1. Part Six
Audit Sampling

2. Structure of Seminar 1. Basic Concepts 2. Sampling Risk
3. Types of Audit Sampling
4. Audit Testing with Samples
5. Statistical Sampling Techniques
6. Conclusions

3. 1. Basic Concepts ASA 530 Audit Sampling
“a process which includes the application of audit procedures to less than 100% of items within a class of transactions or account balance, such that all sampling units have an equal chance of selection”
Used in both tests of controls & substantive tests
Why is sampling used?
Cost/benefit analysis

4. Basic Concepts
—Increase efficiency without compromising effectiveness

5. 2. Sampling Risk
Requirement for reasonable basis in arriving at opinion allows for degree of uncertainty
Uncertainty involves judgment as to consequences of erroneous opinion (audit risk) versus cost & time of extra audit effort
When sampling is used to obtain audit evidence, uncertainties may result from
The use of sampling (sampling risk)
Factors unrelated to sampling (non-sampling risk)

6. Sampling Risk
conclusion, based on a sample, may be different from the conclusion reached if the entire population were subjected to the same audit procedureSampling risk - the risk arising from the possibility that the auditor’s
i.e. sample is not representative
In the case of tests of controls
Risk of over-reliance
Risk of under-reliance
In the case of substantive tests

7. Sampling Risk Risk of incorrect acceptance Risk of incorrect rejection
Impacts on audit efficiency & effectiveness

8. Sampling risks for tests of controls and substantive tests of details

9. Sampling risks for tests of controls and substantive tests of details (cont’d)

10. Sampling Risk How sampling risk be controlled?
By increasing the sample size
How can sampling risk be eliminated?
By testing the whole population!
Even if sampling risk is zero, non-sampling risk cannot be eliminated!
Non-sampling risk is risk of reaching wrong conclusion for reasons other than sample size

11. Sampling Risk Human error, relying on wrong info, etc
Unlike sampling risk, cannot be quantified
Can be controlled by taking “due care”

12. 3. Types of Audit Sampling
Sampling can be statistical or non-statistical
Statistical sampling – random selection, use of probability theory to evaluate results, including quantification of sampling risk
Non-statistical sampling – other than the above!
“Haphazard” selection
Common practice in audit firms
Emphasis on “auditor judgment”

13. Types of Audit Sampling
Other types of testing
Selecting all items
Selecting specific items
High value or key items
All items over a certain amount
Items to obtain information
Items to test control activities

14. 4. Audit Testing with Samples
Planning the sample
Selecting the sample
Performing the audit test
Evaluating the results

15. Audit Testing with Samples
A. Planning the Sample
Determine the objectives of the test
Define what errors are being sought
Identify the population
Consider the use of stratification
Define the sampling unit
Specify the tolerable error
Specify the expected error
Specify required confidence level
Determine the sample size

16. Factors that influence sample size for tests of controls

17. Factors that influence sample size for substantive procedures

18. Audit Testing with Samples
B. Selecting the Sample
10. Select the sample
Methods
Random (statistical sampling)
Systematic
divide units by sample size to give sampling interval
Haphazard

19. Audit Testing with Samples
C. Testing the sample
11. Perform the audit procedures and note errors discovered
Auditor tests in item in accordance with required audit objective
Errors or deviations discovered need to be evaluated

20. Audit Testing with Samples
D. Evaluating the Results
12. Consider qualitative aspects of errors
13. Project the error to the population and conclude on audit test
Tests of control – if projected deviation rate exceeds tolerable deviation rate, then preliminary control risk assessment not confirmed – increase substantive tests
Substantive tests – if projected error exceeds tolerable error, more evidence may be necessary – management to adjust account

21. 5. Statistical Sampling Techniques
Attribute sampling plans (tests of control)
Attribute sampling
Sequential sampling
Discovery sampling
Variable sampling plans
PPS - Probability-proportionate-to-size sampling

22. 6. Conclusions
Sampling is an efficient means of gathering audit evidence
Sample must be representative of population
Sample size is a function of
Risk the auditor is willing to accept
Magnitude of errors/deviations considered material
Expected errors/deviations