1. AU 350 SAS 111
Audit Sampling
C Delano Gray
June 14, 2008

2. Generally accepted auditing
standards

3. General Standards 1. The audit is to be performed by a person or
persons having adequate technical training
and proficiency as an auditor.
2. The auditor must maintain independence
in mental attitude in all matters relating
to the audit.

4. General Standards 3. The auditor must exercise due professional
care in the performance of the audit and the
preparation of the report.

5. Standards of Field Work
1. The auditor must adequately plan the work
and must properly supervise any assistants.
2. The auditor must obtain a sufficient
Understanding of the entity and its environment,
including its internal control, to assess the
risk of material misstatement and to design
further audit procedures.

6. Standards of Field Work
3. 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.

7. Standards of Reporting
1. The report shall state whether the financial
statements are presented in accordance with
generally accepted accounting principles.
2. The report shall identify those circumstances
in which such principles have not been
consistently observed in the current period
in relation to the preceding period.

8. Standards of Reporting
3. Informative disclosures in the financial
statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
4. The report shall contain an expression of
opinion regarding the financial statements,
taken as a whole.

9. Generally Accepted Auditing Standards
General Standards
1. Adequate training and proficiency
2. Independence in mental attitude
3. Due professional care

10. Generally Accepted Auditing Standards
Standards of Field Work
1. Proper planning and supervision
2. Understanding of the entity
3. Sufficient appropriate evidence

11. Generally Accepted Auditing Standards
Standards of Reporting
1. Statements prepared in accordance with GAAP
2. Circumstances when GAAP not followed
3. Adequacy of disclosures
4. Expression of opinion on financial statements

12. Audit Sampling for Tests of Controls Substantive Tests of Transactions

13. AICPA SAS 111
.01 Audit sampling is the application of an audit procedure to less
than 100 percent of the items within an account balance or class
of transactions for the purpose of evaluating some characteristic
of the balance or class.
This section provides guidance for planning, performing,
and evaluating audit samples.
Source AICPA

14. .02 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.

15. .03 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
guidance in this section applies equally to non-statistical and statistical sampling.

16. .04 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.

17. Representative sampling.

18. Representative Samples
A representative sample is one in which
the characteristics in the sample of audit
interest are approximately the same as
those of the population.
Nonsampling risk is the risk that audit
tests do not uncover existing exceptions
in the sample.

19. Representative Samples
Sampling risk is the risk that an auditor
reaches an incorrect conclusion
because the sample is not
representative of the population.
Sampling risk is an inherent part of
sampling that results from testing
less than the entire population.

20. Distinguish between statistical
and nonstatistical sampling and
between probabilistic and non-
probabilistic sample selection.

21. Statistical Versus Nonstatistical Sampling
Similarities:
Step 1: Plan the sample
Step 2: Select the sample and perform the tests
Step 3: Evaluate the results

22. Statistical Versus Nonstatistical Sampling
Differences:
Statistical sampling allows the quantification
of sampling risk in planning the sample (Step 1)
and evaluating the results (Step 3)
In nonstatistical sampling those items that
the auditor believes will provide the most
useful information are selected

23. Probabilistic Versus Nonprobabilistic Sample Selection
Probabilistic sample selection is a method
of selecting a sample such that each
population item has a known probability
of being included in the sample.
Nonprobabilistic sample selection is a
method in which the auditor uses professional
judgment rather than probabilistic methods.

24. Probabilistic Versus Nonprobabilistic Sample Selection
1. Directed sample selection
2. Block sample selection
3. Haphazard sample selection

25. Probabilistic Versus Nonprobabilistic Sample Selection
1. Simple random sample selection
2. Systematic sample selection
3. Probability proportional to size sample selection
4. Stratified sample selection

26. Nonprobabilistic Sample Selection Methods
Directed sample selection is the selection of
each item based on auditor judgmental criteria.
Items most likely to contain misstatements
Items containing selected population characteristics
Large dollar coverage

27. Nonprobabilistic Sample Selection Methods
Block sample selection is the selection
of several items in sequence.
Haphazard sample selection is the selection
of items without any conscious bias on the
part of the auditor.

28. Select representative samples.

29. Probabilistic Sample Selection Methods
A simple random sample is one in which
every possible combination of elements
in the population has an equal chance
of constituting the sample.
Random number tables
Computer generation of random numbers

30. Probabilistic Sample Selection Methods
Systematic sample selection:
The auditor calculates an interval and
then selects the items for the sample
based on the size of the interval.
The interval is determined by dividing
the population size by the number of
sample items desired.

31. Probabilistic Sample Selection Methods
Probability proportional to size:
A sample is taken where the probability
of selecting any individual population item
is proportional to its recorded amount (PPS).

32. Probabilistic Sample Selection Methods
Stratified sample selection:
The population is divided into subpopulations
by size and larger samples are taken of the
larger subpopulations.

33. Sampling for Exception Rates
The occurrence rate, or exception rate,
is the ratio of the items containing the
specific attribute to the total number
of population items.

34. Sampling for Exception Rates
Following are types of exceptions in
populations of accounting data:
1. Deviations from client’s established controls
2. Monetary misstatements in populations
of transaction data
3. Monetary misstatements in populations of
account balance details

35. I: Plan the Sample Step 1: State the objectives of the audit test.
Step 2: Decide whether audit sampling applies.
Step 3: Define attributes and exception conditions.
Step 4: Define the population.
Step 5: Define the sampling unit.

36. I: Plan the Sample Step 6: Specify the tolerable exception rate.
Step 7: Specify acceptable risk of assessing
control risk too low.
Step 8: Estimate the population exception rate.
Step 9: Determine the initial sample size.

37. II: Select the Sample and Perform the Audit Procedures
Step 10: Select the sample.
Step 11: Perform the audit procedures.

38. III: Evaluate the Results
Step 12: Generalize from the sample to the
population.
Step 13: Analyze exceptions.
Step 14: Decide the acceptability of the population.

39. Effect on Sample Size of Changing Factors
Effect on initial
Type of change sample size
Increase acceptable risk of
assessing control risk too low Decrease
Increase tolerable risk rate Decrease
Increase estimated population
exception rate Increase
Increase population size Increase (minor)

40. When planning a particular audit sample for a test of controls, the auditor should consider:
• The relationship of the sample to the objective of the test of controls.
• The maximum rate of deviations from prescribed controls that would support his planned assessed level of control risk.
• The auditor's allowable risk of assessing control risk too low.
• Characteristics of the population, that is, the items comprising the account balance or class of transactions of interest.

41. Probability Proportion to Size
Probability proportional to size (PPS) is a sampling technique
for use with surveys or mini-surveys in which the probability
of selecting a sampling unit is proportional to the size of its
population. It gives a probability (i.e., random, representative)
sample.

42. It is most useful when the sampling units vary considerably
in size because it assures that those in larger dollar value
Transaction have the same probability of getting into the sample
as the smaller ones, and vice verse.

43. Define and describe attributes
sampling and a sampling
distribution.

44. Statistical Audit Sampling
The statistical sampling method most
commonly used for tests of controls
and substantive tests of transactions
is attributes sampling.

45. Sampling Distribution
It is a frequency distribution of the results
of all possible samples of a specified size
that could be obtained from a population
containing some specific parameters.
Attributes sampling is based on the
binomial distribution.

46. Use of attributes sampling in tests
of controls and substantive
tests of transactions.

47. Application of Attributes Sampling
Effect of population size:
Population size is a minor consideration
in determining sample size
Representativeness is ensured by the sample
selection process more than by sample size

48. Application of Attributes Sampling
Select the sample
Perform the audit procedures
Evaluate the results

49. End Questions?????