Date: 27 June 2020

VIRTUAL COACHING CLASSES

ORGANISED BY BOS, ICAI

INTERMEDIATE LEVEL
PAPER 1: AUDITING AND ASSURANCE

Faculty: CA Pradnya Mundada

© The Institute of Chartered Accountants of India

AUDIT SAMPLING
(SA 530)

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF

25 July 2020 INDIA
2
SAMPLING: AN AUDIT PROCEDURE
There is a growing realisation that the traditional approach to audit is economically wasteful
because all efforts are directed to check all transactions without exception.
This invariably leads to more emphasis on routine checking, which often is not necessary in
view of the time and the cost involved.
To ensure good and reasonable standard of work, the auditor should adopt standards and
techniques that can lead him to an informed professional opinion.
Since statistical theory of sampling is based on a scientific law, it can be relied upon to a greater
extent than any arbitrary technique which lacks in basis and acceptability.
MEANING OF AUDIT SAMPLING
According to SA 530 “Audit sampling”,
‘Audit sampling’ refers to the application of audit procedures to less than 100% of items
within a population of audit relevance such that all sampling units have a chance of selection
in order to provide the auditor with a reasonable basis on which to draw conclusions about the
entire population.
The objective of the auditor when using audit sampling is to provide a reasonable basis for the
auditor to draw conclusions about the population from which the sample is selected.
POPULATION
Population refers to the entire set of data from which a sample is selected and about which
the auditor wishes to draw conclusions
The auditor should select sample items in such a way that the sample can be expected to be
representative of the population.
This requires that all items in the population have an opportunity of being selected.
The individual items that make up the population are known as sampling units. The population
can be divided into sampling units in a variety of ways.
CHARACTERISTICS OF POPULATION
1. Appropriateness : The auditor will need to determine that the population from which
the sample is drawn is appropriate for the specific audit objective.
2. Completeness : The population also needs to be complete, which means that if the
auditor intends to use the sample to draw conclusions about whether a control activity
operated effectively during the financial reporting period, the population needs to include all
relevant items from throughout the entire period.
3. Reliable : When performing the audit sampling, the auditor performs audit procedures
to ensure that the information upon which the audit sampling is performed is sufficiently
complete and accurate.
APPROACHES TO SAMPLING
 Statistical Sampling
Statistical sampling is an approach to sampling that has the random selection of the sample
items; and the use of probability theory to evaluate sample results, including measurement of
sampling risk characteristics. (Using Formulae)
Non-Statistical Sampling
Under this approach, the sample size and its composition are determined on the basis of the
personal experience and knowledge of the auditor
An attempt would be made to avoid establishing a pattern of selection year after year to
maintain an element of surprise as to what the auditor is going to check.
 It is a common practice to check large number of items towards the close of the year so that
the adequacy of cut-off procedures can also be determined
The non-statistical sampling is criticized on the grounds that it is neither objective nor scientific
The expected degree of objectivity cannot be assured in non- statistical sampling because the
risk of personal bias in selection of sample items cannot be eliminated
The closeness of the qualities projected by the sample results with that of the whole population
cannot be measured because the sample has not been selected in accordance with the
mathematically based statistical techniques.
Sample must be Representative
Whatever may be the approach non-statistical or statistical sampling, the sample must be
representative.
This means that it must be closely similar to the whole population although not necessarily
exactly the same.
 The sample must be large enough to provide statistically meaningful results.
Statistical Sampling- More Scientific
Audit testing done through this approach is more scientific than testing based entirely on the
auditor’s own judgment because it involves use of mathematical laws of probability in
determining the appropriate sample size in varying circumstances.
Statistical sampling has reasonably wide application where a population to be tested consists
of a large number of similar items and more in the case of transactions involving compliance
testing, trade receivables’ confirmation, payroll checking, vouching of invoices and petty cash
vouchers.
Advantages of Statistical Sampling
(1)The amount of testing (sample size) does not increase in proportion to the increase in the size
of the area (universe) tested. (All areas, properly selected, Eg Wages) Labourers increased.
(2)The sample selection is more objective and thereby more defensible.
(3)The method provides a means of estimating the minimum sample size associated with a
specified risk and precision.
(4)It provides a means for deriving a “calculated risk” and corresponding precision (sampling
error) i.e. the probable difference in result due to the use of a sample in lieu of examining all the
records in the group (universe), using the same audit procedures. (3% risk means 97%
confidence level)
(5)It may provide a better description of a large mass of data than a complete examination of all
the data, since non-sampling errors such as processing and clerical mistakes are not as large.
Sample Design
When designing an audit sample,
1. the auditor’s consideration includes the specific purpose to be achieved
2. the combination of audit procedures that is likely to best achieve that purpose.
3. Consideration of the nature of the audit evidence sought and possible deviation or
misstatement conditions or other characteristics relating to that audit evidence will assist
the auditor in defining what constitutes a deviation or misstatement and what population to
use for sampling.
4. Example: In a test of details relating to the existence of accounts receivable, such as
confirmation, payments made by the customer before the confirmation date but received
shortly after that date by the client, are not considered a misstatement. Also, a misposting
between customer accounts does not affect the total accounts receivable balance.
Sample Size
The level of sampling risk that the auditor is willing to accept affects the sample size required.
The lower the risk the auditor is willing to accept, the greater the sample size will need to be.
The sample size can be determined by the application of a statistically-based formula or
through the exercise of professional judgment.
There are various factors typically have on the determination of sample size.
 The factors to be considered for deciding
Sample size
(i) Size of the organisation under audit: large Organisation- bigger sample size
(ii) State of the internal control. Reliable internal control, small sample size and vice versa.
(iii) Adequacy and reliability of books and records.: If more, less sample size and vice versa
(iv) Tolerable error range: No error above 5000, sample size increase.
(v) Degree of the desired confidence: Level of confidence increase, sample increase
Sample Selection Methods
Random Sampling
Random selection ensures that all items in the population or within each stratum have a known
chance of selection. It may involve use of random number tables.
Random sampling includes two very popular methods which are discussed below–
1. Simple Random Sampling : Homogeneous Population
2. Stratified Sampling: For Heterogeneous population.
Interval Sampling or Systematic Sampling
Systematic selection is a selection method in which the number of sampling units in the
population is divided by the sample size to give a sampling interval,
for example 50, and having determined a starting point within the first 50, each 50th sampling
unit thereafter is selected.
Although the starting point may be determined haphazardly, the sample is more likely to be
truly random if it is determined by use of a computerized random number generator or random
number tables.
 When using systematic selection, the auditor would need to determine that sampling units
within the population are not structured in such a way that the sampling interval corresponds
with a particular pattern in the population.
Monetary Unit Sampling
 It is a type of value-weighted selection in which
sample size,
selection and
evaluation results in a conclusion in monetary amounts.
Haphazard sampling
Haphazard selection, in which the auditor selects the sample without following a structured
technique.
Although no structured technique is used, the auditor would nonetheless avoid any conscious
bias or predictability (for example, avoiding difficult to locate items, or always choosing or
avoiding the first or last entries on a page)
and thus attempt to ensure that all items in the population have a chance of selection.
Haphazard selection is not appropriate when using statistical sampling.
Block Sampling
This method involves selection of a block(s) of contiguous items from within the population.
Block selection cannot ordinarily be used in audit sampling because most populations are
structured such that items in a sequence can be expected to have similar characteristics to each
other, but different characteristics from items elsewhere in the population.
Although in some circumstances it may be an appropriate audit procedure to examine a block
of items, it would rarely be an appropriate sample selection technique when the auditor intends
to draw valid inferences about the entire population based on the sample
Selection of Items for Testing
With statistical sampling,
sample items are selected in a way that each sampling unit has a known probability of being
selected.
 With non-statistical sampling,
1. judgment is used to select sample items.
Because the purpose of sampling is to provide a reasonable basis for the auditor to draw
conclusions about the population from which the sample is selected, it is important that the
auditor selects a representative sample, so that bias is avoided, by choosing sample items which
have characteristics typical of the population.
The principal methods of selecting samples are the use of random selection, systematic
selection and haphazard selection.
Stratification and Value
Weighted Selection
Stratification
Audit efficiency may be improved if the auditor stratifies a population by dividing it into
discrete sub-populations which have an identifying characteristic
The objective of stratification is to reduce the variability of items within each stratum and
therefore allow sample size to be reduced without increasing sampling risk.
When performing tests of details, the population is often stratified by monetary value. This
allows greater audit effort to be directed to the larger value items, as these items may contain
the greatest potential misstatement in terms of overstatement
Similarly, a population may be stratified according to a particular characteristic that indicates
a higher risk of misstatement, for example, when testing the allowance for doubtful accounts
in the valuation of accounts receivable, balances may be stratified by age.
Value-Weighted Selection
When performing tests of details ,it may be efficient to identify the sampling unit as the
individual monetary units that make up the population.
Having selected specific monetary units from within the population, for example, the accounts
receivable balance, the auditor may then examine the particular items, for example, individual
balances, that contain those monetary units.
 One benefit of this approach to defining the sampling unit is that audit effort is directed to the
larger value items because they have a greater chance of selection, and can result in smaller
sample sizes.
This approach may be used in conjunction with the systematic method of sample selection and
is most efficient when selecting items using random selection
Examples of Factors Influencing Sample
Size for Tests of Controls
The more assurance the auditor intends to obtain from the operating effectiveness of controls, the
lower the auditor’s assessment of the risk of material misstatement will be, and the larger the sample
size will need to be
If there is an increase in the tolerable rate of deviation. Then sample size will decrease, as lower the
tolerable rate of deviation, larger the sample size needs to be.
When there is an increase in the expected rate of deviation of the population to be tested then
sample size will increase, as higher the expected rate of deviation, larger the sample size needs to be
so that the auditor is in a position to make a reasonable estimate of the actual rate of deviation
An increase in the auditor’s desired level of assurance that the tolerable rate of deviation is not
exceeded by the actual rate of deviation in the population will increase the sample size
In case of large populations, the actual size of the population has little, if any, effect on sample size.
For small populations however, audit sampling may not be as efficient as alternative means of
obtaining sufficient appropriate audit evidence.
Examples of Factors Influencing Sample
Size for Tests of Details
The higher the auditor’s assessment of the risk of material misstatement, the larger the sample
size needs to be. The auditor’s assessment of the risk of material misstatement is affected by
inherent risk and control risk.
The more the auditor is relying on other substantive procedures (tests of details or substantive
analytical procedures) to reduce to an acceptable level the detection risk regarding a particular
population, the less assurance the auditor will require from sampling and, therefore, the smaller
the sample size can be
An increase in the auditor’s desired level of assurance that tolerable misstatement is not
exceeded by actual misstatement in the population will increase the sample size
An increase in tolerable misstatement will decrease the sample size as lower the tolerable
misstatement, the larger the sample size needs to be
Sampling and Non
Sampling Risk
Sampling Risk
The risk that the auditor’s conclusion based on a sample may be different from the conclusion if
the entire population were subjected to the same audit procedure.
Sampling risk can lead to two types of erroneous conclusions
1. In the case of a test of controls, that controls are more effective than they actually are, or in
the case of a test of details, that a material misstatement does not exist when in fact it does.
The auditor is primarily concerned with this type of erroneous conclusion because it affects
audit effectiveness and is more likely to lead to an inappropriate audit opinion.
2. (ii) In the case of a test of controls, that controls are less effective than they actually are, or
in the case of a test of details, that a material misstatement exists when in fact it does not.
This type of erroneous conclusion affects audit efficiency as it would usually lead to
additional work to establish that initial conclusions were incorrect
Non Sampling Risk
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling
risk.
Examples of non-sampling risk include use of inappropriate audit procedures, or misinterpretation
of audit evidence and failure to recognize a misstatement or deviation.
PERFORMING AUDIT PROCEDURES
The auditor shall perform audit procedures, appropriate to the purpose, on each item selected.
 If the audit procedure is not applicable to the selected item, the auditor shall perform the
procedure on a replacement item.
If the auditor is unable to apply the designed audit procedures, or suitable alternative
procedures, to a selected item, the auditor shall treat that item as a deviation from the
prescribed control, in the case of tests of controls, or a misstatement, in the case of
tests of details.
 NATURE AND CAUSE OF DEVIATIONS
AND MISSTATEMENTS
In analyzing the deviations and misstatements identified,
 the auditor may observe that many have a common feature, for example, type of transaction, location, product
line or period of time.
 In such circumstances, the auditor may decide to identify all items in the population that possess the common
feature, and extend audit procedures to those items.
In addition, such deviations or misstatements may be intentional, and may indicate the possibility of fraud.
Therefore, the auditor shall investigate the nature and causes of any deviations or misstatements identified, and
evaluate their possible effect on the purpose of the audit procedure and on other areas of the audit.
 In the extremely rare circumstances when the auditor considers a misstatement or deviation discovered in a
sample to be an anomaly, the auditor shall obtain a high degree of certainty that such misstatement or
deviation is not representative of the population.
The auditor shall obtain this degree of certainty by performing additional audit procedures to obtain sufficient
appropriate audit evidence that the misstatement or deviation does not affect the remainder of the population
PROJECTING MISSTATEMENTS
The auditor is required to project misstatements for the population to obtain a broad view of the
scale of misstatement but this projection may not be sufficient to determine an amount to be
recorded
When a misstatement has been established as an anomaly, it may be excluded when projecting
misstatements to the population
However, the effect of any such misstatement, if uncorrected, still needs to be considered in
addition to the projection of the non-anomalous misstatements.
For tests of details, the auditor shall project misstatements found in the sample to the
population whereas for tests of controls, no explicit projection of deviations is necessary since
the sample deviation rate is also the projected deviation rate for the population as a whole.
EVALUATING RESULTS OF AUDIT
SAMPLING
The auditor shall evaluate-
(a)The results of the sample; and
(b)Whether the use of audit sampling has provided a reasonable basis for conclusions about the
population that has been tested.
 THANK YOU

25 July 2020 © THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA 35