Week 10: Audit Sampling

Learning Objectives

After completing this module, the student is expected to:

1. Select items for testing to obtain audit evidence

2. Determine how to obtain audit evidence through selecting all items and specific items.
3. Determine how to obtain audit evidence through audit sampling

Selecting Items for Testing to Obtain Audit Evidence

When designing tests of controls and tests of details, the auditor shall determine means of selecting items for
testing that are effective in meeting the purpose of the audit procedure.

An effective test provides appropriate audit evidence to an extent that, taken with other audit evidence obtained
or to be obtained, will be sufficient for the auditor’s purposes. In selecting items for testing, the auditor is required
to determine the relevance and reliability of information to be used as audit evidence; the other aspect of
effectiveness (sufficiency) is an important consideration in selecting items to test. The means available to the
auditor for selecting items for testing are:

(a) Selecting all items (100% examination);

(b) Selecting specific items; and
(c) Audit sampling

The application of any one or combination of these means may be appropriate depending on the particular
circumstances, for example, the risks of material misstatement related to the assertion being tested, and the
practicality and efficiency of the different means.

Selecting All Items

The auditor may decide that it will be most appropriate to examine the entire population of items that make up a
class of transactions or account balance (or a stratum within that population).

100% examination is unlikely in the case of tests of controls; however, it is more common for tests of details.

100% examination may be appropriate when, for example:

 The population constitutes a small number of large value items;

 There is a significant risk and other means do not provide sufficient appropriate audit evidence; or
 The repetitive nature of a calculation or other process performed automatically by an information system
makes a 100% examination cost effective.

Selecting Specific Items

The auditor may decide to select specific items from a population. In making this decision, factors that may be
relevant include;

 The auditor’s understanding of the entity.

 The assessed risks of material misstatement, and
 The characteristics of the population being tested.

The judgmental selection of specific items is subject to non-sampling risk.

Specific items selected may include:

  High value or key items – The auditor may decide to select specific items within a population because they
are of high value, or exhibit some other characteristic, for example, items that are suspicious, unusual,
particularly risk-prone or that have a history of error.
 All items over a certain amount - The auditor may decide to examine items whose recorded values exceed
a certain amount so as to verify a large proportion of the total amount of a class of transactions or
account balance.
 Items to obtain information – The auditor may examine items to obtain information about matters such as
the nature of the entity or the nature of transactions.

While selective examination of specific items from a class of transactions or account balance will often be an
efficient means of obtaining audit evidence, it does not constitute audit sampling. The results of audit procedures
applied to items selected in this way cannot be projected to the entire population; accordingly, selective
examination of specific items does not provide audit evidence concerning the remainder of the population.

Audit Sampling
Audit Sampling is designed to enable conclusions to be drawn about an entire population on the basis of testing a
sample drawn from it.

Non-Sampling Risk

Examples of non-sampling risk include use of:

 Inappropriate audit procedures, or

 Misinterpretation of audit evidence and
 Failure to recognize a misstatement or deviation

Sampling Unit

The sampling units might be physical items, for examples

 Checks listed on deposit slips

 Credit entries on bank statements
 Sales invoices
 Debtor’s balances
 Monetary units

Tolerable Misstatement

When designing a sample, the auditor determines tolerable misstatement in order to address the risk
that the aggregate of individually immaterial misstatements may cause the financial statements to be
materially misstated and provide a margin for possible undetected misstatements.

Tolerable misstatement is the application of performance materiality, as defined in PSA 320 (Revised
and Redrafted), to a particular sampling procedure.

Tolerable misstatement may be the same amount or an amount lower than performance materiality.

Sample Design, Size and Selection of Items for Testing

When designing an audit sample, the auditor shall consider the purpose of the audit procedure and the
characteristics of the population from which the sample will be drawn.
The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level.

The auditor shall select items for the sample in such a way that each sampling unit in the population has a chance
of selection.

Sample Design

Audit sampling enables the auditor to obtain and evaluate audit evidence about some characteristic of the
items selected in order to form or assist in forming a conclusion concerning the population from which the
sample is drawn.

Audit sampling can be applied using either non-statistical or statistical sampling approaches.

When designing an audit sample, the auditor’s consideration includes:

 The specific purpose to be achieved and

 The combination of audit procedures that is likely to best achieve that purpose.

Consideration of the nature of the audit evidence sought and possible deviation or misstatement conditions or
other characteristics relating to that audit evidence will assist the auditor in defining what constitutes a
deviation or misstatement and what population to use for sampling.

When performing audit sampling, the auditor performs audit procedures to obtain evidence that the
population from which the audit sample is drawn is complete.

The auditor’s consideration of the purpose of the audit procedure, includes:

 A clear understanding of what constitutes a deviation or misstatement so that all, and only, those
conditions that are relevant to the purpose of the audit procedure are included in the evaluation of
deviations or projection of misstatements. For example,
 In a test of details relating to the existence of accounts receivable, such as confirmation,
payments made by the customer before the confirmation date but received shortly after
that date by the client are not considered a misstatement.
 Misposting between customer accounts does not affect the total accounts receivable
balance. Therefore, it may not be appropriate to consider this a misstatement in evaluating
the sample results of this particular audit procedure, even though it may have an important
effect on other areas of the audit, such as the assessment of the risk of fraud or the
adequacy of the allowance for doubtful accounts.

In considering the characteristics of a population, for tests of controls, the auditor makes an assessment of the
expected rate of deviation based on the auditor’s understanding of the relevant controls or on the
examination of a small number of items from the population.

This assessment is made in order to design an audit sample and to determine sample size. For example,

 If the expected rate of deviation is unacceptably high, the auditor will normally decide not to
perform tests of controls.
 For tests of details, the auditor makes an assessment of the expected misstatement in the
population. If the expected misstatement is high, 100% examination or use of a large sample size
may be appropriate when performing tests of details.

In considering the characteristics of the population from which the sample will be drawn, the auditor may
determine that stratification or value-weighted selection is appropriate.

Stratification
1. Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-
populations which have an identifying characteristic.

The objective of stratification is to reduce the variability of items within each stratum and therefore allow
sample size to be reduced without increasing sampling risk.

2. When performing tests of details, the population is often stratified by monetary value. This allows greater
audit effort to be directed to the larger value items, as these items may contain the greatest potential
misstatement in terms of overstatement. Similarly, a population may be stratified according to a
particular characteristic that indicates a higher risk of misstatement, for example, when testing the
allowance for doubtful accounts in the valuation of accounts receivable, balances may be stratified by age,
3. The results of audit procedures applied to a sample of items within a stratum can only be projected to the
items that make up that stratum. To draw a conclusion on the entire population, the auditor will need to
consider the risk of material misstatement in relation to whatever other strata make up the entire
population. For example, 20% of the items in a population may make up 90% of the value of an account
balance. The auditor may decide to examine a sample of these items. The auditor evaluates the results of
this sample and reaches a conclusion on the 90% of value separately from the remaining 10% (on which a
further sample or other means of gathering audit evidence will be used, or which may be considered
immaterial).
4. If a class of transactions or account balance has been divided into strata, the misstatement is projected
for each stratum separately. Projected misstatements for each stratum are then combined when
considering the possible effect of misstatements on the total class of transactions or account balance.

Value-Weighted Selection

When performing tests of details, it may be efficient to identify the sampling unit as the individual monetary
units that make up the population.

Having selected specific monetary units from within the population, for example, the accounts receivable
balance, the auditor may then examine the particular items, for example, individual balances, that contain
those monetary units.

One benefit of this approach to defining the sampling unit is that audit effort is directed to the larger value
items because they have a greater chance of selection, and can result in smaller sample sizes.

The decision whether to use a statistical or non-statistical sampling approach is a matter for the auditor’s
judgment; however, sample size is not a valid criterion to distinguish between statistical and non-statistical
approaches.

Sample Size

The level of sampling risk that the auditor is willing to accept affects the sample size required.

The lower the risk the auditor is willing to accept, the greater the sample size will need to be.

The sample size can be determined by the application of a statistically-based formula or through the
exercise of professional judgment.

Selection of Items for Testing

With statistical sampling, sample items are selected in a way that each sampling unit has a known
probability of being selected.

With non-statistical sampling judgment is used to select sample items.

 Because the purpose of sampling is to provide a reasonable basis for the auditor to draw conclusions
about the population from which the sample is selected, it is important that the auditor selects a
representative sample, so that bias is avoided, by choosing sample items which have characteristics
typical of the population.

The principal methods of selecting samples are the use of:

 Random selection
 Systematic selection and
 Haphazard selection

Random Selection

- This is applied through random number generators,

- For example, random number tables

Systematic Selection

- In which the number of sampling units in the population is divided by the sample size to give a
sampling interval.
- For example, 50, and having determined a starting point within the first 50, each 50 th 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 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.

Haphazard Selection

- In which 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.

Haphazard selection is not appropriate when using statistical sampling.

Performing Audit Procedures

The auditor shall perform audit procedures, appropriate to the purpose, on each item selected.

If the audit procedure is not applicable to the selected item, the auditor shall perform the procedure on a
replacement item.

If the auditor is unable to apply the designed audit procedures, or suitable alternative procedures, to a selected
item, the auditor shall treat that item as a deviation from the prescribed control, in the case of tests of controls, or
a misstatement, in the case of tests of details.

Nature and Cause of Deviations and Misstatements

The auditor shall investigate the nature and cause of any deviations or misstatements identified, and evaluate their
possible effect on the purpose of the audit procedure and on other areas of the audit.

In the extremely rare circumstances when the auditor considers a misstatement or deviation discovered in a
sample to be an anomaly, the auditor shall obtain a high degree of certainty that such misstatement or deviation is
not representative of the population. The auditor shall obtain this degree of certainty by performing additional
audit procedures to obtain sufficient appropriate audit evidence that the misstatement or deviation does not
affect the remainder of the population.

Projecting Misstatements

For tests of details, the auditor shall project misstatements found in the sample to the population.

Evaluating Results of Audit Sampling

The auditor shall evaluate:

(a) The results of the sample; and

(b) Whether the use of audit sampling has provided a reasonable basis for conclusions about the population
that has been tested.