auditing sampling

8/3/2019 Auditing Sampling

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AUDITINGCHAPTER 9

Audit Sampling

By

David N. Ricchiute


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GBW 8th ed., Ch. 92

TOPICS

Use of sampling in audit engagements

Role of sampling, nonsampling risk

Risk of assessing control risk too high, too low Risks of incorrect rejection, acceptance

Distinction between statistical, nonstatisticalsampling

Audit sampling for tests of controls andsubstantive tests of details Attribute estimation, sequential sampling

Probability-proportional-to-size (PPS)


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GBW 8th ed., Ch. 93

SAMPLING:Definitions

Sampling: examining less than 100% of itemsin a population

Population: all items within a class of

transactionsSampling plan: procedures to test a sample

Attributes sampling: tests rate of deviationfrom a prescribed control procedure

Variables sampling: tests whether recordedaccount balances are fairly stated


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GBW 8th ed., Ch. 94

AUDIT RISK

Risk that auditor may unknowingly fail tomodify opinion on materially misstated

financial statements2 parts

Risk that errors will occur: uncontrollable Inherent risk & control risk

Risk that material errors will not bedetected: controllableDetection risk


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GBW 8th ed., Ch. 95

UNCERTAINTIES

Sampling risk

Risk that sample may contain

disproportionately more/less error thanexists in population

Nonsampling risk

Aspects of audit risk not attributable tosampling such as human error


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GBW 8th ed., Ch. 96

CONTROL RISKASSESSMENT: Too High

Inefficient

Assessing control risk at maximumwhen it should be lower

Concluding control not effective when itis


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GBW 8th ed., Ch. 97

CONTROL RISKASSESSMENT: Too Low

Ineffective

Lowering control risk when should beset at maximum

Concluding control is effective when itisnt


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GBW 8th ed., Ch. 98

STATISTICAL SAMPLING

Apply the laws of probability to

Design efficient sample Measure sufficiency of sample

Evaluate sample results

Measures sampling risk quantitatively


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GBW 8th ed., Ch. 99

NONSTATISTICALSAMPLING

Relies exclusively on judgment to

Determine sample size


Cannot measure sampling risk

quantitatively


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GBW 8th ed., Ch. 910

(NON)STATISTICALSAMPLING CHOICE

Choice based on relative costs &benefits

Independent of audit procedures


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ATTRIBUTES &DEVIATIONS

Attribute

A characteristic of control

Deviation

Absence of the attribute


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ATTRIBUTE ESTIMATIONSAMPLING

Used to test controls that leave an audittrail

1 Determine objectives, attributes,deviation conditions

2 Define population

3 Define sample size4 Perform sampling plan5 Evaluate sample results


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ATTRIBUTE ESTIMATIONSAMPLING: Objectives

Whether controls for class of transactionssufficiently effective to lower control

risk below maximum Trail of observable & documented evidence

Does not rely primarily on segregation of

duties


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ATTRIBUTE ESTIMATIONSAMPLING: Sample Size

Sample size componentsAcceptable risk of assessing control risk too

low Inverse relationship with sample size

Tolerable rate of deviationMaximum population rate of deviation from

control Expected population deviation rate

Estimated from prior year or pilot sample


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SAMPLE SELECTIONMETHODS

A Random-number sampling

B Systematic sampling

C Block samplingDHaphazard sampling

E Stratified


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SAMPLE SELECTIONMETHODS: Random Number

Uses computer-generated numbers toselect sampling units

Match number to prenumbereddocuments

Appropriate for both statistical &

nonstatistical sampling


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SAMPLE SELECTIONMETHODS: Systematic Sampling

Selecting every nth item frompopulation of sequentially ordered items

Useful when identification numberslacking

Appropriate for both statistical &

nonstatistical sampling


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SAMPLE SELECTIONMETHODS: Block Sampling

A group of items arranged contiguouslywithin a larger grouping

Inefficient & not generalizable

Should not be used for statistical ornonstatistical sampling without care in

controlling sampling risk


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SAMPLE SELECTIONMETHODS: Haphazard Sampling

Sampling units selected without special

reason or conscious bias

Inappropriate for statistical sampling

Useful for nonstatistical sampling


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SAMPLE SELECTIONMETHODS: Stratified Sampling

Subdivide population into homogeneous

strata

Select separate sample for each strataby one of prior methods


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OTHER TECHNIQUES:Sequential Sampling

Stop-or-go

Performed in stages

Auditor decides to stop or continuesampling after each stage


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OTHER TECHNIQUES:Nonstatistical Sampling

Used when costs outweigh benefits ofstatistical sampling

Auditor judgment guided by

Experience

Prior knowledge

Current information


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SUBSTANTIVE SAMPLINGRISK: 2 Sources

Risk of incorrect rejection

Risk that audit sample suggests account

balance is materially misstated when it isfairly stated

Risk of incorrect acceptance

Risk that sample suggests account balanceis fairly stated when it is materiallymisstated


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VARIABLES SAMPLINGPLAN

Determine objectives of test

Define population

Choose sampling technique

Determine sample size

Determine method of sample selection

Perform sampling plan



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OBJECTIVES OF TEST

To estimate account balance that is not

recorded

To test reasonableness of recordedaccount balance


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DEFINING POPULATION

Audit population

All items constituting an account balance

or class of transactions defined by auditorscharacteristic of interest

Sampling unit

Any individual elements of a population


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AUDIT SAMPLING

Sampling used only for thoseaccounts where it is appropriate When large number transactions

within one accountTechniques Probability proportional to size

(PPS)

Nonstatistical sampling

Classical variables sampling(appendix)


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SAMPLING DECISIONS

Choice between statistical &nonstatistical sampling based on

Costs

Effectiveness

Need for quantitative estimate of sampling

risk


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PROBABILITY-PROPORTIONAL-TO-SIZE (PPS)

Derived from attributes sampling theory

Appropriate when 1 or a few errors

expected

Characteristics

Automatically stratifies an audit population

Appropriate for testing for overstatementUseful for testing assets & revenues


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PPSAn Example

Define population for accountsreceivable

All customer debit balances testingoverstatement or

All customer balances, including 0 &negative

Requires special consideration

Dollar is sample unit


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PPS SAMPLE SIZEELEMENTS

Determine

Reliability factor for overstatement errors

based on Expected number overstatement errors

Risk of incorrect acceptance

Tolerable (acceptable) error

Anticipated error & expansion factor


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PPS SAMPLE SIZE MODEL

n = RF x B

TE (AE x EF)

whereRF reliability factor (from table)

B book value (from client)

TE tolerable error (auditor judgment)AE anticipated error (auditor judgment)

EF expansion factor (from table)


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PPS SAMPLE SELECTION

Used for statistical sampling methods

Random number Systematic sampling


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EVALUATING RESULTS:PPS Decision Rule

If the upper error limit is less than or

equal to the tolerable error, the accountis fairly presented


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NONSTATISTICALSAMPLING

Used when

No apparent need to quantify sampling

risk

Cost of statistical sampling exceedsbenefits

Cost to select sampling units exceedsbenefits


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SAMPLE SIZE INNONSTATISTICAL SAMPLING

Requires

Degree audit assurance

Substantial, moderate, little

Assurance factor

Estimated tolerable error


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EVALUATING SAMPLERESULTS

When likely error is estimated,auditor has 4 choices

Accept clients book value Propose audit adjustment

Perform additional substantives

tests Request client to revalue entire

population

auditing sampling

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