1. Chapter 10
Audit Sampling

2. Introduction Overview of Audit Sampling Definition Population
Nonsampling and Sampling Risk
Assessing control risk to high
Assessing control risk to low

3. Sampling Risk: Substantive Testing
Risk of incorrect acceptance
Risk of incorrect rejection
Selecting a Sampling Approach
Statistical sampling
Nonstatistical sampling
Sampling to Test Controls
Attribute estimation sampling

4. Substantive Sampling Considerations
Basic Steps:
Specify audit objective
Define a misstatement
Define the population
Choose sampling method
Determine sample size
Select the sample
Audit the selected items
Evaluate the sample results
Perform follow-up work as necessary
Document

5. Specify the Audit Objective
Combination of sampling and other audit procedures.
Sampling used in two ways:
Determine reasonableness of an account balance.
Estimate some amount.

6. Define Misstatements
Misstatements should be defined before beginning to:
preclude rationalizing away misstatements
provide guidance to the audit team
Misstatement: a difference that affects the correctness of the overall account balance.

7. Define the Population
Group of items in an account balance that the auditor wants to test.
Does not include:
items that the auditor has decided to examine 100%.
items that will be tested separately.

8. Define the Sampling Unit
Sampling units are the individual auditable elements as defined by the auditor.
Completeness of the Population
Auditor needs assurance that the list accurately represents the population.

9. Identify Individually Significant Items
Top stratum--few large-dollar items
Lower stratum--the remaining items
Stratification of the population

10. Choose a Sampling Method
Nonstatistical
Probability proportional to size (PPS)
Classical sampling methods (Appendix 10B)
Mean-per-unit
Ratio estimation
Difference estimation

11. Determine the Sample Size, Select the Sample, and Evaluate the Results
Tolerable misstatement
Expected misstatement
Document the Results

12. Nonstatistical Sampling
Determine sample size
Selecting the Sample
Haphazard selection
Evaluating the sample results
Using audit software

13. Probability Proportional to Size Sampling
PPS sampling is an adaptation of attribute sampling methods to dollar value testing.
Population definition
Test of details risk (incorrect acceptance)
Other substantive procedures risk (OSPR)
Sample size and selection
Zero and Negative Balances

14. PPS Sample Evaluation Error Evaluation Terminology
Upper misstatement limit (UML)
Basic precision
Most likely misstatement (MLM)
Incremental allowance for sampling error
Allowance for sampling error

15. Appendix 10A: Sampling to Test Controls
Planning Factors
Audit objective
Tolerable failure rate
Expected failure rate
Allowance for sampling error (precision)
Allowable risk of assessing control risk too low

16. Sampling to Test Controls
Nonstatistical sampling
Attribute Estimation sampling
Define the attributes of interest and failures
Define the population
Period covered by the tests
Sampling unit
Ensuring the population is complete

17. Sampling to Test Controls
Determine the Sample Size
Multiple attributes
Effect of population size (finite adj. factor)
Determine the method of selecting the sample
Random numbers
Systematic selection
Haphazard selection

18. Sampling to Test Controls
Select and audit the sample items.
Evaluate the sample results.
Quantitative evaluation
Qualitative evaluation
Linkage to substantive testing

19. Appendix 10B: Classical Sampling Methods
MPU Sampling
Difference estimation sampling
Ratio estimation sampling
Sample Size
Estimation of population standard deviation
Desired allowance for sampling error

20. Classical Sampling Methods
Sample Selection
Sample Evaluation
Point estimate
Projected misstatement
Achieved precision
Decision rules
Adjusted achieved precision
Unacceptable results

21. Classical Sampling Methods
Comparison of PPS and classical sampling
Computer support