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Chapter 9 - Audit Sampling

The document discusses audit sampling techniques used in auditing. It defines key terms like population, sampling, attributes sampling, and variables sampling. It describes the use of sampling to assess control risk and detect material misstatements. The document outlines statistical sampling methods like attributes estimation sampling and probability-proportional-to-size sampling. It also covers nonstatistical sampling and factors considered in choosing a sampling approach.

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Vanny Naragas
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© Attribution Non-Commercial (BY-NC)
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880 views

Chapter 9 - Audit Sampling

The document discusses audit sampling techniques used in auditing. It defines key terms like population, sampling, attributes sampling, and variables sampling. It describes the use of sampling to assess control risk and detect material misstatements. The document outlines statistical sampling methods like attributes estimation sampling and probability-proportional-to-size sampling. It also covers nonstatistical sampling and factors considered in choosing a sampling approach.

Uploaded by

Vanny Naragas
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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AUDITING CHAPTER 9

Audit Sampling By David N. Ricchiute

TOPICS
Use of sampling in audit engagements Role of sampling, nonsampling risk

Risk of assessing control risk too high, too low Risks of incorrect rejection, acceptance

Distinction between statistical, nonstatistical sampling Audit sampling for tests of controls and substantive tests of details

Attribute estimation, sequential sampling Probability-proportional-to-size (PPS)


GBW 8th ed., Ch. 9

SAMPLING:
Definitions
Sampling: examining less than 100% of items in a population Population: all items within a class of transactions Sampling plan: procedures to test a sample Attributes sampling: tests rate of deviation from a prescribed control procedure Variables sampling: tests whether recorded account balances are fairly stated

GBW 8th ed., Ch. 9

AUDIT RISK
Risk that auditor may unknowingly fail to modify opinion on materially misstated financial statements 2 parts

Risk that errors will occur: uncontrollable


Inherent risk & control risk

Risk that material errors will not be detected: controllable


Detection risk

GBW 8th ed., Ch. 9

UNCERTAINTIES
Sampling risk

Risk that sample may contain disproportionately more/less error than exists in population Aspects of audit risk not attributable to sampling such as human error

Nonsampling risk

GBW 8th ed., Ch. 9

CONTROL RISK ASSESSMENT: Too High


Inefficient
Assessing control risk at maximum when it should be lower Concluding control not effective when it is

GBW 8th ed., Ch. 9

CONTROL RISK ASSESSMENT: Too Low


Ineffective
Lowering control risk when should be set at maximum Concluding control is effective when it isnt

GBW 8th ed., Ch. 9

STATISTICAL SAMPLING
Apply the laws of probability to

Design efficient sample Measure sufficiency of sample Evaluate sample results

Measures sampling risk quantitatively

GBW 8th ed., Ch. 9

NONSTATISTICAL SAMPLING
Relies exclusively on judgment to

Determine sample size Evaluate sample results

Cannot measure sampling risk quantitatively

GBW 8th ed., Ch. 9

(NON)STATISTICAL SAMPLING CHOICE


Choice based on relative costs & benefits Independent of audit procedures

10

GBW 8th ed., Ch. 9

ATTRIBUTES & DEVIATIONS


Attribute

A characteristic of control

Deviation

Absence of the attribute

11

GBW 8th ed., Ch. 9

ATTRIBUTE ESTIMATION SAMPLING


Used to test controls that leave an audit trail 1 Determine objectives, attributes, deviation conditions 2 Define population 3 Define sample size 4 Perform sampling plan 5 Evaluate sample results
12

GBW 8th ed., Ch. 9

ATTRIBUTE ESTIMATION SAMPLING: Objectives


Whether controls for class of transactions sufficiently effective to lower control risk below maximum

Trail of observable & documented evidence Does not rely primarily on segregation of duties

13

GBW 8th ed., Ch. 9

ATTRIBUTE ESTIMATION SAMPLING: Sample Size


Sample size components

Acceptable risk of assessing control risk too low


Inverse relationship with sample size

Tolerable rate of deviation


Maximum population rate of deviation from

control

Expected population deviation rate


Estimated from prior year or pilot sample

14

GBW 8th ed., Ch. 9

SAMPLE SELECTION METHODS


A Random-number sampling B Systematic sampling C Block sampling D Haphazard sampling E Stratified

15

GBW 8th ed., Ch. 9

SAMPLE SELECTION METHODS: Random Number


Uses computer-generated numbers to select sampling units Match number to prenumbered documents Appropriate for both statistical & nonstatistical sampling

16

GBW 8th ed., Ch. 9

SAMPLE SELECTION METHODS: Systematic Sampling


Selecting every nth item from population of sequentially ordered items Useful when identification numbers lacking Appropriate for both statistical & nonstatistical sampling

17

GBW 8th ed., Ch. 9

SAMPLE SELECTION METHODS: Block Sampling


A group of items arranged contiguously within a larger grouping Inefficient & not generalizable Should not be used for statistical or nonstatistical sampling without care in controlling sampling risk

18

GBW 8th ed., Ch. 9

SAMPLE SELECTION METHODS: Haphazard Sampling


Sampling units selected without special reason or conscious bias Inappropriate for statistical sampling Useful for nonstatistical sampling

19

GBW 8th ed., Ch. 9

SAMPLE SELECTION METHODS: Stratified Sampling


Subdivide population into homogeneous strata Select separate sample for each strata by one of prior methods

20

GBW 8th ed., Ch. 9

OTHER TECHNIQUES:
Sequential Sampling
Stop-or-go

Performed in stages Auditor decides to stop or continue sampling after each stage

21

GBW 8th ed., Ch. 9

OTHER TECHNIQUES:
Nonstatistical Sampling
Used when costs outweigh benefits of statistical sampling Auditor judgment guided by

Experience Prior knowledge Current information

22

GBW 8th ed., Ch. 9

SUBSTANTIVE SAMPLING RISK: 2 Sources


Risk of incorrect rejection

Risk that audit sample suggests account balance is materially misstated when it is fairly stated Risk that sample suggests account balance is fairly stated when it is materially misstated
GBW 8th ed., Ch. 9

Risk of incorrect acceptance

23

VARIABLES SAMPLING PLAN


Determine objectives of test Define population Choose sampling technique Determine sample size Determine method of sample selection Perform sampling plan Evaluate sample results
24

GBW 8th ed., Ch. 9

OBJECTIVES OF TEST
To estimate account balance that is not recorded To test reasonableness of recorded account balance

25

GBW 8th ed., Ch. 9

DEFINING POPULATION
Audit population

All items constituting an account balance or class of transactions defined by auditors characteristic of interest Any individual elements of a population

Sampling unit

26

GBW 8th ed., Ch. 9

AUDIT SAMPLING
Sampling used only for those accounts where it is appropriate

When large number transactions within one account Probability proportional to size (PPS) Nonstatistical sampling Classical variables sampling (appendix)
GBW 8th ed., Ch. 9

Techniques

27

SAMPLING DECISIONS
Choice between statistical & nonstatistical sampling based on

Costs Effectiveness Need for quantitative estimate of sampling risk

28

GBW 8th ed., Ch. 9

PROBABILITY-PROPORTIONALTO-SIZE (PPS)
Derived from attributes sampling theory Appropriate when 1 or a few errors expected Characteristics

Automatically stratifies an audit population Appropriate for testing for overstatement


Useful for testing assets & revenues

29

GBW 8th ed., Ch. 9

PPS

An Example
Define population for accounts receivable

All customer debit balances testing overstatement or All customer balances, including 0 & negative
Requires special consideration

Dollar is sample unit


30

GBW 8th ed., Ch. 9

PPS SAMPLE SIZE ELEMENTS


Determine

Reliability factor for overstatement errors based on


Expected number overstatement errors
Risk of incorrect acceptance

Tolerable (acceptable) error Anticipated error & expansion factor

31

GBW 8th ed., Ch. 9

PPS SAMPLE SIZE MODEL


n= RF x B TE (AE x EF) where RF reliability factor (from table) B book value (from client) TE tolerable error (auditor judgment) AE anticipated error (auditor judgment) EF expansion factor (from table)
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GBW 8th ed., Ch. 9

PPS SAMPLE SELECTION


Used for statistical sampling methods

Random number Systematic sampling

33

GBW 8th ed., Ch. 9

EVALUATING RESULTS: PPS Decision Rule


If the upper error limit is less than or equal to the tolerable error, the account is fairly presented

34

GBW 8th ed., Ch. 9

NONSTATISTICAL SAMPLING
Used when No apparent need to quantify sampling risk Cost of statistical sampling exceeds benefits Cost to select sampling units exceeds benefits
35

GBW 8th ed., Ch. 9

SAMPLE SIZE IN NONSTATISTICAL SAMPLING


Requires

Degree audit assurance


Substantial, moderate, little

Assurance factor Estimated tolerable error

36

GBW 8th ed., Ch. 9

EVALUATING SAMPLE RESULTS


When likely error is estimated, auditor has 4 choices

Accept clients book value Propose audit adjustment Perform additional substantives tests Request client to revalue entire population
GBW 8th ed., Ch. 9

37

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