dollar value (ASA 530/ISA 530 Appendix 1,
paragraphs 1–4).
• Can assist with audit efficiency as it allows the
auditor to reduce the sample size by reducing
variability without increasing the sampling risk.
• Can direct auditor’s attention to areas of audit
interest, especially risky or material items.

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 Defining the sampling unit
The sampling unit is commonly:
•each of the transactions or balances making
up the account balance, or
•individual dollars that make up an account
balance or class of transactions, commonly
referred to as Monetary-Unit Sampling (MUS)
or Dollar Unit Sampling (DUS).

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LO 10.4: Determining sample size
• Sample size is affected by the degree of
sampling risk (the probability that the auditor
has reached an incorrect conclusion because
sampling, rather than 100% examination) the
auditor is willing to accept.
• Auditor's major consideration in determining
appropriate sample size is whether, given
expected results from examining sample,
sampling risk will be reduced to an
acceptably low level (ASA/ISA 530.07).

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 Factors that influence sample
size for tests of controls
Appendix 2 to ASA/ISA 530 outlines the factors that
influence sample size for tests of controls as follows:
•the extent to which the auditor’s risk assessment takes
into account relevant controls (control risk assessment)
•the tolerable rate of deviation
•the expected rate of deviation in the population
•the auditor’s desired level of assurance that actual
deviation rate is not larger than tolerable deviation rate
•the number of sampling units in the population.

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 Factors that influence sample
size for substantive testing
• Appendix 3 to ASA/ISA 530 outlines the factors that
influence sample size for substantive testing as follows:
‒ the auditor’s assessment of risk of material misstatement
‒ the use of other substantive procedures directed at the
same assertion
‒ the auditor’s desired level of assurance that actual
misstatement is not greater than tolerable misstatement
‒ the tolerable misstatement
‒ the amount of misstatement the auditor expects to find in
the population (expected misstatement)
‒ stratification
‒ the number of sampling units in the population.

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 LO 10.5: Selecting the sample
• To draw conclusions about population or stratum,
the sample needs to be typical of characteristics
of population or stratum.
• Sample needs to be selected without bias so
that all sampling units in the population or stratum
have a chance of selection.
• Common sampling techniques are:
– random selection—random number generation
– systematic selection
– haphazard selection—select without conscious
bias.

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 Steps in systematic selection
• For example, suppose the sample size is 20 and the
number of items in the population is 10 000:
• Step 1: Calculate the sample interval:
No. of items in population 10 000
  500
Sample size 20
• Step 2: Give every item in population a chance of
selection by choosing a random number (random
start) within range of one and sampling interval (in
this example, 500), e.g. 217.
• Step 3: Continue to add sampling interval to random
start, and identify items to be sampled, e.g. item nos.
217, 717, 1217. . . 9217, 9717.

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 Biases from haphazard
sampling

Include 10.1
Auditing in
the news . . Biases
from haphazard
sampling Page 467.

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Unacceptable sample selection
methods
• Block selection: the auditor selects all items
of a specified type processed on a particular
day, week or month.
• Judgmental selection (based on sample
item characteristics): the auditor selects large
or unusual items from the population or uses
some other judgmental criterion for selection.
– This method has a conscious bias and sample
cannot be considered representative of population.

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LO 10.6: Performing the audit
procedures and evaluating
sampling results
To ensure conclusions arising from tests on audit
samples are appropriate, auditor must perform
testing on each item selected.
•If selected item is not appropriate for application
of testing procedure, a replacement item can be selected
(ASA/ISA 530.9–10).
•If auditor is unable to perform test on a selected item
(e.g. loss of documentation), it is considered to be an
error.

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 Evaluating sample results
• To evaluate sample results, auditor determines the level of
misstatement found in sample and directly projects this
misstatement to relevant population. For example: sample
20%, find misstatement of $10 000. Therefore projected
misstatement = $50 000 ($10 000/20%).
• Projected misstatement is then compared with tolerable
misstatement for the audit procedure to determine if
characteristic of interest can be accepted or rejected.
• Auditor should consider both the nature and cause of any
misstatement or deviations identified.
• Anomalous error does not need to be projected. Auditor
must perform additional audit procedures to obtain sufficient
appropriate audit evidence that the item is not
representative of the population.

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 Figure 10.3 Projecting
misstatements from sample to
population

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 LO 10.7: Sampling for tests
of controls: attribute sampling
• Audit sampling is useful for tests of controls,
especially involving inspection of source
documentation for specific attributes, such as
evidence of authorisation (attribute sampling).
• Involves examination of documents for particular
attributes related to controls (e.g. authorisation).
• Results of attribute sampling can be used to
support or refute an initial assessment of
control risk.

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 Planning and designing
sample for tests of controls
Auditor should consider:
•audit objectives (assertions of audit interest)
•control risk assessment and tolerable deviation
rate
•allowable risk of over-reliance: allowable risk of
assessing control risk too low
•expected error: amount of error the auditor
expects to find in the population.

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 Audit objectives
• A sampling technique that is suitable for tests of
controls is attribute sampling.
• The following steps are necessary in considering the
relationship between the sample and the objective of
the test:
– identify relevant control objectives, policies and procedures
that are relevant to establishing reliance on internal controls
and reducing substantive tests of the related account
balances
– identify population and sample unit
– define the characteristic of interest—so that an attribute
either exists or does not exist, which means that a control
activity has either been complied with or has not been
complied with.

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 Table 10.1 Control risk
assessment and
tolerable deviation rate

<Insert Table 10.1,

page 472 here>

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 Table 10.2 Reliability factors
for assessing required
confidence level

<Insert Table 10.2,

page 473 here>

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 Sample size estimation for
attribute sampling

<Insert Example
10.3, page 474 here>

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 Sample size estimation for
attribute samples (alternative
method)
An alternative method is to determine sample size by
reference to:
– Table 10.3 (p. 474), for where allowable risk of over-
reliance (ARO) is 10% (90% confidence). This ARO is
common in practice.
– Table 10.4 (p. 475), for where allowable risk of over-
reliance is 5% (95% confidence).
– For example, where desired level of assurance is 90%,
(Table 10.3), tolerable deviation rate is 10%, and expected
deviation rate is 0, required sample size is 22.

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 Selection of sample items for
tests of controls
• Having determined the appropriate sample size, it is then
a matter of determining which sample items to select.
• The representative selection methods of random
selection and systematic selection generally apply to
both tests of controls and substantive tests.
• However, stratification is not usually applicable to tests of
controls.
• Systematic selection is often useful for tests of controls
because it helps to achieve the auditor’s internal control
objective of testing continuity of controls by ensuring
sampling is continual throughout the year.

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 Evaluation of sample results
• Approach in practice is to use sample deviation rate
(SDR) as best estimate of population deviation rate.
• For example, auditor selects 25 items, finds one error
=> SDR rate is 4%.
• Auditor compares with tolerable deviation rate (TDR).
If SDR ≤ TDR, sample results support auditor’s
planned reliance on IC.
• If SDR > TDR, sample results do not support auditor’s
planned reliance on IC. Auditor will need to consider
reliance on IC and may consequentially increase
substantive testing.

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LO 10.8: Sampling for substantive tests:
in particular, dollar-unit sampling
• The following matters should be considered
when planning for substantive tests:
– relationship of sample to relevant audit objective
(assertion of audit interest)
– preliminary judgments about materiality levels
– auditor's desired level of assurance that actual
misstatement is not greater than tolerable
misstatement
– characteristics of the population
– use of other substantive procedures directed at
same financial report assertion.
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 Dollar-unit sampling
• Sample unit is individual dollar units, not
physical units (transactions or balances).
• A population with $1 000 000 that contains
1000 physical units or accounts is viewed as
a population with 1 000 000 sample units.
• Individual dollar selected is attached to that
physical unit or account in which it is
contained, and the unit or account will then
be tested.

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 Advantages of dollar-unit
sampling (DUS)
• Directs auditor’s attention to material items.
• For example, under traditional sampling, debtor A
(owing $10 000) and debtor B (owing $1000) have
equal chance of selection. Under DUS, debtor A is
ten times more likely to be selected and tested.
• Directs auditor’s attention towards overstatement
errors.
• However, a disadvantage is that it directs auditor’s
attention away from understatement errors.

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 Determination of sample size
for substantive tests
• For convenience, this is usually presented as:

n = BV x R
TE$1 000 000. Tolerable
• E.g. account balance
error $50 000.
•
1 000 000 x 3
Sample Size   60
50 000
• Expected error is zero and risk of incorrect
acceptance is 5%
 Reliability factor = 3 (Table 10.5, p. 480)

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Example 10.4 Illustration of DUS selection
using systematic sampling with a
dollar interval

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Example 10.4 Illustration of DUS
using systematic sampling with a
dollar interval (continued)

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 Example 10.5 Evaluation
of sample results for
substantive testing

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 LO 10.9: Other statistical
sampling approaches
• Mean per unit estimation
• Difference estimation
• Ratio estimation

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 Summary
• Audit sampling is a very important part of the
evidence-gathering procedures of the audit
process.
• It is through sampling techniques that the auditor
can determine the number of items in a
population that need to be tested and which
particular items in the population will be selected
for audit testing.
• After audit testing has been carried out, the
auditor can extrapolate sample results so that a
conclusion can be formed on the population.

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