AUDIT
THEORY
CHAPTER 11: AUDIT SAMPLING
LIST OF CONTENTS
PPS Sampling Advantages
PPS Sampling Dis advantages
Classical Variables Sampling Advantages
Classical Variables Sampling Dis Advatages
LIST OF CONTENTS
Factors Influencing Sample size for
Substantive Procedures
Factor
Effect on Sample Size
tiv e A dv a n ta g e s
Compa ra P S
a d v a nt a g e s o f P
and Dis v a ria b le s
and c la s s ic a l
& F a c to rs
sampling s iz e for
g S am p le
Influencin r o c e d u re s
Subst a n t iv e P
Proba bil ity -
Pro p ortio n a l to
size ( P P S )
sa m p l in g
Cla s sic al
va ria b le s
sam p lin g
PPS ADVANTAGES
Automatically results May results in smaller
in stratified sample Usually in a smaller sample size if there
because items are sample size than are many individual
selected in classical variables differences between
proportion to their sampling when no recorded and audited
peso amounts. errors are expected. amounts in the
population.
PPS ADVANTAGES
Selection of zero or May results in smaller
negative balances Can be designed sample size if there
within a sample does more easily and are many individual
not require special sample differences between
sample design recorded and audited
considerations amounts in the
population.
PPS
DISADVANTAGES
Evaluation of the sample will require
special sample design considerations if
sample includes understatement errors.
Evaluation may overstate the allowance for
sampling risk when errors are found.
Generally includes an assumption that the audited
amount of a sampling unit should not be less than
zero or greater than the recorded amount.
CLASSICAL VARIABLES
SAMPLING
ADVANTAGES
If necessary, it is Classical variable
easier to expand sampling
samples selection complete
can begin, before population is
the than pps. available
Classical Variables
sampling
DISADVANTAGES
Normal distribution theory, the
More complex To determine sample basis underlying classical
than PPS size, the auditor must variables sampling, may not be
have an estimate of appropriate when the sample
size is not large and there are
the population either very large items or very
standard deviation. large differences between
recorded and audited amounts in
the population.
FACTORS INFLUENCING
SAMPLE SIZE FOR
SUBSTANTIVE PROCEDURES
FACTOR FACTOR FACTOR
An increase in the An increase in the An increase in the use
auditor’s auditor’s assessment of other substantive
assessment of of control risk ( or a procedures directed
inherent risk decrease in reliance at the same financial
on internal controls) statement assertions
EFFECT ON EFFECT ON EFFECT ON
SAMPLE SIZE SAMPLE SIZE SAMPLE SIZE
Increase Increase Decrease
FACTORS INFLUENCING
SAMPLE SIZE FOR
SUBSTANTIVE PROCEDURES
FACTOR FACTOR FACTOR
An increase in the auditor’s An increase in the
required confidence level (or An increase in the
conversely, a decrease in the risk total error that the amount of error the
that the auditor will conclude that auditor is willing to auditors expects to
a material error does not exist, accept (tolerable
when in fact it does exist- risk of find in the population
incorrect acceptance) error) (expected error)
EFFECT ON EFFECT ON EFFECT ON
SAMPLE SIZE SAMPLE SIZE SAMPLE SIZE
Increase Decrease Increase
FACTORS INFLUENCING
SAMPLE SIZE FOR
SUBSTANTIVE PROCEDURES
FACTOR FACTOR
Stratification of the The number of
population when sampling units in
appropriate the population
EFFECT ON EFFECT ON
SAMPLE SIZE SAMPLE SIZE
Decrease Negligible Effec0t
-pro p ortio na l-to-
Probab ility
) sam p lin g
size (PPS
p lin g is a s am p li n g
PPS s a m ut e
ue t h a t u s e s a t trib
techniq e v alu a t e th e
sampling th e o ry t o
a la rg e n u m b e r of
results w h e n
tio n s a r e c a p t u r e d
tran sa c
le ac c o u n t.
within a sing
-pro p ortio na l-to-
Probab ility
) sam p lin g
size (PPS
t he po p u la tio n ha s
Each peso in
a l ch a n c e o f b e in g
an eq u d o f
d , b u t th e lik e l ih o o
selecte g ic a l u n it fo r
a n y o n e lo
selecting p ro p o r tio n a l
testing is d ir e c tly
to its size.
g is m os t
PPS samplin n :
appropriat e w he
r ro rs a re e x p ec t ed
1. no e p ria te
h it is a ls o a p p ro
(althoug err o rs a r e
when o n e o r f e w
expe ct e d ); a n d
g is m os t
PPS samplin n :
appropriat e w he
for ov er sta te m en t
2. testing m e)
or ass et s a nd inc o
(normally f
EVALUATION OF
RESULTS
Factors of deviation
Here are the some general guidelines
that may be used when evaluating
sample results for tests of controls:
1. Determine the sample
deviation rate. The sample 2. Compare the sample
deviation rate is computed by deviation rate with the
dividing the number of tolerable deviation rate
deviations found in the
sample by the sample size.
Determine the sample
deviation rate
This is the percentage of
items in your sample that
have deviations (errors or
issues)
The sample The sample
deviation rate deviation rate
exceeds the is less than
tolerable the tolerable
deviation rate = deviation rate
(SDR> TDR) = (SDR<TDR)
BUT!
Before making a As the sample
conclusion, the deviation rate
auditor should approaches the
determine how tolerable division
close the sample rate, the
deviation rate is allowance for
to the tolerable sampling risk
deviation rate decreases
A. If the sample May results in smaller
deviation rate is B. If the sample deviation sample size if there
considerably lower than rate is barely lower than are many individual
the tolerable rate (for the tolerable deviation differences between
example 2% as against rate ( for example 8% as recorded and audited
tolerable rate of 10%) compared to tolerable amounts in the
deviation rate of 10%) population.
Non-statistical Statistical
sampling - Sampling –
OTHER SAMPLING
APPLICATION FOR TESTS OF
CONTROLS
1. Sequential
Sampling -
Sequential One or
sampling can be few
used as an
alternative form of deviations
testing controls are found
when an auditor
expects very few
deviations within
the population
OTHER SAMPLING
APPLICATION FOR TESTS OF
CONTROLS
2. Discovery Sampling
- this form of
attribute sampling is
most appropriate
when no deviations
are expected in the
population and
therefore one
deviation (Error)
would cause concern.
DETERMINATION OF
SAMPLE SIZE
The level of sampling risk
that the auditors is willing to
accept affects the sample
size required
FACTORS THAT INFLUENCES THE SAMPLE
SIZE (REGARDLESS OF THE SAMPLING
APPROACH USED)
FOR TEST OF FOR RELATION/
CONTROLS SUBSTANTIVE EFFECT
PROCEDURES
Planned risks of Planned risk of
accessing control incorrect Inverse
risk too low acceptance
FACTORS THAT INFLUENCES THE SAMPLE
SIZE (REGARDLESS OF THE SAMPLING
APPROACH USED)
FOR TEST OF FOR RELATION/
CONTROLS SUBSTANTIVE EFFECT
PROCEDURES
Tolerable Tolerable
Deviation Rate Misstatement Inverse
FACTORS THAT INFLUENCES THE SAMPLE
SIZE (REGARDLESS OF THE SAMPLING
APPROACH USED)
FOR TEST OF FOR RELATION/
CONTROLS SUBSTANTIVE EFFECT
PROCEDURES
Expected Expected
Deviation Rate Misstatement Direct
FACTORS THAT INFLUENCES THE SAMPLE
SIZE (REGARDLESS OF THE SAMPLING
APPROACH USED)
FOR TEST OF FOR RELATION/
CONTROLS SUBSTANTIVE EFFECT
PROCEDURES
Population Size Population Negligible
Size Direct
Samp le Se le ction
M et ho d
STRATIFIED SAMPLING
population divides stratification enables
into separate the auditor to relate
groups called sample to materiality,
often the auditor
strata, then a examine a large
probability sample percentage of the
is drawn from each stratum containing
group. high value items.
For example, the customers accounts
may be stratified as follows:
STRATUM ACCOUNT NO. OF
BALANCES SAMPLE SIZE
CUSTOMERS
1 More than P1 000 000
40 100% examination
2
P100 000 to P1 000
000 70 50 customers
3 Below P100 000 2040
100 customers
STRATIFICATION IS USEFUL TO
THE AUDITOR WHEN PERFORMING
SUBSTANTIVE TEST BECAUSE:
b. It allows
a. It decreases the the auditor to
effect of variance give more
in the population emphasis to
and as a result, those items
decreases the with higher
sample size; and monetary
value.
VALUE WEIGHTED
SELECTION
is used when
population consist of
monetary amounts. amounts with
The sampling unit is a higher value
each individual peso have the
in the account
balance. The greater
amounts in the chance or
account balance that probability of
contain the selected being
peso unit are picked selected.
as the sample
Example:
p la ns t o s e le c t o n e
The au d it o r t s
r o m a t o t a l a cc o u n
custome r f 0 0 , a
a la n c e o f P 1 0 0 0 0
rec e iva ble b f P 10 0
a c c o u n t b al an c e o
cus to me r 's 0 0 / P 1
e a 10 % ( P 10 0 0
000 will hav ili ty o f of b e in g
000 000 ) p r ob a b
selected.
le ct io n is s im ila r to
e t h o d o f s am p le s e
This m s a m p li n g
strat i fie d v e n
e t a ry v a l u e s a re g i
in that large m o n
r e s e n t a t io n in
greater rep p r i a t e w h e n th e
p le a n d it is a p p r o
th e sa m ip a t e s
auditor a n t ic r
e c a u s e t h e g r e a te
s t a te m e n t e r r o r s b
o v er a t e m e n t in
the over s t t h at
t e r t h e p ro b a b ili t y
a c c ou n t, th e g r e a
an c o u n t w i ll b e
the ac n t s d e t e c t ed .
d th e o v e r s t a te m e
sele c te d a n
Evalua tin g the
R es u lts
PROJECT THE
MISSTATEMENTS TO THE
POPULATION
After the audit procedures to the sample,
the auditor may have identified
misstatements in the sampling by using :
Ratio estimation
Difference estimation
RATIO ESTIMATION
uses the ratio of audited amounts to record in the sample to
estimate the total peso amount of the population (also called point
estimate) and an allowance for sampling risk.
the use of rato estimation is appropriate when the misstatements
in an account is directly proportional to its book value.
RATIO ESTIMATION
(SAV/SBV) x PBV = EPAV +(-) sampling risk
where:
SAV= Sample Audited Value
SBV= Sample Recorded Book Value
PBV= Population Book Value
EPAV= Population Audited Book Value
compreHensive example
Book value of on projection of errors
P159 960
samples selected
Audited value of 151 360 An external auditor sent out
samples selected positive confirmation request to
Difference P8 600 2 000 customers. Population
size is 4 800 accounts, with a
Average/Mean book total recorded value of P380
value (P159 360/2 P80 (rounded) 000. The summary of results of
000) examination of confirmation
Average/Mean replies received from customers
audited value (P151 P76 (rounded) are presented.
360/2 000)
RATIO ESTIMATION
(SAV/SBV) x PBV = EPAV +(-)
sampling risk
where:
SAV= Sample Audited Value
SBV= Sample Recorded Book
Value
PBV= Population Book Value
EPAV= Population Audited Book
Value
DIFFERENCE
ESTIMATION
uses the average the use of
difference between difference
audited amounts and estimation is
individual recorded appropriate
amounts in the when the
sample to estimate misstatements
the total audited in an account is
amount of the not affected by
population and an the book value
allowance for of the item
sampling risk. being
examined.
compreHensive example
Book value of on projection of errors
P159 960
samples selected
Audited value of 151 360 An external auditor sent out
samples selected positive confirmation request to
Difference P8 600 2 000 customers. Population
size is 4 800 accounts, with a
Average/Mean book total recorded value of P380
value (P159 360/2 P80 (rounded) 000. The summary of results of
000) examination of confirmation
Average/Mean replies received from customers
audited value (P151 P76 (rounded) are presented.
360/2 000)
DIFFERENCE ESTIMATION
(SAV-SBV)/SS x P = Projected
Error
where:
SAV= Sample Audited Value
SBV= Sample Recorded Book
Value
SS= Sample Size
P= number of items in
population
MEAN-PER-UNIT
ESTIMATION
projects sample the use of
average (mean) mean-per-
to the total unit
population by estimation is
multiplying the appropriate
sample average when
by the number of individual
items in the populations
do not have
population. recorded
values.
MEAN-PER-UNIT
ESTIMATION
SAV/SS x P = EPAV +(-) sampling risk
where:
SAV= Sample Audited Value
SS= Sample Size
P= number of items in population
EPAV= Estimated Population Audited Value
compreHensive example
Book value of on projection of errors
P159 960
samples selected
Audited value of 151 360 An external auditor sent out
samples selected positive confirmation request to
Difference P8 600 2 000 customers. Population
size is 4 800 accounts, with a
Average/Mean book total recorded value of P380
value (P159 360/2 P80 (rounded) 000. The summary of results of
000) examination of confirmation
Average/Mean replies received from customers
audited value (P151 P76 (rounded) are presented.
360/2 000)
BEFORE APPLYING RATIO OR DIFFERENCE
ESTIMATION, THE FOLLOWING CONDITIONS
MUST EXIST:
Total population Expected
Each population book value must difference
item must have a be known(e.g.,
recorded general between
recorded value audited and
(e.g., perpetual ledger book
value) and must recorded book
rather than correspond to values must
periodic the sum of all
inventory) not be too
individual
population items rare.
EVAL UA TIN G THE
RE SU LTS
2. COMPARE THE PROJECTED MISSTATEMENTS TOGETHER WITH THE TOLERABLE
MISSTATEMENTS AND DRAW AN OVERALL CONCLUSION.
AFTER PROJECTING THE SAMPLE MISSTATEMENTS TO THE POPULATION, THE AUDITOR
WILL HAVE TO COMPARE THE PROJECTED MISSTATEMENT WITH THE TOLERABLE
MISSTATEMENT.
If the projected a) Examine
misstatement is additional units,
greater than the
tolerable b) Perform suitable
misstatement, the
auditor will conclude alternative
that the account procedures, of
balance is materially
misstated. In this case, c) Request the
the auditor may: client to adjust the
account balance.
However, if the projected misstatement is less than
the tolerable misstatement, the auditor should
consider the allowance for sampling risk. The auditor
should recognize that sampling risk increases as the
projected misstatement approaches the tolerable
misstatement.
ANOMALOUS ERRORS IN AUDITING
Definition: Errors from rare, isolated events that don’t represent typical
mistakes.
Exclusion: These errors should not be included when estimating errors for
the entire population.
Consideration: Despite exclusion, the impact of these errors must
be factored in with other errors to assess the total effect on
account balance or transaction class.
A summary of the essential audit
sampling steps:
TEST OF SUBSTANTIVE
CONTROLS TESTS
Specify the purpose of the
1. Define the Specify the control test and its relationship to
objective of the procedures to be tested. the financial statement
test assertions.
Determine the appropriate audit Determine the appropriate audit
2. Determine the procedures to be performed to procedures to be performed to
satisfy the objective. satisfy the objective.
procedures to
be performed Define the population and the
Define the population and its
conditions that constitute a
deviation. characteristics
A summary of the essential audit
sampling steps:
TEST OF SUBSTANTIVE
CONTROLS TESTS
Consider the effects of the Consider the effects of the
3. Determine the following factors in following factors in
sample size determining the sample determining the sample size:
size:
• Acceptable Sampling Risk
• Acceptable Sampling Risk (Inverse)
(Inverse) • Tolerable Deviation rate
• Tolerable Deviation rate (Inverse)
(Inverse) • Expected Population
• Expected Population Deviation Rate (Direct)
Deviation Rate (Direct)
A summary of the essential audit
sampling steps:
TEST OF SUBSTANTIVE
CONTROLS TESTS
Use any one of the following
4. Select the Use any one of the following techniques and stratify the
Sample techniques: population, when
appropriate:
• Random number selection
• Systematic selection • Random number selection
• Haphazard • Systematic selection
selection(applies only to • Haphazard
non-statistical sampling) selection(applies only to
non-statistical sampling)
• Value weighted selection
A summary of the essential audit
sampling steps:
TEST OF SUBSTANTIVE
CONTROLS TESTS
Apply the audit procedures
5. Apply the Apply the audit procedures to the sample items.
audit to the sample items.
procedures
6. Evaluate the Decide whether the results Decide whether to accept
sample results supported the planned account balance as fairly
degree reliance control. stated or to require further
actions.
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