Chapter 10Chapter 10

Audit SamplingAudit Sampling

IntroductionOverview of Audit Sampling

Definition

Population

Nonsampling and Sampling Risk

Assessing control risk to high

Assessing control risk to low

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

Substantive Sampling Considerations

Basic Steps:Basic Steps:

•Specify Specify audit objectiveaudit objective

•Define a Define a misstatementmisstatement

•Define the Define the populationpopulation

•Choose Choose sampling methodsampling method

•Determine Determine sample sizesample size

•SelectSelect the samplethe sample

•AuditAudit the selected items the selected items

•EvaluateEvaluate the sample resultsthe sample results

•Perform follow-up work as necessaryPerform follow-up work as necessary

•Document Document

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.

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 Misstatement: a difference that affects the correctness of the overall account balance.correctness of the overall account balance.

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.

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.

Identify Individually Significant Items

•Stratification of the population

•Top stratum--few large-dollar items

•Lower stratum--the remaining items

Choose a Sampling Method

•Nonstatistical

•Probability proportional to size (PPS)

•Classical sampling methods (Appendix 10B)

Mean-per-unit

Ratio estimation

Difference estimation

Determine the Sample Size, Select the Sample, and Evaluate the Results

•Tolerable misstatement

•Expected misstatement

•Document the ResultsDocument the Results

Nonstatistical Sampling•Determine sample size

•Selecting the Sample

Haphazard selection

•Evaluating the sample results

•Using audit software

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

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

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

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

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

Sampling to Test Controls

•Select and audit the sample items.

•Evaluate the sample results.

•Quantitative evaluation

•Qualitative evaluation

•Linkage to substantive testing

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

Classical Sampling Methods

•Sample Selection

•Sample Evaluation

Point estimate

Projected misstatement

Achieved precision

Decision rules

Adjusted achieved precision

Unacceptable results

Classical Sampling Methods

•Comparison of PPS and classical sampling

•Computer support