Chapter-One

Audit Sampling

Definition: Audit sampling may be defined as, “ the application of audit procedures to less
than 100% of the items within an account balance or class of transactions to enable the
auditor to obtain and evaluate and evidence about some characteristic of the items selected
in order to form or assist in forming a conclusion concerning the population”
Auditing sampling is the application of audit procedures to less than 100% of the items in
a population in order to extrapolate a conclusion about the population. The object is to select a
sample that is expected to be representative of the population, and to examine the sample items.
Preference of audit sampling:
Audit sampling is usually preferable to testing all items, because:
i) it would be prohibitively expensive and time consuming to test every single item.
ii) Users of the financial statements are looking for reasonable assurance, not 100%
accuracy.
iii) Full substantive testing of the accounting records will not verify that all
transactions are recorded. ( ie it does not prove completeness).
However, audit sampling is not appropriate if,
i) Population is small.
ii) All great transactions in a particular area are of great monetary significance.
iii) Population is non-homogeneous.
iv) Data may be sensitive items such as directors’ remuneration.
v) Auditor is on enquiry as a result of previous information.

Constructing samples:
The steps involved in sampling can be summarized as follows:
i) Sample design,
ii) Selection of the sample,
iii) Evaluation of the sample.
When designing an audit sample, the auditor should consider the specific audit objectives, the
population from which the auditor wishes to sample and the sample size.
Audit objectives may relate to test of control or subjective procedures. The population is the
entire set of data from which the auditor wishes to sample in order to reach a conclusion.
The essential feature of a population is that it must be homogeneous ie, composed of similar or
uniform parts.
When determining the sample size, the auditor should consider sampling risk, the tolerable error
and the expected error.
The auditor often is aware of account balances and transactions that may be more likely to
contain misstatements. He considers this knowledge in planning his procedures, including audit
sampling. The auditor usually will have no special knowledge about other account balances and
transactions that, in his judgment, will need to be tested to fulfill his audit objectives. Audit
sampling is especially useful in these cases.
There are two general approaches to audit sampling: non-statistical and statistical. Both
approaches require that the auditor use professional judgment in planning, performing, and
evaluating a sample and in relating the audit evidence produced by the sample to other audit
evidence when forming a conclusion about the related account balance or class of transactions.
The third standard of field work states, "The auditor must obtain sufficient appropriate audit
evidence by performing audit procedures to afford a reasonable basis for an opinion regarding
the financial statements under audit."
Either approach to audit sampling, when properly applied, can provide sufficient audit evidence.
The sufficiency of audit evidence is related to the design and size of an audit sample, among
other factors. The size of a sample necessary to provide sufficient audit evidence depends on
both the objectives and the efficiency of the sample. For a given objective, the efficiency of the
sample relates to its design; one sample is more efficient than another if it can achieve the same
objectives with a smaller sample size. In general, careful design can produce more efficient
samples.
Evaluating the appropriateness of audit evidence is solely a matter of auditing judgment and is
not determined by the design and evaluation of an audit sample. In a strict sense, the sample
evaluation relates only to the likelihood that existing monetary misstatements or deviations from
prescribed controls are proportionately included in the sample, not to the auditor's treatment of
such items. Thus, the choice of nonstatistical or statistical sampling does not directly affect the
auditor's decisions about the auditing procedures to be applied, the appropriateness of the audit
evidence obtained with respect to individual items in the sample, or the actions that might be
taken in light of the nature and cause of particular misstatements.
Sample risk
Some degree of uncertainty is implicit in the concept of "a reasonable basis for an opinion"
referred to in the third standard of field work. The justification for accepting some uncertainty
arises from the relationship between such factors as the cost and time required to examine all of
the data and the adverse consequences of possible erroneous decisions based on the conclusions
resulting from examining only a sample of the data. If these factors do not justify the acceptance
of some uncertainty, the only alternative is to examine all of the data. Since this is seldom the
case, the basic concept of sampling is well established in auditing practice.
The uncertainty inherent in applying audit procedures is referred to as audit risk. Audit risk
includes both uncertainties due to sampling and uncertainties due to factors other than sampling.
The risk that the conclusion auditors drawn will be different from that which they would have
drawn had they examined the entire population. That is, particular sample may contain
proportionately more or less monetary misstatements or deviations from prescribed controls than
exist in the balance or class as a whole. For a sample of a specific design, sampling risk varies
inversely with sample size: the smaller the sample size, the greater the sampling risk.
Auditors are faced with sampling risk in both tests of control and substantive procedures:
i) In tests of control there is the risk of under reliance or over-reliance.
ii) In substantive procedures there is the risk of incorrect rejection or incorrect
acceptance.
The auditor should apply professional judgment in assessing sampling risk. In performing
substantive tests of details the auditor is concerned with two aspects of sampling risk:
 The risk of incorrect acceptance is the risk that the sample supports the conclusion that
the recorded account balance is not materially misstated when it is materially misstated.
 The risk of incorrect rejection is the risk that the sample supports the conclusion that the
recorded account balance is materially misstated when it is not materially misstated.
The auditor is also concerned with two aspects of sampling risk in performing tests of controls
when sampling is used:
• The risk of assessing control risk too low is the risk that the assessed level of control risk
based on the sample is less than the true operating effectiveness of the control.
• The risk of assessing control risk too high is the risk that the assessed level of control risk
based on the sample is greater than the true operating effectiveness of the control.
Tolerable error:
Tolerable error is the maximum error in the population that the auditor would be willing to
accept and still concludes that the result from the sample has achieved the audit objective.
 The smaller the tolerable error, the larger the samples size needs to be. Tolerable error is
considered during the planning stage.
Expected error:
If the auditors expect error to be present in the population, a larger sample than when no
error is expected ordinarily needs to be examined to conclude that the actual error in the
population is not greater than the planned tolerable error. Smaller sample sizes are justified when
the population is expected to be error free.
ii) Selection of the sample:
The auditor should select sample items in such a way that the sample can be expected to
be representative of the population.
A representative sample is one where all the items in the population have an equal or
known probability of being selected.
Types of selection:
a) Random selection: Simple random sampling is a method of selection in which every
item in a population has the same statistical probability of being selected as every other item. It
involves selection from a source of random numbers, using computer programs or random
number tables.
b) Value weighted selection: Value weighted selection involves using the currency unit
value rather than the items as the sampling population. Such techniques are useful where the
objective of the test is to test for overstatement, but not for understatement.
c) Systematic selection: In systematic sample selection the auditor calculates a uniform
sampling interval by dividing the population size by the sample size. This is unusual in practice.
d) Block selection: Block selection consists of selecting a number of adjacent
transactions or items, eg. All sales invoice in a particular week or all credit customers with a
name beginning with particular letters.
Block selection can result in significant cost savings in audit time, and there are some
occasions where practical considerations may require the use of block selection, for example
when visiting a branch.
e) Haphazard selection: This is selection process in which the auditor attempts to give
all items in a population a chance of being selected by choosing items haphazardly. The auditor
should avoid conscious bias and predictability in selecting items. Haphazard selection is
acceptable as an alternative to random selection providing the tendency to bias is resisted.
iii) Evaluation of the sample results:
Having carried out, on each sample item, those audit procedures that are appropriate to
the particular audit objective, the auditor should:
a) Analyze any errors detected in the sample: In analyzing the errors detected in the
sample, the auditors’ first need to determine that an item in question, in fact, an error.
b) Project the errors found in the sample to the population: If tolerable error is
exceeded when the error is projected to the population, the auditor may perform additional
procedures, and perhaps suggest adjustments to the financial statements.
c) Reassess the sampling risk: Where projected errors exceed tolerable error, risk should
be reassessed and it may necessary to perform additional procedures as a result.

Statistical and non- statistical sampling procedures:

Statistical sampling requires the use of random selection and uses probability theory to
determine the sample size, evaluate quantitatively the same results and measure the sampling
risk.
Non- statistical sampling may use non-random sample selection methods, does not rely
on probability theory and requires more subjectivity in making sampling decisions. Non-
statistical sampling is sometimes referred to as judgment sampling.
Statistical sampling is relatively expensive as the procedures need to be developed and
staff need to be trained. This is balanced by the sample sizes small. There is always a danger
with non-statistical techniques that sample sizes are larger than necessary.
Conditions necessary for the use of statistical sampling: If statistical sampling is to be used:
a) The population to be tested must be homogeneous.
b) The population must be large
c) Expectation of error must be low and
d) The items in the population must be easily identifiable.