Rhona Mae S.

Bacaran

Assignment/Activity on Audit Sampling

Problem 1

1. Auditor’s Justification for Accepting the Uncertainties Inherent in Sampling

Auditors accept uncertainties in the sampling process because auditing is based on
reasonable assurance, not absolute assurance. It would be impractical and costly to examine
every single transaction or document in the financial statements.

Sampling provides sufficient evidence to form an opinion, as long as the sample is properly
designed and representative of the population. The cost-benefit principle supports the use
of sampling, as examining all data would consume excessive time and resources without
proportionate improvement in audit quality.

Professional judgment and audit standards guide the auditor in determining an appropriate
sample size and selection method to minimize risk while maintaining audit efficiency.

In summary, auditors accept sampling uncertainty because it allows them to obtain

reasonable assurance in a practical and efficient manner.

2. Uncertainties That Embody the Concept of Ultimate Audit Risk

Ultimate audit risk is the risk that the auditor may express an inappropriate opinion on
financial statements that are materially misstated. It consists of several inherent
uncertainties:

1. Inherent Risk (IR) – The susceptibility of an account balance or transaction class to

material misstatement, assuming there are no related internal controls.

Example: Cash transactions are more prone to misstatement due to their liquid nature.

2. Control Risk (CR) – The risk that a material misstatement will not be prevented or
detected and corrected on a timely basis by the entity’s internal controls.

Example: Weak segregation of duties in the accounting department.

3. Detection Risk (DR) – The risk that the auditor’s procedures will not detect a material
misstatement that exists in an account balance or class of transactions.

Example: An auditor’s sample fails to include an item that is misstated.

These three components interact as follows:

Audit Risk (AR) = Inherent Risk (IR) × Control Risk (CR) × Detection Risk (DR)

The uncertainty comes from the auditor’s inability to know with absolute certainty the true
level of misstatement in the population. Thus, audit risk is managed — not eliminated —
through planning, testing, and professional judgment.

3. Nature of Sampling Risk and Nonsampling Risk

A. Sampling Risk
Sampling risk is the risk that the auditor’s conclusion based on a sample differs from the
conclusion that would have been reached if the entire population were tested. It occurs
because only a portion of the population is examined.

Effects:
- In substantive tests of details: Sampling risk may cause the auditor to conclude that an
account balance is fairly stated when it is actually misstated (risk of incorrect acceptance)
or vice versa (risk of incorrect rejection).
- In compliance tests of internal controls: Sampling risk may cause the auditor to conclude
that controls are effective when they are not (risk of assessing control risk too low) or that
they are ineffective when they are actually effective (risk of assessing control risk too high).

B. Nonsampling Risk
Nonsampling risk is the risk that the auditor reaches an incorrect conclusion for reasons
unrelated to sampling. Examples include applying inappropriate audit procedures,
misinterpreting evidence, or failing to recognize a misstatement.

Nonsampling risk can be reduced through proper supervision, training, review, and careful
audit planning.

 Summary Table:

Type of Risk Definition Examples Effect / Control

Sampling Risk Error due to Sample not Controlled by

examining only a representative. increasing sample
sample. size or using
 statistical sampling.

Nonsampling Risk Error due to auditor Wrong procedure, Controlled by

judgment or misinterpretation. proper planning,
procedural failure. supervision, and
review.

In summary, auditors accept uncertainty because audits provide reasonable, not absolute,
assurance. Audit risk is made up of inherent, control, and detection risks. Sampling and
nonsampling risks both affect audit conclusions, but only sampling risk is directly related to
the sample size and selection.

Problem 2

A. Factors That Should Influence the Auditor’s Judgment

1. Acceptable Level of Risk of Overreliance

- Degree of planned reliance on the control (more reliance → lower acceptable risk).
- Materiality of the account(s) affected by the control.
- Inherent risk: higher inherent risk → require lower acceptable risk.
- Quality of control environment and prior audit experience.
- Consequences of an incorrect conclusion.
- Cost-benefit and practical considerations.

2. Tolerable Deviation Rate

- Degree of assurance needed from the control (tighter assurance → lower tolerance).
- Materiality and dollar effect of deviations.
- Nature and importance of the control.
- Assessed inherent and control risks.
- Prior-year deviation rates and corrective actions.

3. Expected Population Deviation

- Prior audit results.

- Results of pilot or preliminary tests.
- Client changes in personnel, systems, or processes.
- Industry or environment factors.
- Professional judgment based on walkthroughs and inquiries.

B. Effect on Sample Size

Factor If the factor increases... Effect on Sample Size
 Acceptable Level of Risk of Auditor is willing to accept Sample size decreases
Overreliance more risk (confidence
decreases)

Tolerable Deviation Rate Auditor allows more Sample size decreases

(INVERSE) deviation before concluding
control is ineffective

Expected Population Auditor expects more Sample size increases

Deviation (DIRECT) deviations in the population

Sample size grows when more precision is needed (lower risk, tighter tolerance) or when
population variability is higher.

C. Evaluation of Sample Results

Given:
- Sample size = 100
- Deviations found = 7 (Sample deviation rate = 7%)
- Population size = 2,500
- Tolerable deviation rate = 8%
- Acceptable level of risk of overreliance = Low (≈ 5%)

1. Point Estimate:
Projected deviations = 0.07 × 2,500 = 175.
Tolerable deviations = 0.08 × 2,500 = 200.
→ On point estimate, population deviation (7%) < tolerable (8%).

2. Confidence Bound Calculation:

Standard error = √(0.07×0.93/100) = 0.02552.
Finite population correction = √((2,500−100)/2,499) = 0.98.
Adjusted SE = 0.02501.
Upper one-sided 95% bound = 0.07 + 1.645×0.02501 = 0.111 (≈11.1%).

3. Conclusion:
- Upper bound (11.1%) > tolerable rate (8%).
- The auditor cannot rely on the control because at 95% confidence, the population
deviation may exceed tolerable limits.
- Auditor should either increase sample size or perform additional substantive
procedures.
D. How Statistical Sampling Assists the Auditor
Statistical sampling provides objective, measurable support for audit conclusions. It helps
the auditor:

- Specify a decision rule in advance (acceptable risk, tolerable rate) and compute the needed
sample size.
- Quantify sampling risk using confidence intervals.
- Project results to the population with measurable uncertainty.
- Calculate how much evidence is needed to reach desired confidence.
- Provide defensible, statistically sound audit conclusions.
- Make cost-benefit trade-offs visible and measurable.

In this case, statistical sampling showed that although the observed 7% deviation was
below the 8% tolerance, the uncertainty range extended beyond tolerance. This prevented
overreliance on a potentially weak control.

Summary:
- Do not rely on the control based on the 100-item sample.
- Increase the sample size (around 1,000+ items for 95% confidence) or perform more
substantive tests.
- Use statistical sampling to quantify and justify audit conclusions.

Problem 3
Using statistical sampling to verify year-end accounts payable balance:

Population: Number of accounts = 4,100; Book balance (population total) = P 10,000,000

Sample: n = 200; Sample book balance = P 500,000; Sample audited (auditor) balance = P
600,000

1. Ratio Estimation Technique

Sample ratio (r) = Audited sample total / Book sample total = 600,000 / 500,000 = 1.2

Projected audited population total = r × Population book total = 1.2 × 10,000,000 = P

12,000,000

Projected misstatement = Projected audited total − Population book total = 12,000,000 −

10,000,000 = P 2,000,000
2. Difference Estimation Technique
Sample total difference = Audited sample total − Book sample total = 600,000 − 500,000 = P
100,000

Mean difference per sampled unit = 100,000 / 200 = P 500 per account

Projected total difference = Mean difference × Population size = 500 × 4,100 = P 2,050,000

Projected misstatement = P 2,050,000 (i.e., projected audited total − population book total)

3. Mean-per-Unit Estimation Technique

Sample mean audited per unit = Audited sample total / sample size = 600,000 / 200 = P
3,000 per account

Projected audited population total = Sample mean audited × Population size = 3,000 × 4,100
= P 12,300,000

Projected misstatement = 12,300,000 − 10,000,000 = P 2,300,000

Problem 4
ABC Company accounts receivable: Population = 10,000 accounts; Population book total = P
1,200,000

Sample audited 100 accounts: Sample book total = P 10,000; Sample audited total = P
12,000

1. Difference Estimation Technique

Sample difference = Audited sample total − Book sample total = 12,000 − 10,000 = P 2,000

Mean difference per sampled unit = 2,000 / 100 = P 20 per account

Projected total difference = 20 × 10,000 = P 200,000

Estimated total audited value of population = Population book total + Projected difference =
1,200,000 + 200,000 = P 1,400,000
2. Ratio Estimation Technique
Sample ratio (r) = Audited sample total / Book sample total = 12,000 / 10,000 = 1.2

Estimated total audited value = r × Population book total = 1.2 × 1,200,000 = P 1,440,000

3. Mean-per-Unit Estimation Technique

Sample mean audited per unit = Audited sample total / sample size = 12,000 / 100 = P 120
per account

Estimated total audited value = Sample mean audited × Population size = 120 × 10,000 = P
1,200,000