©2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley 5 - 5 Audit Sampling for Tests of...

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

Audit Sampling for Tests of Audit Sampling for Tests of Controls and Substantive Controls and Substantive

Tests of TransactionsTests of Transactions

Chapter 15Chapter 15

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 15 - 15 - 22

Learning Objective 1Learning Objective 1

Explain the concept of representative Explain the concept of representative sampling.sampling.


Representative SamplesRepresentative Samples

A representative sample is one in whichthe characteristics in the sample of auditinterest are approximately the same asthose of the population.

In practice, an auditor can increase the likelihood of a representative sample by using care in designing the sampling process and selection, and evaluating the results.


Sampling RisksSampling Risks

Sampling risk is the risk that an auditorreaches an incorrect conclusion because the sample is not representative of the population.

Nonsampling risk is the risk that audittests do not uncover existing exceptionsin the sample.


Minimizing Sampling RiskMinimizing Sampling Risk

Use appropriate sample selectionmethod

Adjust sample

size

Step 1 Step 2

Sampling Risk Meter



Distinguish between statistical and Distinguish between statistical and nonstatistical sampling and between nonstatistical sampling and between probabilistic and nonprobabilistic probabilistic and nonprobabilistic sample selection.sample selection.


Statistical Versus Statistical Versus Nonstatistical SamplingNonstatistical Sampling

Similarities of both approaches:

Select the sample

and perform the tests

Plan the sample

Step 1

Step 2

Evaluate the results

Step 3


Statistical Versus Statistical Versus Nonstatistical SamplingNonstatistical Sampling

Statistical sampling allows the quantificationof sampling risk in planning the sample (Step 1)and evaluating the results (Step 3)

In nonstatistical sampling those items thatthe auditor believes will provide the mostuseful information are selected

Differences in approach:


Probabilistic Versus Probabilistic Versus Nonprobabilistic Sample Nonprobabilistic Sample

Selection Selection

Probabilistic sample selection is a methodof selecting a sample such that eachpopulation item has a known probabilityof being included in the sample.

Nonprobabilistic sample selection is amethod in which the auditor uses professionaljudgment rather than probabilistic methods.



Selection Selection

1. Directed sample selection

2. Block sample selection

3. Haphazard sample selection

Nonprobabilistic selection methods:



SelectionSelection

1. Simple random sample selection

2. Systematic sample selection

3. Probability proportional to size sample selection

4. Stratified sample selection

Probabilistic selection methods:


Nonprobabilistic SampleNonprobabilistic SampleSelection MethodsSelection Methods

Directed sample selection is the selection ofeach item based on auditor’s judgmental criteria.

Items most likely to contain misstatements

Items containing selected population characteristics

Large dollar coverage


Nonprobabilistic SampleNonprobabilistic SampleSelection MethodsSelection Methods

Block sample selection is the selectionof several items in sequence.

Haphazard sample selection is the selection of items without any conscious bias on the part of the auditor.



Select representative samples.Select representative samples.


Probabilistic Sample Probabilistic Sample Selection MethodsSelection Methods

A simple random sample is one in whichevery possible combination of elementsin the population has an equal chanceof constituting the sample.

Computer generation of random numbers offers several advantages

time savingsreduced risk of errorautomatic documentation

Random number tables


Random Sample Selection Random Sample Selection ToolsTools

Computer generation of random numbers offers several advantages

•time savings•reduced risk of error•automatic documentation

Random number tables



Systematic sample selection:

The auditor calculates an interval andthen selects the items for the samplebased on the size of the interval.

The interval is determined by dividingthe population size by the number ofsample items desired.



Probability proportional to size:

A sample is taken where the probabilityof selecting any individual population itemis proportional to its recorded amount (PPS).



Define and describe audit sampling for Define and describe audit sampling for exception rates.exception rates.


Sampling for Exception Sampling for Exception RatesRates

The occurrence rate, or exception rate,is the percent of items in the population containing the characteristic or specific attribute of interest to the total numberof population items.


Sampling for Exception Sampling for Exception RatesRates

Following are types of exceptions inpopulations of accounting data:

1.Deviations from client’s established controls

2.Monetary misstatements in populationsof transaction data

3.Monetary misstatements in populations ofaccount balance details



Use nonstatistical sampling in tests of Use nonstatistical sampling in tests of controls and substantive tests of controls and substantive tests of transactions.transactions.


Terms Used in Audit Terms Used in Audit SamplingSampling

Characteristic or attribute Acceptable risk of assessing control risk too

low (ARACR) Tolerable exception rate (TER) Estimated population exception rate (EPER) Initial sample size

Terms related to planning:


Terms Used in Audit Terms Used in Audit SamplingSampling

Exception Sample exception rate (SER) Computed upper exception rate (CUER)

Terms related to evaluating results:


I: Plan the SampleI: Plan the Sample

Decide whether

audit sampling applies.

State the objectives of the audit test.

Step 1 Step 2

Define attributes

and exception conditions

Step 3

Define the population

Step 4 Define the

sampling unit

Step 5


I: Plan the SampleI: Plan the Sample

Specify acceptable

risk of assessing

control risk too low

Specify the

tolerable exception rate.

Step 6 Step 7

Estimate the

population exception

rate.

Step 8

Determine the initial sample

size

Step 9


II: Select the Sample and II: Select the Sample and Perform the Audit ProceduresPerform the Audit Procedures

Perform the audit procedure

s

Select the

sample

Step10Step 11


III: Evaluate the ResultsIII: Evaluate the Results

Analyze exceptions

Generalize from

the sample to the

population

Step 12

Step 13Decide the acceptability of the

population

Step 14


Guidelines for ARACR and Guidelines for ARACR and TER Tests of ControlsTER Tests of Controls


Guidelines for ARACR and Guidelines for ARACR and TER Tests of TransactionsTER Tests of Transactions


Effect on Sample Size of Effect on Sample Size of Changing FactorsChanging Factors

Effect on initialType of change sample size

Increase acceptable risk ofassessing control risk too low

Increase tolerable risk rate

Increase estimated populationexception rate

Increase population size (minor)


Actions When Population isActions When Population isNot AcceptableNot Acceptable

Revise TER or ARACR

Expand the sample size

Revise assessed control risk

Communicate with the auditcommittee or management


Summary of Audit Sampling Summary of Audit Sampling StepsSteps

Plan the sample(Steps 1-9)

Select the sample(Step 10)

Perform the tests(Step 11)

Evaluate the results(Steps 12-14)

Number ofexceptionsin sampleand actualsample size

To Step 12To Step 14

Fro

mS

tep

12

Com

pare

To/From Step 6

Computedupper

exceptionrate



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


Statistical Audit SamplingStatistical Audit Sampling

The statistical sampling method mostcommonly used for tests of controlsand substantive tests of transactionsis attributes sampling.


Sampling DistributionSampling Distribution

It is a frequency distribution of the resultsof all possible samples of a specified sizethat could be obtained from a populationcontaining some specific parameters.

Attributes sampling is based on thebinomial distribution.


Sampling DistributionSampling Distribution



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


Application of Attributes Application of Attributes SamplingSampling

i. Select the table corresponding to the ARACRii. Locate the TER on the top of the tableiii. Locate the EPER in the far left columniv. Read down the appropriate TER column until

it intersects with the appropriate EPER rowin order to get the initial sample size

Use of the tables:



Population size is a minor considerationin determining sample size

Representativeness is ensured by the sampleselection process more than by sample size

Effect of population size:



Select the sample

Perform the audit procedures

Evaluate the results

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

End of Chapter 15End of Chapter 15

©2012 Pearson Education, Auditing 14/e, Arens/Elder/Beasley 5 - 5 Audit Sampling for Tests of...

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