Modern Auditing: Assurance Services and the Integrity

of Financial Reporting, 8th Edition

William C. Boynton California Polytechnic State

University at San Luis Obispo

Raymond N. Johnson Portland State University

Chapter 13 – Audit Sampling

Chapter Overview

Basic 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 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

Controls

Sampling Risks – Substantive

Tests

Nonsampling Risk

• Human mistakes

• Inappropriate application of audit

procedures

• Misinterpretation of results of sample

• Reliance upon erroneous information

from another party

Nonstatistical and Statistical

Sampling

Nonstatistical and Statistical

Sampling

Tests of Controls v. Substantive

Tests

Audit Sampling for Tests of

Controls

• 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

Controls

• 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

Controls

• Select a Representative Sample

• Apply Audit Procedure

• Evaluate the Sample Results

• Document Conclusions

Audit Sampling for Substantive

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 Substantive

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 Substantive

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 Substantive

Tests - PPS

• Select a Representative Sample

– Sampling Risk

– Calculate Sampling Interval

– Select Random Sample

• Apply Audit Procedures

Audit Sampling for Substantive

Tests - PPS

• Evaluate Sample Results

– Upper Misstatement Limit

– No Misstatements Found in the

Sample

– Some Misstatements Found in the

Sample

– Qualitative Considerations

• Document Conclusions