Application of Sampling

in Auditing Financial
Statements

1
Learning Outcomes
After studying this module, the students are expected to:

▪ Define audit sampling.

▪ Explain the different risk considerations in obtaining audit
evidence.
▪ Differentiate statistical from non-statistical sampling.
▪ Discuss sampling approaches and other means of testing.
▪ Illustrate sampling for tests of controls and for substantive
tests.

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PSA 500, Audit Evidence states:

“
When designing tests of controls and
tests of details, the auditor shall
determine means of selecting items for
testing that are effective in meeting the
purpose of the audit procedure.

*
“ 3
Audit Sampling, defined…PSA 530

◼ Application of an audit procedure to < 100%

of the items in an account balance or class of
transactions,

◼ to provide the auditor with reasonable basis

on which to form a conclusion about a
population by examining only part of the
data.

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 Circumstances in Which Sampling
Does Not Apply
◼ Tests of controls that depend primarily on
appropriate segregation of duties

◼ Tests that provide no documentary evidence of

performance

◼ Small populations: why sample?

◼ We can’t read every tenth line of board meeting

minutes

◼ * Testing footings 5
 Application of Audit Sampling in
Relation to Audit Procedures

◼ Risk Assessment Procedures - do not involve the

use of audit sampling.

◼ Test of Control – application of audit sampling is

appropriate when controls leave audit evidence of
performance of controls.

◼ Substantive Procedures – application of audit

sampling appropriate in testing details to verify
assertions embodied in the the financial statements.
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 Risks
◼ Sampling risk
▪ risk that the auditors’ conclusions based on a sample
may be different from the conclusion they would
reach if they examined every item in the population

◼ Nonsampling risk
▪ risk pertaining to non-sampling errors;
▪ Can be reduced to low levels through effective
planning and supervisions of audit engagements

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Sampling Risk vs. Non- Sampling Risk

◼ Sampling risk: the risk that the sample

result is not representative of the
population

◼ Sampling risk is reduced by increasing

sample sizes.

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Sampling Risk vs. Non- Sampling Risk

◼ Nonsampling risk: everything else that

can go wrong in a test, due to:

▪ Inappropriate procedures
▪ Failure to recognize misstatements
▪ Reduced by adequate planning and
supervision

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Q&
A
Sampling Risk in Test of Controls

▪ Risk of assessing control risk too high

(Risk of Under reliance) - Alpha Risk

▪ Risk of assessing control risk too low

(Risk of Over reliance) – Beta Risk

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 9-12
Summary Sampling Risk – Test of
Controls

Actual Extent of Operating Effectiveness

of the Control Procedure is

Adequate Inadequate
The Test of Controls
Sample Indicates: Incorrect
Correct Decision
Extent of Operating (Risk of Assessing
Effectiveness is Decision Control Risk
Adequate
Too Low)
Incorrect
Extent of Operating Decision
Effectiveness
Correct
(Risk of Assessing
Inadequate
Control Risk
Decision
Too High)
Sampling Risk in Substantive Tests

◼ Risk of incorrect rejection – Alpha Risk

◼ Risk of incorrect acceptance – Beta Risk

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Why Is Alpha Risk Generally of Less
Concern Than Beta Risk?

◼ Ordinarily the auditor would expand and

extend testing, thus arriving at the correct
conclusion

◼ The audit may be less efficient (i.e., extending

substantive procedures unnecessarily), but
nevertheless effective.

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Always Evaluate Qualitative
Aspects of Misstatements

◼ Consider these issues:

▪ Does the item appear to be due to error or
fraud?
▪ Does it appear to be isolated or systemic?

◼ Fraud/systemic requires much broader

consideration than error/isolated

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Projected Deviation Rates or
Misstatements

◼ Where projected sample misstatement or

deviations less than tolerable...

◼ Consider risk that such result might be

obtained…

◼ Even though true misstatement or deviation

rate exceeds tolerable in the population

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Non-statistical vs. Statistical Sampling

◼ Both are acceptable under auditing standards

◼ Both require professional judgment in planning,

performing, and evaluating a sample

◼ Statistical sampling has one distinguishing feature:

▪ Allows auditor to measure mathematically the
uncertainty resulting from examining only part of
the data
▪ i.e., Allows auditor to quantify sampling risk

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What Does This Mean: Quantifying
Sampling Risk?
◼ Assume the following:
▪ A population to be tested consists of 100,000
purchase transactions
▪ The population contains only 2 fraudulent entries
▪ However, Both fraudulent entries are randomly
selected in our sample of 100 transactions

◼ This would be an example of sampling error arising

from sampling risk

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 9-19

Non-statistical sampling

◼ The auditor estimates sampling risk by using

professional judgment rather than statistical
techniques

◼ Provides no means of quantifying sampling risk

◼ Sample may be larger than necessary or

auditors may unknowingly accept a higher than
acceptable degree of sampling risk
Non-statistical Sampling
◼ Some auditors select sample items randomly, but
evaluate non-statistically

◼ Forms of nonstatistical selection:

▪ Haphazard selection
▪ Block selection

◼ Non-statistical sampling sizes must approximate

what would be obtained from selecting a statistical
sample size using reasonable parameters

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Forms of Probabilistic Selection
◼ Must be used to draw statistical inferences when
using a statistical sampling approach

◼ Random numbers software

◼ Systematic selection:
▪ Selecting every “nth” item after a random start.
▪ Some auditors avoid using: what if population not
randomly arranged?
▪ A solution: two or three random starts (e.g. three starts
selecting 20 items, rather than one start selecting 60 items)

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Attributes Sampling Plans

◼ Used typically to test compliance with

internal controls.

◼ Results are always in terms of a percentage

projection of rate of occurrence in a
population.

◼ The higher the frequency of attributes, the

better.
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Attributes Sampling Typically Used in
Tests of Controls for:
◼ Voucher processing in A/P
◼ Cash disbursements
◼ Billing systems
◼ Payroll and related personnel policy systems
◼ Inventory pricing
◼ Fixed asset additions
◼ Depreciation computations

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What Attributes Would We Want to
Test? Examples:

◼ Is purchase entry supported by a vendor’s invoice with

correct amount?

◼ Is there an authorized P.O. signed by purchasing agent?

◼ Is there a receiving report from the receiving dept.?

◼ Was account classification correct?

◼ Was vendor an authorized vendor?

◼
*
Was final approval for payment authorized? 24
Some Final Words on Selecting
Samples for Test of Attributes

◼ Don’t define too many attributes: the

process gets unwieldy

◼ Don’t define too few attributes: you’ll be

evaluating disparate circumstances

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Be Sure You’re Sampling from the Right
Population in Testing Assertions!

◼ Completeness: sample items are receiving

reports, traced to system entry [source
document to recorded entry

◼ Existence: sample from evidence of system

entry; trace to receiving reports [recorded
entry to source document]

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Q&
A
How to Deal with Sample Items
Which Cannot Be Located
◼ The item should be considered a control
deviation in evaluating sample result

◼ Do not substitute with a replacement random

number for the item!

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 Learning Outcomes
After studying this module, the students are
expected to:
▪ Define audit sampling.
▪ Explain the different risk considerations in obtaining
audit evidence.
▪ Differentiate statistical from non-statistical sampling.
▪ Discuss sampling approaches and other means of
testing.
▪ Illustrate sampling for tests of controls and for
substantive tests.

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 Useful References

◼ American Institute Of Certified Public Accountants

(AICPA). 1983. Audit Sampling. New York, N. Y.

◼ Arens, A.A., R.J. Elder and M.S. Beasley. 2003. Auditing

and Assurance Services: an Integrated Approach, 9th
edition. Prentice-Hall. Upper Saddle River, N.J.

◼ Guy, Dan M., D. R. Carmichael and R. Whittington. 2002.

Audit Sampling: an Introduction, 5th edition. John Wiley
and Sons. New York, N. Y.

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