Chapter 09 Audit Sampling McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

What is Audit Sampling?  Applying a procedure to less than 100% of a population  To estimate some characteristic of the population Qualitative Quantitative 9-2

Risk  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  Non-sampling risk risk pertaining to non-sampling errors Can be reduced to low levels through effective planning and supervisions of audit engagements 9-3

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 9-4

Advantages of Statistical Sampling  Allows auditors to measure and control sampling risk which helps: Design efficient samples Measure sufficiency of evidence Objectively evaluate sample results 9-5

Selection of Random Sample  Random sample results in a statistically unbiased sample that may not be a representative sample  Random sample techniques Random number tables Random number generators Systematic selection 9-6

Other Methods of Sample Selection  Other methods Haphazard selection Select items on an arbitrary basis, but without any conscious bias Block selection Block sample consists of all items in a selected time period, numerical sequence or alphabetical sequence  Stratification Technique of dividing population into relatively homogeneous subgroups 9-7

Types of Statistical Sampling Plans  Attributes sampling  Discovery sampling  Classical variables sampling Mean-per-unit estimation Ratio estimation Difference estimation  Probability-proportional-to-size sampling 9-8

Dual Purpose Test  Tested used both as a test of control and substantiating the dollar amount of an account balance Ex. Test to evaluate the effectiveness of a control over recording sales transactions and to estimate the total overstatement or understatement of the sales account 9-9

Actual Extent of Operating Effectiveness of the Control Procedure is Adequate Inadequate The Test of Controls Sample Indicates: Extent of Operating Effectiveness is Adequate Extent of Operating Effectiveness Inadequate Sampling Risks--Tests of Controls Correct Decision Incorrect Decision (Risk of Assessing Control Risk Too Low) Incorrect Decision (Risk of Assessing Control Risk Too High) Correct Decision 9-10

Audit Sampling Steps for Tests of Controls Audit Sampling Steps for Tests of Controls  Determine the objective of the test  Define the attributes and deviation conditions  Define the population to be sampled  Specify: The risk of assessing control risk too low The tolerable deviation rate  Estimate the population deviation rate  Determine the sample size  Select the sample  Test the sample items  Evaluate the sample results  Document the sampling procedure 9-11

Sampling Risks--Substantive Tests The Population Actually is Not MateriallyMaterially MisstatedMisstated The Substantive Procedure Sample Indicates Misstatement in Account Exceeds Tolerable Amount Misstatement in Account Is Less Than Tolerable Amount Correct Decision Incorrect Decision (Risk of Incorrect Rejection) Incorrect Decision (Risk of Incorrect Acceptance) Correct Decision 9-12

Audit Sampling Steps for Substantive Tests  Determine the objective of the test  Define the population and sampling unit  Choose an audit sampling technique  Determine the sample size  Select the sample  Test the sample items  Evaluate the sample results  Document the sampling procedure 9-13

Difference Estimation  Difference Use sample to estimate the avg. difference between the audited value and book value of items in population Projected =Sample Net Misstatement * Pop. Items Misstatement Sample items Most appropriate when size of misstatements does not vary significantly in comparison to book value 9-14

Ratio Estimation  Use a sample to estimate the ratio of misstatement in a sample to its book value and project it to population Projected =Sample Net Misstatement * Pop. Book Value Misstatement Book Value of Sample  Preferred when the size of misstatements is nearly proportional to the book values of the items  Large accounts have large misstatements 9-15

Audit Risk AR = IR x CR x DR where  AR=The allowable audit risk that a material misstatement might remain undetected for the account balance and related assertions.  IR= Inherent risk, the risk of a material misstatement in an assertion, assuming there were no related controls.  CR= Control risk, the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by internal control.  DR= Detection risk, the risk that the auditors’ procedures will fail to detect a material misstatement if it exists. 9-16