Auditing and Assurance Services

Eighteenth Edition

Chapter 6
Audit Sampling

Dr. Shaker AL-Duais

Learning Objectives
6.1 Explain the concept of representative sampling and
sampling terms.
6.2 Distinguish between statistical and nonstatistical
sampling and between probabilistic and nonprobabilistic
sample selection.
6.3 Select samples using probabilistic and nonprobabilistic
methods
6.4 Use non-statistical sampling in tests of controls and
substantive tests of transactions
6.5 Define and describe statistical sampling for exception
rates
6.6 Identify the sample size
6.7 Evaluate sample results and compare projected errors
to tolerable error and materiality.
6.1 Representative Sampling (1 of 3)
• When selecting a sample from a population, the auditor
strives to obtain a representative sample
• A representative sample is:
– One in which the characteristics in the sample are
approximately the same as those of the population.
• In practice, auditors never know whether a sample is
representative, even after all testing is complete
• Auditors can increase the likelihood of a sample being
representative by using care in:
– Designing the sampling process
– Selecting the sample
– Evaluating the sample results
6.1 Representative Sampling (2 of 3)
• There are two types of risks that can lead to sampling
error or nonsampling error:
– Sampling risk
 Risk that an auditor reaches an incorrect conclusion
because the sample is not representative of the
population.
 Tests of control risks include the risk of assessing
control risk too high or too low.
 Substantive test risks include incorrect rejection and
incorrect acceptance
– Nonsampling risk
 Risk that the auditor reaches an incorrect conclusion
for any reason not related to sampling risk
6.1 Representative Sampling (3 of 3)
 “Audit sampling” (sampling) involves the application of
audit procedures to less than 100% of items within an
account balance or class of transactions such that all
sampling units have a chance of selection.
 From the sample, the auditor forms a conclusion about the
population from which the sample is drawn.
 Audit sampling can use either a statistical or a non-
statistical approach.
6.1 Sampling Terms (2 of 2)
“Population” means the entire set of data from which a
sample is selected and about which the auditor wishes to
draw conclusions.
 For example, all of the items in an account balance or
a class of transactions constitute a population.
“Error” means either control deviations, when performing
tests of control, or misstatements, when performing
substantive procedures.
 “Sampling risk” arises from the possibility that the
auditor’s conclusion, based on a sample may be different
from the conclusion reached if the entire population were
subjected to the same audit procedure.
6.1 Sampling Terms (2 of 2)
“Sampling unit” means the individual items constituting a
population, for example checks listed on deposit slips,
credit entries on bank statements, sales invoices or
debtors’ balances, or a monetary unit.
“Stratification” is the process of dividing a population into
subpopulations, each of which is a group of sampling units
which have similar characteristics (often monetary value).
“Tolerable error” means the maximum error in a
population that the auditor is willing to accept.
6.2 Statistical Versus Nonstatistical Sampling
and Probabilistic Versus Nonprobabilistic
Sample Selection (1 of 3)
• Audit sampling methods can be divided into two
broad categories:
– Statistical sampling
– Nonstatistical sampling
• Both involve three phases:
1. Plan the sample
2. Select the sample and perform the tests
3. Evaluate the results
6.2 Statistical Versus Nonstatistical Sampling
and Probabilistic Versus Nonprobabilistic
Sample Selection (2 of 3)

• There are two methods auditors can use when

selecting a sample:
1. Probabilistic sample selection
2. Nonprobabilistic sample selection
6.2 Statistical Versus Nonstatistical Sampling
and Probabilistic Versus Nonprobabilistic
Sample Selection (3 of 3)
• Auditing standards permit auditors to use either
statistical or nonstatistical sampling methods
• When statistical sampling is used, the sample must be
a probabilistic one
• Auditors may make nonstatistical evaluations when
using probabilistic selection,
– But it is never acceptable to evaluate a
nonprobabilistic sample using statistical methods
6.3 Sample Selection
 The auditor should select items for the sample with the
expectation that all sampling units in the population have
a chance of selection.
 Statistical sampling requires that sample items are
selected at random so that each sampling unit has a
known chance of being selected. The sampling units
might be physical items (such as invoices) or monetary
units.
 With non-statistical sampling, an auditor uses professional
judgment to select the items for a sample.
6.3 Sample Selection
Appropriate means of selecting items for testing are:
 Selecting all items (100% examination)
Rarely done –only for substantive tests
 Selecting specific items
(next slide)
 Audit sampling
Audit sampling can be applied using either non-
statistical or statistical sampling methods.
6.3 Sample Selection
• Specific Items (Judgmental) Sampling
 A judgmental sample is selected from a population
based on such factors as knowledge of the client’s
business, preliminary assessments of inherent and
control risks, and the characteristics of the population
being tested.
• Specific items selected may include:
 High value or key items
 All items over a certain amount
 Items to obtain information
 Items to test procedures
 This does not constitute audit sampling because it
cannot be projected to the entire population.
6.3 Sample Selection Methods (1 of 2)
• Probabilistic sample selection methods include the
following:
– Simple random sample selection
 Every possible combination of population items
has an equal chance of being included in the
sample
– Systematic sample selection
 The auditor calculates an interval and then selects
the items for the sample based on the size of the
interval
– Probability proportional to size sample selection
 In many auditing situations, it is advantageous to
select samples that emphasize population items
with larger recorded amounts
6.3 Sample Selection Methods (2 of 2)
• Nonprobabilistic sample selection methods
include:
– Haphazard sample selection
 The selection of items without any conscious
bias by the auditor
– Block sample selection
 Auditors select the first item in a block, and the
remainder of the block is chosen in sequence
6.4 Application of Nonstatistical Audit Sampling
(1 of 3)
• There are three phases when sampling for tests of
controls and substantive tests of transactions:
1. Plan the sample
2. Select the sample and perform the audit procedures
3. Evaluate the results to conclude on the acceptability
of the population
• These three phases involve 14 well-defined steps
6.4 Application of Nonstatistical Audit Sampling
(2 of 3)
• Plan the sample:
1. State the objectives of the audit test
2. Decide whether audit sampling applies
3. Define attributes and exception conditions
4. Define the population
5. Define the sampling unit
6. Specify the tolerable exception rate
7. Specify acceptable risk of overreliance
8. Estimate the population deviation or exception rate
9. Determine the initial sample size
6.4 Application of Nonstatistical Audit Sampling
(3 of 3)

• Select the sample and perform the audit procedures:

10. Select the sample
11. Perform the audit procedures
• Evaluate the results:
12. Generalize from the sample to the population
13. Analyze exceptions
14. Decide the acceptability of the population
Figure 6.1
Summary of Audit Sampling Steps

1
Many auditors using nonstatistical methods calculate tolerable exception rate minus sample exception rate and
evaluate
whether the difference is sufficiently large.

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6.5 Statistical Audit Sampling
 Auditors use statistical sampling for tests of controls and
substantive tests of transactions
 Statistical sampling to reach a conclusion about exception
rates is called attributes sampling
 The application of statistical attributes sampling for tests of
controls and substantive tests of transactions has far more
similarities to nonstatistical sampling than differences
• Differences between statistical sampling and
nonstatistical sampling for exception rates include:
– the calculation of initial sample sizes developed from
statistical probability distributions using tables or audit
software
– the calculation of estimated upper exception rates that
include sampling risk using audit software or tables similar
to those for calculating sample sizes
6.6 Sample Size
 Sample size is affected by the level of sampling risk that
the auditor is willing to accept.
 The lower the risk the auditor is willing to accept, the
greater the sample size will need to be.
 The tolerable rate is the maximum rate of deviation from
policy that an auditor will accept without modifying the
planned assessed level of control risk.
 When the planned assessed level of control risk is
low, and the degree of assurance desired from the
sample is high, the tolerable rate should be low.
(Especially when other tests of controls are not done)
6.7 Evaluation of Sample Results
 The auditor should consider the sample results, the
nature and cause of any errors identified, and their
possible effect on the particular test objective and on
other areas of the audit.
 For substantive procedures, the auditor should
project monetary errors found in the sample to the
population and should consider the effect of the
projected error.
– The auditor projects the total error for the population
to obtain a broad view of the scale of errors, and to
compare this to the tolerable error.
– Tolerable error is will be an amount less than or
equal to the auditor’s preliminary estimate of
materiality.
6.7 Evaluation of Sample Results
 The auditor should evaluate the sample results to
determine whether the preliminary assessment of
the relevant characteristic of the population is
confirmed or needs to be revised.
– In test of controls, an unexpectedly high sample error
rate may lead to an increase in the assessed level of
control risk.
– In a substantive procedure, an unexpectedly high error
amount in a sample may cause the auditor to believe
that an account balance or class of transactions is
materially misstated.