AUDITINGCHAPTER 9

Audit SamplingByDavid N. Ricchiute

GBW 8th ed., Ch. 92

TOPICS

Use of sampling in audit engagementsRole of sampling, nonsampling risk

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

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

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

GBW 8th ed., Ch. 93

SAMPLING:Definitions

Sampling: examining less than 100% of items in a populationPopulation: all items within a class of transactionsSampling plan: procedures to test a sampleAttributes sampling: tests rate of deviation from a prescribed control procedureVariables sampling: tests whether recorded account balances are fairly stated

GBW 8th ed., Ch. 94

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. 95

UNCERTAINTIES

Sampling risk Risk that sample may contain

disproportionately more/less error than exists in population

Nonsampling risk Aspects of audit risk not attributable

to sampling such as human error

GBW 8th ed., Ch. 96

CONTROL RISK ASSESSMENT: Too High

InefficientAssessing control risk at maximum when it should be lowerConcluding control not effective when it is

GBW 8th ed., Ch. 97

CONTROL RISK ASSESSMENT: Too Low

IneffectiveLowering control risk when should be set at maximumConcluding control is effective when it isn’t

GBW 8th ed., Ch. 98

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. 99

NONSTATISTICAL SAMPLING

Relies exclusively on judgment to Determine sample size Evaluate sample results

Cannot measure sampling risk quantitatively

GBW 8th ed., Ch. 910

(NON)STATISTICAL SAMPLING CHOICE

Choice based on relative costs & benefitsIndependent of audit procedures

GBW 8th ed., Ch. 911

ATTRIBUTES & DEVIATIONS

Attribute A characteristic of control

Deviation Absence of the attribute

GBW 8th ed., Ch. 912

ATTRIBUTE ESTIMATION SAMPLING

Used to test controls that leave an audit trail

1 Determine objectives, attributes, deviation conditions

2 Define population3 Define sample size4 Perform sampling plan5 Evaluate sample results

GBW 8th ed., Ch. 913

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

GBW 8th ed., Ch. 914

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

GBW 8th ed., Ch. 915

SAMPLE SELECTION METHODSA Random-number samplingA Systematic samplingA Block samplingDHaphazard samplingA Stratified

GBW 8th ed., Ch. 916

SAMPLE SELECTION METHODS: Random Number

Uses computer-generated numbers to select sampling unitsMatch number to prenumbered documentsAppropriate for both statistical & nonstatistical sampling

GBW 8th ed., Ch. 917

SAMPLE SELECTION METHODS: Systematic Sampling

Selecting every nth item from population of sequentially ordered itemsUseful when identification numbers lackingAppropriate for both statistical & nonstatistical sampling

GBW 8th ed., Ch. 918

SAMPLE SELECTION METHODS: Block Sampling

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

GBW 8th ed., Ch. 919

SAMPLE SELECTION METHODS: Haphazard Sampling

Sampling units selected without special reason or conscious biasInappropriate for statistical samplingUseful for nonstatistical sampling

GBW 8th ed., Ch. 920

SAMPLE SELECTION METHODS: Stratified Sampling

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

GBW 8th ed., Ch. 921

OTHER TECHNIQUES: Sequential Sampling

Stop-or-go Performed in stages Auditor decides to stop or continue

sampling after each stage

GBW 8th ed., Ch. 922

OTHER TECHNIQUES: Nonstatistical Sampling

Used when costs outweigh benefits of statistical samplingAuditor judgment guided by Experience Prior knowledge Current information

GBW 8th ed., Ch. 923

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 of incorrect acceptance Risk that sample suggests account

balance is fairly stated when it is materially misstated

GBW 8th ed., Ch. 924

VARIABLES SAMPLING PLAN

Determine objectives of testDefine populationChoose sampling techniqueDetermine sample sizeDetermine method of sample selectionPerform sampling planEvaluate sample results

GBW 8th ed., Ch. 925

OBJECTIVES OF TEST

To estimate account balance that is not recordedTo test reasonableness of recorded account balance

GBW 8th ed., Ch. 926

DEFINING POPULATION

Audit population All items constituting an account

balance or class of transactions defined by auditor’s characteristic of interest

Sampling unit Any individual elements of a

population

GBW 8th ed., Ch. 927

AUDIT SAMPLINGSampling used only for those accounts where it is appropriate When large number

transactions within one accountTechniques Probability proportional to size

(PPS) Nonstatistical sampling Classical variables sampling

(appendix)

GBW 8th ed., Ch. 928

SAMPLING DECISIONS

Choice between statistical & nonstatistical sampling based on Costs Effectiveness Need for quantitative estimate of

sampling risk

GBW 8th ed., Ch. 929

PROBABILITY-PROPORTIONAL-TO-SIZE (PPS)

Derived from attributes sampling theoryAppropriate when 1 or a few errors expectedCharacteristics Automatically stratifies an audit

population Appropriate for testing for

overstatement Useful for testing assets & revenues

GBW 8th ed., Ch. 930

PPSAn 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

GBW 8th ed., Ch. 931

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

GBW 8th ed., Ch. 932

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)

GBW 8th ed., Ch. 933

PPS SAMPLE SELECTION

Used for statistical sampling methods Random number Systematic sampling

GBW 8th ed., Ch. 934

EVALUATING RESULTS:PPS Decision Rule

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

GBW 8th ed., Ch. 935

NONSTATISTICAL SAMPLING

Used whenNo apparent need to quantify sampling riskCost of statistical sampling exceeds benefitsCost to select sampling units exceeds benefits

GBW 8th ed., Ch. 936

SAMPLE SIZE IN NONSTATISTICAL SAMPLING

Requires Degree audit assurance

Substantial, moderate, little Assurance factor Estimated tolerable error

GBW 8th ed., Ch. 937

EVALUATING SAMPLE RESULTS

When likely error is estimated, auditor has 4 choices Accept client’s book value Propose audit adjustment Perform additional substantives

tests Request client to revalue entire

population