AUDIT SAMPLING

FOR TESTS OF
CONTROLS AND
SUBSTANTIVE TESTS OF
TRANSACTIONS
CHAPTER 15

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 CHAPTER 15 LEARNING OBJECTIVES
15-1 Explain the concept of representative sampling.
15-2 Distinguish between statistical and nonstatistical sampling and
between probabilistic sample selection and nonprobabilistic
sample selection.
15-3 Select samples using probabilistic and nonprobabilistic methods.
15-4 Define and describe audit sampling for exception rates.
15-5 Use nonstatistical sampling in tests of controls and substantive
tests of
transactions.
15-6 Define and describe attributes sampling and a sampling
distribution.
15-7 Use attributes sampling in tests of controls and substantive tests of
transactions.
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 OBJECTIVE 15-1
Explain the concept of
representative sampling.

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 REPRESENTATIVE SAMPLING
A representative sample is one in which the characteristics in the
sample are approximately the same as those of the population.
• Auditors strive to get a representative sample for testing.
• Auditors never know if a sample is representative or not, but the auditor can
increase the likelihood by using care in designing the sampling process,
sample selection, and evaluation of sample results.
A sample, even a representative sample, has the risk of two types of errors:
a sampling error and a nonsampling error.
• The risks of these two types of errors are called sampling risk and
nonsampling risk.

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 REPRESENTATIVE SAMPLING (CONT.)

Sampling risk is the risk that an auditor reaches an incorrect conclusion

because the sample is not representative of the population.
Sampling risk can be controlled by the auditor by:
1. Adjusting sampling size
2. Using an appropriate method of selecting sample items from the population.

Nonsampling risk is the risk that the auditor reaches an incorrect

conclusion for any reason not related to sampling risk. Common reasons are:
• Auditor’s failure to recognize exceptions
• Ineffective audit procedures

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 OBJECTIVE 15-2
Distinguish between statistical and
nonstatistical sampling and between
probabilistic sample selection and
nonprobabilistic sample selection.

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 STATISTICAL VERSUS NONSTATISTICAL SAMPLING
AND PROBABILISTIC SAMPLE SELECTION
Statistical Versus Nonstatistical Sampling - Both methods involve
the same three phases when used in audits:
1. Plan the sample
2. Select the sample and perform the tests
3. Evaluate the results
Statistical sampling applies mathematical rules so that the auditor can
quantify sampling risk in planning the sample (step 1) and evaluating
results (step 3).
Nonstatistical sampling does not quantify sampling risk, but a properly
designed nonstatistical sample can provide effective results in audits.

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 STATISTICAL VERSUS NONSTATISTICAL SAMPLING
AND PROBABILISTIC SAMPLE SELECTION(CONT.)

Probabilistic Versus Nonprobabilistic Sample Selection

Probabilistic sample selection – the auditor randomly selects items such that
each item has a known probability of being included in the sample.
• When statistical sampling is used, a probabilistic sample must be used.

Nonprobabilistic sample selection – any other method of selecting a sample.

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 OBJECTIVE 15-3
Select samples using probabilistic and
nonprobabilistic methods.

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 SAMPLE SELECTION METHODS

Probabilistic sample selection methods:

1. Simple random sample selection
2. Systematic sample selection
3. Probability proportional to size sample selection
Nonprobabilistic sample selection methods:
4. Haphazard sample selection
5. Block sample selection

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 SAMPLE SELECTION METHODS (CONT.)
Probabilistic Sample Selection Methods:
• Simple Random Sample Selection – In this selection method, every possible
combination of population items has an equal chance of being included in
the sample.
This requires a method to make sure that all items in the population have an equal
chance of selection.
Auditors often generate random numbers by using one of three computer sample
selection techniques (example shown in Figure 15-1) :
• Electronic spreadsheets
• Random number generators
• Generalized audit software

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 SAMPLE SELECTION METHODS (CONT.)

Probabilistic Sample Selection Methods (cont.):

• Systematic Sample Selection
• The auditor calculates an interval and then selects items for the sample based on
the size of the interval.
• The interval is determined by dividing the population by the desired sample size.
• Probability Proportional to Size and Stratified Sample Selection
• In many auditing situations, it is advantageous to select samples that emphasize
population items with larger recorded amounts.

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 SAMPLE SELECTION METHODS (CONT.)

Nonprobabilistic Sample Selection Methods:

• Haphazard Sample Selection
• the selection of items without any conscious bias by the auditor
• shortcoming is the difficulty of remaining completely unbiased
• Block Sample Selection
• the auditor selects the first item in a block and then the remainder of the block is chosen in
sequence
• acceptable to use block sampling if a reasonable number of blocks is used

Although these methods seem less logical than probabilistic methods, there are auditing
situations in which a probabilistic method is not practical, such as in the situation of
auditing a population that is not numbered in any way.

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 OBJECTIVE 15-4
Define and describe audit sampling for
exception rates.

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 SAMPLING FOR EXCEPTION RATES
When testing controls and performing substantive tests of transactions, the auditor
determines whether the controls are operating effectively and whether the rate of
monetary errors is below tolerable limits.
To test this, auditors estimate the percent of items in a population containing a
characteristic or attribute of interest. This percentage is called the occurrence rate or
exception rate.
Auditors are interested in the following types of exceptions in accounting data:
1. Deviations from the client’s established controls
2. Monetary misstatements in populations of transaction data
3. Monetary misstatements in populations of account balance details

When testing controls and performing substantive tests of transactions, the auditor focuses
on the upper limit of the estimated population exception rate, which is the computed upper
exception rate (CUER).

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 OBJECTIVE 15-5
Use nonstatistical sampling in tests
of controls and substantive tests
of transactions.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING

The three phases of sampling are identical for both statistical and
nonstatistical sampling:
1. Plan the Sample
2. Select the Sample and Perform the Audit Procedures
3. Evaluate the Results
There are 14 well-defined steps that fall under the three phases.
The terms used in audit sampling are detailed in Table 15-1.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)
Phase 1 - Plan the Sample:
1. State the objectives of the audit test.
2. Decide whether audit sampling applies.
3. Define attributes and exception conditions.
4. Define the population.
5. Define the sampling unit.
6. Specify the tolerable exception rate.
7. Specify acceptable risk of overreliance.
8. Estimate the population deviation or exception rate.
9. Determine the initial sample size.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)
Phase 2 - Select the Sample and Perform the Audit Procedures:
10. Select the sample.
11. Perform the audit procedures.
Phase 3 – Evaluate the results:
12. Generalize from the sample to the population.
13. Analyze exceptions.
14. Decide the acceptability of the population.

Attributes for Hillsburg Hardware Co. are defined in Table 15-3.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)

Phase 1 - Plan the Sample:

1. State the Objectives of the Audit Test: The objectives of the test must be
in terms of the transaction cycle being tested. The objectives are usually
defined as follows:
• Test the operating effectiveness of controls
• Determine whether the transactions contain monetary misstatements
2. Decide Whether Audit Sampling Applies: Audit sampling applies
whenever the auditor plans to reach conclusions about a population
based on a sample.

Audit procedures for Hillsburg Hardware Co. where audit sampling is

appropriate are illustrated in Table 15-2.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)

Phase 1 - Plan the Sample (cont.):

3. Define Attributes and Exception Conditions: Auditors must carefully
define the characteristics (attributes) being tested as well as the
exception conditions.
• Nine attributes of interest and exception conditions for the Hillsburg audit are
shown in Table 15-3.
4. Define the Population: The items which the auditor wishes to generalize.
• The auditor defines the population consistent with the objectives of the tests.
5. Define the Sampling Unit: The sampling unit is defined based on the
population and the sample selection method.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)

Phase 1 - Plan the Sample (cont.):

6. Specify the Tolerable Exception Rate: The tolerable exception rate (TER) for
each attribute requires the auditor’s professional judgment. The TER can
significantly affect the sample size. Figure 15-2 on page 494 shows the TER
on a sampling data sheet.
7. Specify Acceptable Risk of Overreliance: Sampling always has a risk of
incorrect conclusions about the population. Auditors are concerned with
the risk of overreliance because it impacts the effectiveness of the audit. The
acceptable risk of overreliance (ARO) measures the risk the auditor is
willing to take of concluding that a control is effective when the true
population exception rate is greater than TER.
Guidelines for establishing TER and ARO are illustrated in Tables 15-4 and 15-5.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)
Phase 1 - Plan the Sample (cont.):
8. Estimate the Population Exception Rate: Auditors should make an estimate of
the population exception rate to plan the appropriate sample size. If the
estimated population exception rate (EPER) is low, a relatively small sample
will satisfy the auditor’s tolerable exception rate (TER).
9. Determine the Initial Sample Size: Four factors determine the initial sample
size: population size, TER, ARO, and EPER.
• It is called an initial sample size because the exceptions in the initial sample must be
evaluated before an auditor can decide if the sample is sufficient to achieve the
objectives of the test.
Factors that affect the sample size are shown in Table 15-6.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)
Phase 2 - Select the Sample and Perform the Audit Procedures:
10. Select the Sample: Auditors can choose any of the methods presented to
select the initial sample.
11. Perform the Audit Procedures: The auditor performs the audit
procedures by examining each item in the sample to determine whether
it is consistent with the definition of the attribute and by maintaining a
record of all the exceptions found.
An inspection of sample items for attributes worksheet is shown
in Figure 15-3 on page 498.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)
Phase 3 – Evaluate the Results:
12. Generalize from the Sample to the Population: The sample exception rate
(SER) can be calculated from the actual sample results by dividing the
actual exceptions by the actual sample size. When the SER exceeds the
EPER used in designing the sample, the auditor can conclude that the
sample results do not support the preliminary assessed risk.
The SER and calculated allowance for sampling risk (TER- SER) is
summarized in Figure 15-4 on page 500.
13. Analyze Exceptions: The exception analysis is illustrated in Figure 15-5
on page 501.

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)
Phase 3 – Evaluate the Results:
14. Decide the Acceptability of the Population: If the sample exception rate is
less than the expected rate, the auditor will conclude that the sample
does not indicate any significant problems. However, when the SER
exceeds the EPER, the auditor will conclude that the results are
unacceptable and must follow one of four courses of action:
1. Revise TER or ARO
2. Expand the Sample Size
3. Revise Assessed Control Risk
4. Communicate with the Audit Committee or Management

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 APPLICATION OF NONSTATISTICAL AUDIT
SAMPLING (CONT.)
Documentation and Evidence Planning: The auditor needs to retain
adequate documentation of:
• Procedures performed
• Methods used to select the sample and perform the tests
• Results found in the tests
• Conclusions reached
The conclusions of the tests of controls and substantive tests of transactions
will determine the remainder of the audit evidence that needs to be obtained.
This evidence planning is illustrated in Figure 15-6 on page 504.
The steps in nonstatistical sampling are summarized in Figure 15-7.

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 OBJECTIVE 15-6
Define and describe attributes sampling
and a sampling distribution.

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 STATISTICAL AUDIT SAMPLING

Differences Between Attributes Sampling and Nonstatistical

Sampling - The statistical sampling method most commonly used for tests of
controls and substantive tests of transactions is attributes sampling.
Statistical attributes sampling and nonstatistical sampling use the same 14
steps. The differences are:
1. The calculation of the initial sample sizes are developed from statistical
probability distributions
2. The calculation of estimated upper exception rates use statistical probability
distributions.

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 STATISTICAL AUDIT SAMPLING (CONT.)
Sampling Distribution – Auditors base their inferences on samplng
distributions, which are a frequency distribution of the results of all possible
samples of a specified size that could be obtained from a population
containing some specific characteristics.
Each population exception rate and sample size has a unique sampling
distribution.
The sampling distribution for a sample of 50 items from a very large
population and an exception rate of 5 percent is shown in Table 15-7.

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 OBJECTIVE 15-7
Use attributes sampling in tests of controls
and substantive tests of transactions.

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 APPLICATION OF ATTRIBUTES SAMPLING

The steps for attributes sampling are the same as those for
nonstatistical sampling with a few exceptions:
7. Specify acceptable risk of overreliance – The concepts are the same, but
the method of quantifying is usually different. Rather than using high,
medium, and low, the auditor will use a specific amount, such as 5 percent.
9. Determine the initial sample size – The factors that affect the initial
sample size are the same, but in attributes sampling, the auditor uses
tables developed from statistical formulas or audit software to determine
the initial sample size. This is illustrated in Table 15-8 on page 508.

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 APPLICATION OF ATTRIBUTES SAMPLING (CONT.)
The steps for attributes sampling are the same for nonstatistical
sampling with a few exceptions (cont.):
10. The only difference in sample selection is that probabilistic methods must be
used for statistical sampling.
12. For attributes sampling, the auditor calculates the computed upper exception
rate using statistical formulas. This is illustrated in Table 15-9 on page 509
and Figure 15-8 on page 511.
Need for Professional Judgment – One criticism of statistical sampling is that
it reduces the auditor’s use of professional judgment. However, the auditor does
have to exercise considerable judgment in many statistical sampling decisions.

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