Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition

Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition

William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State

University at San Luis ObispoUniversity at San Luis Obispo

Raymond N. Raymond N. JohnsonJohnson

Portland State UniversityPortland State University

Chapter 13 – Audit Sampling

Chapter OverviewChapter OverviewChapter OverviewChapter Overview

Basic Audit Sampling ConceptsBasic Audit Sampling ConceptsBasic Audit Sampling ConceptsBasic Audit Sampling Concepts

• Nature and Purpose of Audit Sampling– Use less than 100% of items– Apply to evaluate entire population

• Uncertainty and Audit Sampling– Audit Risk– Control Risk and Test of Details Risk

Sampling RiskSampling RiskSampling RiskSampling Risk

• Sample v. Population

• Tests of Controls– Risk of Assessing Control Risk too Low– Risk of Assessing Control Risk too

High

• Substantive Tests– Risk of Incorrect Acceptance– Risk of Incorrect Rejection

Sampling Risks – Tests of Sampling Risks – Tests of ControlsControls

Sampling Risks – Tests of Sampling Risks – Tests of ControlsControls

Sampling Risks – Substantive Sampling Risks – Substantive TestsTests

Sampling Risks – Substantive Sampling Risks – Substantive TestsTests

Nonsampling RiskNonsampling RiskNonsampling RiskNonsampling Risk

• Human mistakes

• Inappropriate application of audit procedures

• Misinterpretation of results of sample

• Reliance upon erroneous information from another party

Nonstatistical and Statistical Nonstatistical and Statistical SamplingSampling

Nonstatistical and Statistical Nonstatistical and Statistical SamplingSampling

Nonstatistical and Statistical Nonstatistical and Statistical SamplingSampling

Nonstatistical and Statistical Nonstatistical and Statistical SamplingSampling

Study BreakStudy BreakStudy BreakStudy Break

1. The risk that the sample will not be representative of the population is:

A. Inherent RiskB. Audit RiskC. Control RiskD. Sampling Risk

D. Sampling Risk

Study BreakStudy BreakStudy BreakStudy Break

2. The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated is:

A. Risk of assessing control risk too lowB. Risk of assessing control risk too highC. Risk of incorrect acceptanceD. Risk of incorrect rejection

C. Risk of incorrect acceptance

Tests of Controls v. Tests of Controls v. Substantive TestsSubstantive Tests

Tests of Controls v. Tests of Controls v. Substantive TestsSubstantive Tests

Audit Sampling for Tests of Audit Sampling for Tests of ControlsControls

Audit Sampling for Tests of Audit Sampling for Tests of ControlsControls

• Determine the Objectives of the Tests of Controls

• Determine the Procedures to Evaluate Internal Controls

• Make a Decision about the Audit Sampling Technique

Audit Sampling for Tests of Audit Sampling for Tests of ControlsControls

Audit Sampling for Tests of Audit Sampling for Tests of ControlsControls

• Define the Population and Sampling Unit

• Use Professional Judgment to Determine Sample Size– Nature of Control– Frequency of Operation– Importance of the Control– Risk of Assessing Control Risk too Low– Tolerable and Expected Deviation Rates– Population Size

Audit Sampling for Tests of Audit Sampling for Tests of ControlsControls

Audit Sampling for Tests of Audit Sampling for Tests of ControlsControls

• Select a Representative Sample

• Apply Audit Procedure

• Evaluate the Sample Results

• Document Conclusions

Study BreakStudy BreakStudy BreakStudy Break

3. The _____ represents the way the auditor identifies the performance of internal controls of interest.

A. PopulationB. Sampling UnitC. MaterialityD. Sampling Risk

B. Sampling Unit

Study BreakStudy BreakStudy BreakStudy Break

4. The _____ is the maximum rate of deviation from a control that an auditor is willing to accept and still use the planned control risk.

A. Tolerable deviation rateB. Maximum deviation rateC. Maximum error rateD. Inherent risk

A. Tolerable deviation rate

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

• Determine the Objectives of the Substantive Test– Estimating total amount of

population– Estimating amount of misstatement

• Determine the Substantive Audit Procedures to Perform– Tests of Details of Transactions– Tests of Details of Balances

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

• Make a Decision About the Audit Sampling Technique– PPS v. Classical Variables Sampling

• Define the Population and Sampling Unit– Reciprocal Population– Logical Sampling Unit

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

• Use Professional Judgment and Statistical Methods to Determine Sample Size– Book Value of Population Tested– Reliability Factor for Specified Risk

of Incorrect Acceptance– Tolerable Misstatement– Anticipated Misstatement and

Expansion Factor– Calculation of Sample Size

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

• Select a Representative Sample– Sampling Risk– Calculate Sampling Interval– Select Random Sample

• Apply Audit Procedures

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

Audit Sampling for Audit Sampling for Substantive Tests - PPSSubstantive Tests - PPS

• Evaluate Sample Results– Upper Misstatement Limit– No Misstatements Found in the

Sample– Some Misstatements Found in the

Sample– Qualitative Considerations

• Document Conclusions

Study BreakStudy BreakStudy BreakStudy Break

5. This type of test can be used to estimate the total dollar amount of a population or the total dollar amount of error in a population.

A. Test of ControlsB. Attribute TestsC. Audit TestsD. Substantive Tests

D. Substantive Tests

Study BreakStudy BreakStudy BreakStudy Break

6. In PPS, an item snagged in the selection of the sample is know as the ______.

A. Sampling UnitB. Logical Sampling UnitC. PopulationD. Tolerable Misstatement

B. Logical Sampling Unit