. ling Concepts.

Chapter Eleven - Basic Audit Samp

CHAPTER ELEVEN
. VDIT SAMPLING CONCEPTS
BASIC A .
. ed than to do the wrong things and
. . ht things and succe ,- .A
It requires less effort to do the rtg _ nonymous
fail. .

hould be able to:

Learning Objectives
-
After studyingthis chapter,you s
Defineaudit sampling: ld rations in obtaining audit evidence
Explainthe differ~n~risk consi e_statisticalsampling.
Differentiate-statisticalfrohmnond other means of testing.
Discusssamplingapproac es an
Illustrate samplingfor tests of c:ontrols.
_ Illustrate samplingfor substantivetests. .
Discuss the common projection techniques for sampling in
substantivetests. .' .
Identify other samplingconsiderations.
Introduction
. .
PSA500 (Redrafted),Audit Evidence states ~hat:
When designing tests of controls and tests of details, the auditor
shall determine means of selecting .items for testing that are
effectivein meeting the purp_oseof the audit procedure'.

Actuallv, the means of selecting items for testing which are

available to the auditor are:
1. Selecting all items (100% examination)
2. Selecting specific items
3. Audit sampling.
The decision as to which approach to use will depend on the
Circumstances,and the application of anyone or combination of the
above means may be appropriate in particular circumstances. While
the decision as to which f!1eans,.or combination. of means, to use is
made on the basis of the risk of material misstatement related to the
assertion being tested and audit efficiency, the auditor needs. to be
satisfied that methods used are. effective in providing sufficient
appropriate audit evidence to meet the objectives of ,the audit
procedure.

IpSA 500 (Redrafe~), par. 10

384
 Auditing
Qnd As'surunc
, Selecting all . _-. e Prine' tp I es
Items
The, audit (1000/0
the enttIre p or may d e . ' ..Inat'
eXa,_'
account baolpulation o~l.dethat it ' Ion)
. ance ( Item will b
examination is or a s thafm e most a
more cornrn unlikely i stratum ake Upa fP'oP'iate t
may be ap ron for tests n the case oWlthinth~tass of t,an:a examine
large valueP'topnate
I ems WhenOf the'details Ff0,
tests of cont'ol
POPulatiOn)ctlons or
. 100~
not provide ' when t POpular example s; howeve .. '
repetitive natS~fficient a~ce is a Si~~~fi constitut~sl~O%exami~a~\IS
automaticaiiy ~~e Of. a ~:~priate aul~~ntrisk and~~~Ilnumb.,o,:;
cost effective f an Inform cUlation 0 eVIdence er means do
techniques (~~example,
s). ~~Ionsystem'
rough the makes ap,;ce~'
oth., 1000;, s when the
performed
Selecting S.., use of comput.,~ examination
. peclflc Items esststed audit

The auditlor ma d '

a
b ased on such f y
actors ecide t
select
ssessed risk 'of ma ~s the auditor' specific items fr
population being te:;:,~al misstatem:n~ndecstanding ~f~ha population
subject to non- "" The jud ' and the cha e entity, the
those mentiOnedsamPhng risk. ~mental selection o;actenstics of the
10 Table 11-1" peciflc items s I specificitems is
.Table 11-1 .' ncude
e ected may' I I

,Selecting Specific Items. ,

,
.' The audita ~escription '
r may decide t I .
a population because th 0 se ect specific items with~
~gh value or key 'sorn~ ?ther characterist~~a~eof high va~ue,or exhibit
Items SUSpICIOUS,unusual p~. 0;
exam~le Items that ~e
have a history of error. a ICUarly risk-prone that,or
The
valuesauditor
exceed may deCIide to examme
a certai
' .
Items
In amount so as t 'fy whose
All items over a proportion.of the totalamountof cl
certain amount or account balance, ass
0
0~ennansecuons
a large

- The auditor may examine items -to obtain inforrnatioo

"
Items to obta~ about matters sU,ch,as the nature of the entity, the
I

information nature of transactlOnS, and internal control.

The ~ud~tor may use judgment to select and examine
speCific itemS to determine whether or not a parti~ular
Items to test control
control activity is being perfon11ed.'
,activities
.....:
. While selective examination of specific itemS from a class of
transactions or account balance will often be an efficient means 'of
gathering audit ev'idence, it does not constitute audit sampling. The
results of audit procedures applied to items selected in this way cannot
be projected .to the entire population. The auditor considers the need
to obtain. st,lfficient appropriate audit evidence regardln!!the remainder
of the population when that remainder is rnatenal.

2' '
PSA 500 (Redrafted), 'pat. A54 ' 385

l
 , Concepts
, dit Samp/lng
BasIc Au '
Chapter Eleven -

. sampling Iication of audit procedures to

Audit 'involves the appof transactions or accOunt bal less
Audit 5amp.'~n~swithin a class a chance of selection in Ordance
than 100% ~f la~pling units havesonable basis on which to ~ to
such,tha,t a suditor with, a rea ulation3; Audit sampling can raw
provide -the a h entire pop h uSe
conclusions about tenon_statistical approac .
'either a statiIS tical or a d in this chapt er:
, terms are use, ' '
The follOWing I deviations" when performing tests
r _ means.either controwhen performing tests of details. Of
1. Erro isstatements, '
controls, or m e between what was expected bas
"differenc ' I d h ' ed
a. Deviation - tation of contro S,' an w at actual!
on the dOCU~~~ns are stated in terms of percentages Y
occurred. Devla 10 . '
_ difference between the amount computed
b. Mi55tatemend~t and' the amount actually recorded or
bY the au 'theI or accounting recor ds. M'ISSt at ements are
reflected I~ t ms of monetary amount.
presented In er
f deviation or total misstatement.
2. Total error - the rate 0 dlt xpects to b
Th error that the au I or e e presentin
3. Expected error- e .
the population. .
- or that arises from an Isolated event that has not
4. Anomaly -tahn.errthanon specifically identifiable occasions and is
recurred 0 er .' hit'
therefore not representative of e.rrors in t e popu a Ion.
-The entire set of data from which a sample is selected
5. PopuIation . h t d I .
d bout which the auditor WIS es 0 raw cone usions. A
~~pul~tion may be divide.d. into strata, or sub-populations,. Wit,h
each stratum being examined separately. The term population IS
used to include the term stratum.
6. Sampling unit - the individual items constituting a population, for
example checks listed on deposit slips, credit entries on bank
statements, sales invoices or debtors' balances, or a monetary
unit.

Audit Sampling
Audit sampling is based on the premise that a sample can be
sufficiently representative of an audit population to warrant valid and
reliable conclusions without testing the entire population. audit .An
population may consist of all the Items within a class of transactions,
such as. all credit .sales processed for a specified period, or all the
transactions constituting an account balances such as accounts
receivable. "

3 Ibid., par. 5(a)

386
 AUditing and A
A population m - ' SSurol1ce Principles
each stratum beln ay be divided int
to include the terr1 eXaminedsepa 0 strata, Orsub
, stratum. rately. Theterm- POPUla,tions, with
Audit Sampling I b POpulation is used
n "elation t
Risk Assessment p 0 AUdit Proced
rocedure ures
The auditor perform'S ,
understanding of the ~ nsk assessm '
control. Ordinarily ,ekntlty and its env'ent proceduresto obt '
di , ns asse Ironment ' arn an
af au It sampling How ssment proced ' includingits-internal
, of controls'concu~rentl eVe,r,the auditor ofteuresldonot involvethe use
af cant ro Isand determ'Y .with obralnlng
' . an U!"ld
n pans and performstests
Inlng Whetherthey havee~standing of the design
Tests of Control eenimplemented.

Tests of controls are perf

includes an expectation ormed whenthe auditor' ,
Based OIl the auditor's u~~ the o~erating effective~;~~ka;sessment
identifies the characteristi erstandmg of in'ternalcontrol thcontdr~ls,
tiCS or attributes th t . , e au itor
a can ro, as well as Possible de" a Indicateperformanceof
departures from adequate perf vranon conditions which indicate
att nib ut es can t hen be tested b ormance
th ., The presenceor absenceof
of controls is generally approy, te auditor, Audit samplingfor tests
pna e when applicat' f
Ieaves audIt evidence of cerro Ion a the control
credit manaqer on a sales i::~C:cein(f?r ~xample" initials of the
evidence of authorization of data input tod~cat~ngcredit approval, or
processing system. ' microcomputerbaseddata

Substantive Procedures
Substantive procedures are concernedwith amounts and are of
two types: tests of details of classesof transactions,accountbalances,
and disclosures and substantive analytical procedures.The purposeof
substantive procedur-es is to obtain audit evidenceto detect material
,'misstatements at the assertion level. In the context of substantive
procedures, audit sampling and other means of selecting items for
testing, relate only to tests of details. When perforrnlnq tests of
details, audit sampling and other means of selecting.itemsfor testing
and 'gathering audit evidence may be used to venfy one or more
assertions about a financial statement amoun~ (for example! the
existence of accounts receivable), or to make an Ind~penden~ estimate
of some amount (for example, the value of obsoleteinventories).

Audit Sampling' and Audit Risk

, .' t an auditor may unknowinglyfail to
. Audit risk as the likelihood tha, II misstated financfalstatements;
'mo~ify. hiS. or
her o~ini~n onf~;~e~:m~onents: '
Audit risk 1$ a combination 0 . I occur in the process !?y whi~h
i. The risk that material errors W~eveloped (risk of material
financial statement~ are
misstatement); and

387
 , ling tonceplS
Chapter Eleven - Basic Alldit Samp
that occurwill not be detectedby
terial errors
2. Therisk that any ~anrisk). .
the auditor(detectlo .
. t ternent
Risk of Material MISS a t can be illustratively shown as
'sstatemen
The risk of material rru
foilows:
Exhibit II I -------,-
Rjs k of M~terial MiSstatement I
1 Risk of material misstatement
-r
I
I

,
,
I
- -l
.
- -_ I-

, ::::::=-:::::;
f-
r
I_J ___
I
Inherent Risk
-- ,
J
I _- Control Risk

ents the susceptibility of an account balanceto

- _ ..
____'__

Jnherent risk represb.ed with errors In 'other accounts, could be

errors.tlhat'dwthhent caOrem
nlontmonitored by related control procedures.
materia an h a ent risk is higher for llquld asset s, sueh as cash
For exampe, I In "d er assets such as property, plant, and equipment
. '
t han for non-IIqUI . , . .
Becauseneither control risk nor Inherent ~sk IS directly ,controllable by
an auditor, the risk that material errors will occur - ~hefirst component
of audit risk _ is not directly controllable by the auditor.
Control risk representsthe likelihood that errors could occur, and
could be material when combined with errors in other accounts, but
will not be prevented or detected by the entity's internal control
structure. For example,control risk would be increased if an entity did
not maintain effective physicalcontrols over blank checks_.

Detection Risk
Detection ris_k is the likelihood that errors could occur and could be
material when combined with errors in other accounts, but will not be
detected by the auditor's procedures. The risk that material errors will
not be detected is directly controllable' by the auditor through
substantive tests of details and other substantive audit procedures.
Detection risk may be further subdivided into: sampling risk and non-
sampling risk. Detection risk. and its sub-components, can be
illustratively shown as follows: .
Exhibit 11-2
Detection Risk
'I
t Detection risk
c-L ~

~t .- ~.-.-- .-- I--

L
11___ Sampling Risk' Non-samplinq risk
jj

88
 AUditing and
Assuran
The risk that material ce Pn,IClp1e.s
'
influenced by two categOrieerrors may occ
, ,s Of unc ,Ur and r '
1. Sampling risk - uncert ' ertalnties: ernaln undetect '
. f th alnties eo IS
arises rom e possibTt related t
sample may be differ~~ y that the aUdi~o~arnpling. Sarn '
population were Subject t ;rom the concl r ~ Conclusionb~hng risk
e to the same USI?nreached'if sed on a
Sampling risk result audit prOced 4 the entire
I s from th Ure
samp e may not be repres ' ' e fact, tha .
is, the sample may c e~~atlve of the pta .Particular aUd't
control d~viations Or m~~~aln disprOportion~~~iatlontested, Th~t
of tr.ansactions or aCCOunt~ary differences tha/ ,:,or~ Or fewer
auditor's conclusions ma ala,nceas a whole sueXlst~nthe class
tested. Since Sampling ~i~~ different if the e~tir:~~stlng ,that the
sample size, sampling risk v c~n b~ reduced simply ~UI~tlonW~re
greater the sample' anes InVersely with y tn~reaslng
,' " SIze, the srn 1/ ,sample SIZe' th
relationship IS quite logical b a, er the Sampling risk ''Th,e
, I d II ' ecause If sam I ' 'IS
to inc u e a the items in a 0 ' , p e Sizewere increased
sampling and therefore no sam I' P p~latlon, there would be n
Ping risk. 0
2. 'Non-sampling risk - uncertainties "
sampling, Non-sampling risk inclu~~~n~tom factors unrelated to
due to sampling, a aspects of audit risk not

- , Two aspects of sampling risk

Sampling ~isk in Tests of C~ntrol~

are critical in test of controls:

1. RiS~' of asse~si~g contr:ol risk too high (or the ~iSk of under
renence). This IS the risk that a sample deviation rate supports
assessing -control risk at the maximum when, unknown to the
Ii I
auditor, the true deviation rate in the population supports
assessing control risk below the maximum. '
2. Risk of assessing control risk too low (or the 'risk of over reliance),
This is the risk that a sample does support assessing control risk
below the maximum when, unknown to the auditor, the true
deviation rate in the population supports assessing control risk at
the maximum.
See exarnptes of both types of sampli'ng risk's below:
Example':'" Risk-of Assessing Control Risk Too High
If based on an unreprc3cnlative sample, an auditor estimated a 5
, ", b It was willing to tolerate only 3 percent,
percent rate 01 devlutlon l I tion rate of deviation was really
and the true, but ,lIllknown"
2 percent. 1n this example.,
P~;~I
:u~itor' would probably conclude
h r. he would assess a
I ' .I etfective: t crerore, "d
that the centro IS no .: k i detcnllllllng .' the nalure, ummg,, an
hig her level of conlrol ns III 1 S0l111,I6 indicaled a higher
, , I 'IS because ule
extent or substantlvc cs

----------'.------ , 1 100% of the population,

4 Sampling risk may be eliminatcd by testing
'389
 , . Sam ling Concepts
Chapter Eleven - Basic Audit rp
) than tile auditor was willing to
deviation rate (i.e., 5 perceknwn nt to the auditor, he or she would
. nt) Un 0.. tl
tolerate(i.c., 3 perc~ . ntrol risk too 11Ighbecause re true
actually be assess 109 co. 2 percent) is less than the tolerable
. devia. rion rate(I.e.,
populatIOn
ratew ICh IS
hi i 3 percent. . t I risk too high results .
h t assessing con ro In
It can be concluded tab tantive tests than necessary),
over-auditing. (do~ng . more SU s
i h affects the efficiency (tl ff
rrne, e ort, and
Assessing control nsk too h g
cost) of the audit. -., .
. 0 hi h results in mefficlency: when an
.Assessing co~trol nsk :ntro~ is ineffective and therefore that
auditor ~on~lu~es that ~. aril sets a lower acceptable detection risk
control risk IS high, he or I; su~stantive tests to compensate for the
and ~xpands the scop-e 0 If the expanded scope of substantive
percel~ed c~ntr~1 deficlen~'udit will be less efficient since more
tests IS unjustified. the rfo d than necessary,
substantive tests Will be pe rrne
Example _ Risk of Assessing Control Risk Too Low
ntative sample an auditor estimated a 5
If based on an unreprese '
, f deviation but was willing to tolerate 7 percent, and
percentrate 0 8 I'
' b t unknown population rate was really percent. n this
tbe true, u WINI , I' ff .
example,the auditor would conclude that the COl ntrf0 IS eI e~tklv~;
therefore, be or she would assessa lower leve f s contr~ ns In
determining the nature, timing, and ext~n? to ~ substantive tests.
becausethe sampleindicated fewer deviations (i.e., 5 percent) than
tbe auditor was willing to tolerate (7 percent). However, unknown
to the auditor, he would actually be assessingcontrol risk too low
since the true popuLationrate (i.e., 8 percent) exceeds the tolerable
rate (7 percent). .
It can be concluded that assesslnq control risk too low results in
under-auditing (doing less substantive tests than necessary).'
Assessing control risk too low affects the effectiveness of the audit
(i.e., errors in the financial. statements_ may remain undetected)
because the scope of substantive tests will be restricted' under the
erroneous assumption that the control is effective and control risk in
low, Thus, the substantive tests may be ineffective in detecting
material misstatements.

Sampling Risk in Substantive Tests

Two aspects ofsarnpllnq risk are critical in substantive tests:

1. Risk Of. incorrect rejection is the risk that a sample supports the
conclusion that a recorded account balance is materially misstated
w~en, unkno~n to, th~ auditor, the account is not materially
mls~tated. Llk.e the risk of assessing control risk too high in
attn?ute sampling, ~he risk of incorrect rejection relates to the
etticiencv 'of an audit, because an initially erroneous conclusion
that an account balance is misstated would ordinarily be revised _

390
 AUdit; ".
. ~~dA
when the auditor C . SSI.It"ance p .
audit procedures. ~nslders othe ' t"1I1ciples
an initial conclusio Or example r eVidenceOr
physical inventory o~ that Cost ~~ aUditorwo~t1'orms addit'
. that Inventory was n~erva~ionand'i Goods Sold~ ord~nari\yr~~7:'
that Accounts Receiv btlmisstated nventory priceStml~stated if e
a e and S ' and oth estlng a
2. Risk of incorrect aCCept ales were no~r~rocedures~evealed
suppo~ the concIUSlo~nce, in Contrast. misstated. evealed
ma~er~ally misstated wh that a record~dlsthe risk that
materially misstated. L,~n, unknown to th aCCOunt bala a S?tnple
in attribute samplin I e the risk of as e ~Uditor,the~e IS not
audit' effectiveness g~ntdhe ,risk of incor~eectsstngControlris~c~unlt is
' IS P rtl accept 0 ow
b ecause mcorrecnv ace t' a Icularly c 't' ance relatest
resu It 'In financl
inanclal stateep 109 a' misstated na Ical to an auditor a
therefore misleading. ments that are mat~~~~Intb~Iancecould
y misstatedand

~ ---,~::::::::.~::,=-,~~----------~N~o~n~-~s~a~m~p~'~in~g~R~is~k~
. Non-sampltng risk mcludes II '
sampling. It includes
' the POSSibi~I't
. y asfPects~f
0 selecting
audit
d' risk not due to
are no t appropnate to achieve the ,au It proceduresthat
, ' k specific object'
non-samp I109 ns could result from h rve, For example
detect errors contained within samUp~a\errors, such as failing t~
misinterpreting errors that are detected e SI ems or overlookmq,or
reduce non-s~mpling risk, including pr~pe;v~ral !actors can se~e,to
and encouragmg effective firm-wide quality c~n~~o~~ng and supervision

Risk Considerations in Obtaining Audit Evidence

- ~ampling riS~ and. non-sampling risk can affect the co~ponel)tsof
the nsk of matenal mtsstaternent. For example, when performingtests
of 'controls, .the auditor may find no errors in a sample and conclude
that controls are operating effectively; when the rate of error in the
population'i!?, in fact, unacceptably high (sampling risk). Or there may
be errors in the 'samole which the auditor fails to recognize(non-
sampling risk). With respect to substantive procedures, the auditor
may use a variety of method~ to reduce detection risk to an acceptable

level. ,
Dep~nding on their nature, these m'ethods will be sU,bjectto ~I
ling risks For example, the auditor may
sampling and/or non-~a~p sUbstantive analytical procedure (non-
choose an inappropna ~ I minor misstatements in a test of
I'
sampling risk) .. or may find on ~on misstatement is reater than the
details when, 10 fact, the popu'~ For both tests of controls ~nd
tolerable amount (sampling nsk). lsk an be reducedby increaSing
. substantive tests of details, sampling ~Isk~an be reduced by proper
on sal1lpllng rts '
sample size, h WI:
OI
n - ision and review.
engagement plannlOg superv

39/'
 Concepts
dit Samp I IlIg
Chapter Eleve_n- Basic A U I .

proaches to Audit Samplins_

GeneraI AP ,

Statistical Sampling _. I the laws of probability to aid an

S tatistical sampling plans app Yple in measuring the sufficiency of
cient sam, . It .
auditor in designing an effi. I tlng the sample resu s. It IS a
evidence obtained, and I.n ev~ uaoVides the auditor with an objective
mathematically derived tool th~ pr about a population characteristic
basis for expressing c~nclu~I~;:m the population. 'rable' 11-2 shows
based upon a sample of Itemt es of statistical sampling:
the advantqges and disadvan ag .'

Table 11-2. fSt'atistical S:Jmpling

Advantages and DISadvantages 0 .

f Statistical Sampling . . .
A dvan tages 0 . . d . . 19 the sample size required to meet given
I. It aids an auditor III etemllOl1 .
objectives. . .
2: It rovides more objective audit evidence. . ., .
3. It ~lIows an auditor io measure ~recision, reliability, and sampling error,
Disadvant~ges of Statistical SamphlJ~. . .
. d faccepting sratisncat eVidence at face value, without
I. Th ere IS a anger 0
sufficient skepticism.
2. The cost of statistical sampling could exceed the benefits.
3. Statistical sampling may be less IIPpropriate. in~Sth0~~ .:ase~dthan .0011-
statistical sampling or other audit procedures tor ga enna eVI ence.

Non-Statistical Sampli.ng
Non-statistical sampling plans rely exclusively' on subjective
judgment to determinesample size and eval~ate sampl~ results. It is
an auditor-derived tool for examining' a sample of Items from a'
population. The auditor usesjudgment in deciding which Items.should .
.be included in the sample. It is not appropriate to use judgment in
selectinq items for a sample and' then use statistical sampling.
techniques to express ~ conclusion about the population. Judgment
sampling is preferable to statistical sampling when the auditor desires
to perform some operation on the sample items only (for example, find
and correct errors).
, \

A properly d.esigned.non-statistical sampling application can

provide results as effective as those from' a' properly designed
statistical sampling appllcation, There is, however, one critical
diffe.ren~e b~twee~} statistlcal . and a non-statistical sampling
application: .statistical sarnplinq allows an auditor to measure
sampling risk. Statistical sampling plans measure the risk that a
sample - j~ not: representatIVe of a population; it provides a
mat.he.~atlc~1 ~easurement of the degree of uncertainty non-
statlsticel sampling plans do not, ' .

392
 AUditing and A
SSlIrance p -
nncipies
statistical
. or
_ non-stahstiCal")-
.
. Th~ ch~lce between 0 _ . - -
_is based pnmarily on th e aUd-
statistical and a
bene fiItS. For example Itor's a non-star
the.cost of selecting a 's~n _a~ditor ~~~sment of t~~i~al s~mp1ingplan
However, an aUditor rniothlstlcal randgot Usenon-stat'_el~tlvecostsand
. - Ig t c - rn sam I ISticals -
contro Is were criticat a d onslder th . p e Wasd amphngIf
deemed essential. ' n a measure ~f cost justifiab~:~ed too high_
sampling ri the related
N~te that the choice sk Was therefore
sampling plan is made ?etween a sta - -
procedures. Audit samplin Independent o~Istical and non-statl -
merely a means for accom~is~~ether_ statlsti~~~ o~election of ~~~~~
~ audit procedures. non-statistical, is

~ ...
...-...-
__~~~.::~_~~~::~~~~s~a~m~ep~'e~-~s~e~'e~c~t~io~n~M~e~thh2od~s~
The objective of audit sam llno t .
or more population charac~l~g. IS to draw conclusions
population: Even with the most nst~cs wIthout testing t~bout one
I I
is still a degree of uncertalntcyarebUllY-designedsampling pI~n etnhtlre
ti f h a out 'wheth ' ere
. represen t a Ive 0 t e population A er sample results
of probability only if the sampl~ is~am~le can be evaluated' in te:~~
from sampling bias. If each Item in ~an omly. se~ectedand thus free
chance of- selection, the sample would ~~p~'atlon ISnot given an equal
items with the greater chance-of selection ~ed toward the population
sample selection are presented below": . 0r:ne common methods of

Random-Number Sampling I
\\I
This method utilizes '-
r.andom-number tables- 0 r computer-
generate d ran d om numbers to s.elect sampling units from a population.
Ran~om-nun:'b.er tables c?ntam ~olumns and rows of randomly
generated digits, An auditor beqins at any digit in the table - a
random start - and proceeds alonqa column or row or diagonally,
selecting digits corresponding to identification numbers on' the
sampling units (e.q. invoice numbers or check numbers), If the I '
sampling units do not have identifying numbers, the audit assigns
numbers to eacn population Item.
To minimize potential bias, in ~tarting-point selec~ion, an .auditor
could periodically proceed to anew starting pO.intwhile s~lecttn~ ~he
.I Random-number sampling is approp(late both for statistical
sarnp e, -'
and non-statistical sampling plans,

systematic-sampling
'. item from a population
th . -of
This involves selecting e~ery nf amplin9 eliminates the need
sequentially ordered itemS, systema IC s lation items and random .
to. establish corresponden.ce betwee~ ~f~~on items lack identific~tion
digits 'and therefore is useful whent,P1 PI'tems tc skip when selecting a
, b- f sequen la "
numbers. The num er 0
j
\

s S~ethe Appendices to PSA 5-30.- 393

 , I' Concepts
, A idit Samp /IIg
Chapler Eleven - BaSIC I

, d b dividing population Size by

. ically is determl~e f~' for non-statistical sampling,
sample~ystema~ematic selectionISus~ random, it can be useful for _
sampleSize.Sys , t is selected a
and if the starting pOIn . ,
statisticalsampling,
, )6
t r sampling
Block selection (ciuS e 'a group of items arranged
This method inve_> Ives selecting 'F
u ing of sampling Units, or exampe,I
t' ouslywithin a larger gro Pf II invoices processed during the
conIgu d nsist 0 a 'ft' Its '
a block sample coul co h Block sampling 0 en resu In
months of January t~ M~~,' Although a bl~ck ~ample ~ould be
'excessivelyhigh sa_mphng ks to minimize sampling risk, testrng large
designedwith enough,bloc b 'nefficient, Thus, an auditor should
numbersof blocks is likely ,to, e tl tistlcal or non-statistical sampling,
not use blocksame In,g for either sa
considerable care in controIii ng sampI'109
"
unlesshe or she exercises
risk,

Haphazard sampling ,
, ts of sampling units selected without
Haphazardsampling con~l~out conscious bias, For exarnpla, a
't
special reasons, but also WI, of 90 items selected simply by pulling
haphazardsample could ~O~~I~rawer Like block sampling, haphazard
,Invoic~sfrom a fi_leofsc:,~~ samples that are wholly representative of
samplrngm~y fall t~ Although it may be useful for non-statistical
the p~pulatlonhtestrd' sampling is not appropriate for statistical
sampling, hap aza
sampling.

Audit Sampling Considerations

Characteristics of Interest
When designing an audit sample, the au~tor should consider ~he _
objectives of the audit procedure and the attributes of, t~e po~ulatlon
from which the sample will be drawn. The characteristic of Interest
depends on the type of test that will be performed on the sample
selected.

Appropriateness and Completeness of the Population

It is important for the auditor to ensure that the population is
appropriate to the objective of the audit procedure, and complete. '
Appropriateness involves the consideration of the direction of
testing. For example, if the auditor's objective is to test for
overstatement of accounts payable, the population could be defined as
the accounts payable listing, On the other 'hand, when testing for
understatement of accounts payable, the, population is not the
accounts payable listing but rather subsequent disbursements, unpaid

6 This is the least desirable sample selection"method,

394
 Table 11-3
..;;C~h_a_ra_c_te_r...;;is;.;t.::.::ic:::.s~o:!.r.!_ll
r: n tcrest
Procedure

Tests of controls

Substantive tests

Stratification

Audit. efficiencY rnav be improved if the auditor stratifies' a

population by dividing it into discrete sub-populationswhich have an
identifying characteristic. The objective of stratificationIs to reduce the
variability of Items within each stratum and therefore allow sample
size to be reduced without it proportional increasein samplingrisk.
Sub-populations need to be carefully defined such that any sampling
unit can. only belong to one stratum.
When performing tests of details, a classof trans~ctionor account
balance or. is often stratified by monetary value. This allows greatt~r
. I 'alue items which may con am
audit effort to be directed to the arger v. t s of overstatement.
th tl I netary error m errn
e greatest potern fa rno tif d according to a particular
Similarly, a population may be stra I re

395
 di S pIing ConceplS
Chapter Eleven - Basic All II am

hl her risk of error, for example, when

cha'racteristicthat indicates a 19 ce'lvable balances may be stratified
. f counts re '
testing the valuation 0 ac
by age, - applied to a sample of items within
The results of audit proce,du;e~to the neme that make up that
a stratum can only be p~o)ec e the entire population, the auditor will
stratum, To draw a conclUSion fO~aterial misstatement in relation to
need to consider the risk 0 the entire population, _
whateverother strata make up ~. ,
_ , . ulation may make up 90% of the
.Example' 20% of theItems
b I III a pop
The auditor may deCI ide t0 examine ' a
value of an account. a ance. I
The auditorevaluatesthe resu ts 0 f thiISsampe I
samp le of theseItems.' C n the 90% of value separate Iy fTom th.e
and reachesa coneIusion 0 f '
. " 100/' (on which a furthersampleor other means0 gathering
remaining ~o , d' '
- di id '11b used or which may be consldcre immaterial),
au It eVI enceWI C - C - -

Value-Weighted Selection

It will otten be efficient in performing tests of details, particularly

when testing for overstatements, to Identify the sarnpllnq unit as the
individual monetary units (for example, pesos) that make up a class of
tr:ansactions or account balance, Having selected specific monetary
units from within the population, for example, the accounts receivable
balance, the auditor then examines the particular items, for- example,
individual balances, that contain those monetary units. This approach
to defining the sampling unit ensures 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 is ordinarily used
in conjunction with the systematic method of sample selection and is
most efficient when selecting items using CAATs.

Attributes Sampiing
The procedures for attributes sampling are presented below:
1. Determine the objective(s) of the test.
2. Define the attribute (characteristiC of a con t ro I) and deviatlon _
( absence of an attribute) conditions. -
3. Define the population,
4. Choose an audit sarnplinq approach / technique.
5. Determine the sample size and the sampls selectlon method.
6. Perform.the sampling plan.
7. Evaluate sample results.

8.. Comply with documentation req~irements.

396
 Audi/in
galld;f
SSlirance p ,
rl/1cip1es

Increase

III e number of samplingunits in the

ulation. Negligible
. Effect
1. The extent 'to which the risk of materi .
reduced by the operating effectivenes fal misstatementis
_ h" - s 0 controls.Themo
assurance t e auditor Intends to- obtain f th .re
n cti f rom e operating
~ ~ ~ve~eis?, co~trols, the lower the auditor'sassessment of the
r~s 0 ."ma edrlatmblsstathement.
will be, and the iargerthe sample
size ~I nee. 0 e. W en the auditor'sassessment of the riskof
material misstatement at the. assertion I,evel includes an
expectation of the operating effectivenessof controls,the auditor
is required to perform tests of controls-.Otherthingsbeingequal,
the more the auditor relies' on the operatingeffectivenessof
controls in the risk assessment, the greateris the extentof the
. auditor.'s tests' of controls (and therefore, the samplesize is
Increased).
2. The rate ~of deviation from the prescribed control ha~ivity
the auditor is willing to accept (tolerable error). T e ower
the rate of deviation that the auditor is willi,ngto accept,the larger
the sample size needs to be. . .'
. ' . th prescribed control activity
3. Th~ rate of deviation 'ro~ .e the opulation (expected
the auditor expects to 'tnd I~ t' n t~at the auditorexpects,
error). The higher the rate of devre 10 s to be in a'positionto
.
,,

the larger the sample size needs to ~: s~r:te of deviation.Factors

make a reasonable ~stimate o~the ~i~~aofthe expect~derro.rrate
relevant to the auditorS consld~ra of -thebusinesS(In particular,
include' the 'auditor's understandtng

397
 . . di S 'nlillg ConceplS
Chapter Eleven - Basic All II 01l1/,

dures undertaken to obtain an

risk assessment. procf control) changes in personnel or in
understandingof mternaIts of audit pr:oceduresapplied in prior
internal control, the resuf other audit procedures. High expected
p,eriod~and the res~lts ~arrant little, if any, reduction of the
error rate~ ordmanly . I misstatement, and therefore in such
assessednsk of matenat I would ordinarily be omitted.
circumstancestests of con ro s
. , re uired confidence level. The greater the
4. The audl.tor ~d q that the auditor requires that the results of
degreeof con I .enf~~ indicative of the actual incidence of error in
the sampleare rn . ds to be
the population,the larger the sampleSizene~ .
5. The number of sampling units in the populatio~. Fo~ large
ti the actual size of the population has little, If any
- effect
popua I onIons,
sample size. For smaII popuIatiIons however, audit'
samplingis often not as efficient as altern~tive means of obtaining
sufficient appropriateaudit evidence.

Other Sampling Applications for Tests of controls

Sequential sampling is used when the auditor ex~ects very few
deviationswithin the population being tested. Under this method, the
auditor has no fixed sample size. After testing a sample, the auditor
.makes a decision whether to stop testing or to continue with the
samplingplan (hencethe name stop-or-go sampling).
Discovery sampling is most appropriate when no deviations are
expected within the population (thus, even a single deviation is a
causefor concem). This is normally used when the auditor suspects
fraud. Discoverysampling involves the determlnation of a sample size
.whichis sufficient to discover at least one deviation to confirm whether
fraud has occurred.

Variables Sampling
The procedures for variables sampling are presented below:
1. Determine the objective(s} ofthe test. . I

2. Define "fair presentation" and "materia! misstatement".

3. Define the population. "

4. Choose an audit sampling approach I technique.

5. Determine the sample size and the sample selection method.
6. Perform the sampling plan.
7. Evaluate sample results.
8. Comply with documentation requirements.

398
,"

Increase

lncrease
Decrease
The numberof sampling units in thepopulation Negligible
Effect

1. The auditor's assessmentof th . k . .

. st t t Th' e rrs of material
mls ~ e~en. e higher the auditor's assessmentof the risk of \\
mat,enal misstatement, the larger the samplesizeneedst& be.The
auditor's assessment
' h ' of the risk of materIal misstatement IS
aff ecte d by In erent risk and control risk. '

For example, if the auditor does not perform tests of controls,the

auditor's risk assessment cannot be reduced for the effective
operation of internal controls with respect to the particular
assertion. Therefore, in order to reduceaudit r-iskto an acceptably
low level, the auditor needs a low detection risk and will rely more
on substantive procedures. The more audit evidence =.
obtained from tests of details (that is, the lower the detection
is

risk), the Iarqer the sample size will needto be.

2 The use of other substantive proceduresdir~ctedat the
. e the auditor is relYing on other
same assertion. The mar tails or substantiveanalytical
substantive procedures (tests of d\ ble level the detection risk
procedures) to reduce to an acc~p~ions or accountbalance,the
regarding a particular clas~ of t~i~sa~qUire from sampling and,
less assurance the auditor size can be.
. therefore, the smaller the sample

I
 / . g Concepts
Chapter Eleven - Basic. A UditSamp In
, fidence level. The greater the
d'tor's required con 'd'tor requires that the resultsof
3, Td he auo,'confidencethat the,au ~f the actual amount of error in
egree f ct indicative ds to be
the sampleare in a the samplesize nee '
the popuaI t Ion, ~e~~~ (
I willing to accept tolerable
.
The total error t h e auditor ror s that the audlt I or 'IS WI 'II'109 to
4, the total er b
error). The lower.: Ie-sizeneedsto c,
accept,the larger the ~am;h~_auditor expects to find in the
5, The amount of error ) The greater the amount of errOr
population (expected e~~h~ population, the larqer the sample
the auditor expectsto find
size needs to be in ord~r. z: ake a reasonable estimate of the
mopulation, Factors relevant to the

auditor's consider~tlonof I :s
actual amount of e~r In th P pected error amount include the
e:re determined subjectively, the
extent to ~hich Item v~~ rocedures, the results ?f tests of
results of risk assessmedit Procedures applied In prior periods,
control, the results of aub t:ntive procedures,
and the results of other su s ,,
h Is a wide range (vartabtllty) In the
6, Stratifica~on. ~hen ~ ~~e ~oPulation.It may be useful to group
monetarysize of Ite~s m parate sub-populations or strata, This is
items of similar SizeJnt~se i When a population can be
f d to as stratlficat on,
re erre the a gregate of the sample sizes from the
appropnatelystra~,~~~less t~an the sample size that would have
strata gen~redallYt Wlattalna given level of sampling risk, had one
been requir 0 I '
sample been drawn from the whole popu anon. I

.._ f sam'piing units in the population. For large

7. The numuoo;r0 .. ' h littl lf
populations. the actual size of the pOPulat,I~~ as Id'te, I al~YI
effect on sample size. ThUS,for small popu a Ions, ~u, I samp.mg
, ft not as efficient as alternative means of obtaining suffiCient
IS 0 en 'h' t '
appropriate audit evidence. (However, w en usmq mane ary u,nlt
sampitng, an increase in the mo~et~ry value of the Popul~t1on
increases sample size, unless this IS offset by. a proportlonat
increase in materiality.)

Nature andcause of Errors

The auditor should consider the sample results, the, nature and
cause of any errors identified, and their possible effect on the
particular audit objective and 'on ,other areas o,f the audit.
When performing tests 'of controls, the auditor is primarily
concerned with obtaininq audit evidence that controls operated
effectively throughout the period of reliance. This' includes obtaining
audit evidence about how controls were applied at relevant times
during the period under audit, the conststencv with which they were
applied, and by whom or by what means they were applied. The
concept of effectiveness of the, operation of controls 'recognizes that,
some errors in the way controls are applied by the entity may occur.
However, when such errors' are identified, the auditor makes specific

400
 Aud" .
/(Ing and '
, Assura
inquiries to understand nce Princ'ipIes
matters such as7: . these
matters and
a, Tthet. direct effect also needs to
s a ements; and of identified Consider
' errors
b. Th e effectivene on . the fi
audit approach ss hOfinternal Co t Inancial'
rn w en f . n rot and
anagement override 'Of~rc eXample, the their effect On the
In these cases th ontrol. errOrs result f
,. e aUdit rom
controls performed prov'd Or determ'
id h hie an mes wh th
eVI ence, yv et er addition I appropriate b . e er the tests
w~ether the ~otential risks aOfte~ts of contro~:ISfor Use as au~~
USing substantive procedur misstatement are necessary
es, need to b ' or
" In analyzing the errors d' e- addressed
ha ' Iscovered
many ve a common featu ' the auditor
location, product line or pe . rde, for example tv may Observethat
di d '
au itor may ecide to identif
no of ti
I'
'
me, In Such cir
pe of tra .
nsactlon,
the common feature, and ex~ea~ Iten:'s in the pOPulat~~m~~ances, the
addition, such errors may bn .~Udlt _proceduresin th~t ~t possess
P ossibility of fraud .' e ntentlOnal and
'
s :atum. In
may Indicate,the
Sometimes, the auditor may b
.arises from an isolated event that ehabl~ to establish that an erro '
specifically identifiable occasions and ' a~hnot recurred other than o~
similar errors in the population (an anls ~refore not representativeof
.an anomalous error, the auditor has t~~a ous e~ror).To,be considered
that such error is -not' representative o:~~ a high de~reeof certainty
obtains-this certafnty by performing addit' e jOPul~tlon. The auditor
additional audit procedures depend on thel~~auat~UdltbProcedures. The
. . id th dtt ' Ion, ut are adequate
to provt ed e au I or With suffiCient appropriate audit evidencethat
the error, oes not affect the remaining part of the population, One
example IS an error caused by a computer breakdown that is known to
have occurred on only one day during the period.
In 'that' case, the auditor' assesses the' effect of the breakdown for
example by examining specific transactions processed'on that day,'and
considers the effect of the cause of the breakdown on audit procedures
and conclusions. Another example is an error that 'is found to be
'Caused by use of an Incorrect formula in calculating all inventory
values at one particular branch. To establish that this is an anomalous
error, the auditor needs to ensure t~e' correct formula has been used
at' other branches.

'Jib'Id" par.48
 . Concepts'
. A idit Samplmg
Chapter Eleven - Basic I.

. f Controls
Projecting Errors

.
-
Pro'ections for Tests 0 .' o'ection of errors IS necessary
J f controls, no expllclthPrpJ rojected rate of error for the
For tests 0 te Is also t e
since the sample error ra '.
populationas a whole.
b t ntive Tests
Projections for SU sa. hould project monetary errors
. For tests of details, the a~~~~~~n~and shOul? c~nsider the E:ffeCt:
found in the sample to the poparticular audit objective and on other
of the projected e~ror on the ~tor projects the total error for the
s of the audit. The aud. f the scale of errors, and to
area . broad view 0 '1 t I bl
population to obtain a . For tests of detai s, 0 era e error
comparethis to the tolerable err~r. '11be an amount less than or equal'
is the tolerablemissta~e~ent,ea;fo~~he individual class of transactions
to the auditor's materiality us. d
or accountbalancesbeing audite .
Anomalous Errors '.'
t blished as an anomalous error, It may
Whenan error has ~ee~es a mple errors to the population. The
be excluded when proJe.~m;c:r~ected,still needs to be constoereo in
effect of any such.errct~r,IOfUthenon-anomalous errors.
addition to the proJe Ion. ._
, .
Stratification
. of transactlons
If a class I. or account balance has beenI divided into
P . ct
strata the error .IS proiected
J h y. rojeb' ed
for each stratum .separate
errors' plus
, anomaIous errors for each stratum are t en , com
I I med
when conslidenn. 9 the possible effect of errors on the tota
. c ass of
transactions or account.balance'.

Commonlv Used Projection Techniques

Commonly used projection techniques are. difference estimation,
ratio estimation, and mean-per-unit estimation.
Difference estimation is used to measure the estimated total
misstatement amount in a population when there is both a recorded
value and an audited value for each item in the sample .. This method
frequently results-In smaller sample sizes than any other method, and
it is' relatively easy to use. The use of difference .estimation is
appropriate when the misstatement in an account is not affected by
the book value of the item being exarruned..

Ratio estimation is slrnilar to difference estimation except that the

point estimate of the population misstatement is determined. by.
multiplying the portion of sample amount misstated times the total
recorded population book value. The ratio estimates results in even,
smaller sample sizes than difference estimation if the size of the
misstatements in the population is proportionate to the recorded value
of the POPul~tion items. The use of ratio estimation is appropriate
when the misstatement in an account is directly Proportional to its
book value.

/
402
 Auditing and A
ssurance p ,
, rlllcipics
Under, mean-per-unl't
' ' t'
estlm
audited value rather than th a ron, the audit '
the s(!mple, Except for the defin:i:statement ~r IS concernedWithth
rne~hod is calculat~d in exa~llnltlon of Whati~~~~t of eachitem i~
estimate. The pomt estim t y the same man ng measured,this
audited value of items in tha e of the audited nerlas.the difference
. . e sample t' va ue IS th
comput ed preciston interval is irnes the oo ,e average
value of the sample items rath computed on the bp~latlonsize, The
rnean-per-unit estimation is aer tha~ the 'misstate~~n~fthe audited
do not have recorded vaiues ppropnate when indlvidusi The us~of
. a populations
Comprehensive
'- example on pro]ection of errors
An external auditor sent out ',
.'
customers- Ponulati
opulation size is 4800 pOSItive
a confinn at'Ion requests to 2000
, ccounts with t I '
P380,000. Presented below are the su ' a ota recorded value of
confinnation replies received from custon~~I~~ryresults of the examination of
Book value of samples selected
PIS9,960
Audited value of samples selected
IS 1,360
Difference P 8600

Average/mean book value (p I59,,960-i- 2,000) I_l_.8Q (rounded)

Average/mean audited value (p151 ,360 ., 2,000) m(rounded)

-Ratio estimation _
I. Compute for the ratio of sample audited value to sample book value
Sample Audited Value (SAV) _. P151,360
Sample Book Value (SBy) 159,960

Answer: 94.62% or 95% (rounded)

Compute for the Estimated Audited Value (EAV) or estimated population

2.
audited value (EPA V) .' '
= ratio x population Book Value (PBY)
.= 0.9462 x P380,OOO'
Answer: f359.55..6 .

3. Compute for the sample misstatement

=SAV'-SBV
;::::
P151;360 - PI,59,96~ 1,1 I

Answer: .8. 600 oye[state~

Compute for the projected misstatement
4.
= EPAV -PBV'
;::::P359,556 - P380,OOO
'Aoswer:m~
 , , ' Concepts
, (1:1 Samplmg
Chapter Eleven - BaSIC Au I ,

Difference estiDlllf10 n d'tTerence between SA V and SBV '

1 Compute for the averag~ I 1 _ Average or mean book value
, dlted va ue
= Average or mean au
= P76-P80
Answer: N oyersta~.d
, , d misstatement , I' I'
2, Compute for proJecte I) x number of items ~nthe popu auon
= Average difference (nun~ber
= P4 x 4,800 accounts
Answer: r 19,209 overstated

3, Comp~te for the EPA,V t

= PBV + projected mlsstatemen
= P380,000 - P19,2oo overstatement
Answer: r360,SOO,

Mean-per-unit (MPU) esnma, tion

1 Compute for EPA V f' , I I ' .
.. = Average or mean. au dited
I
value x number 0Items III the popu anon
= P76 x 4,800 accounts .
Answer: P364 800

Note: Assume that there is an allowance for sampling risk amounting to

+P40,Ooo, then the EPAV would be in the range ofP324,800 and P404,800,

. probability-Proportional-to-Size (PPS) Sampling

Sample selection of iodividual peso amounts in' a population by the

use of random or systematic sample selection, PPS sampling is a
sampling technique that uses attribute a sampling theory (Q evaluate'
the results when a large number of transactions are captured within a
single account. In
PPS sampling, the 'auditor randomly selects
individual pesos from a population and then audits the balances,
transactions, or documents - called logical units - that include the
pesos selected. Each peso in the population has an 'equal chance of
being selected, but the likelihood of selectinq anyone logical unit for
testing is directly preportrcnal to its size. PPS 'sampling is most
appropriate when no errors' are expected (although it is also
appropriate when one, or few errors are ~xpected); and testing for
overstatement (normally forassets and income). '

404
 AUd'"
I lng and Assu
ranee Prin ' I
, c'P es
...--------~-_..!e~"aluatin th '
The audit?r should evaI e Safll Ie Resul
whether the assessment uate the sam I . ts
population is confirmed Or n of the reieVapte reSults to det ' ,
eeds to b n char enTllne
contro ls, ,an unexpectedly hi h e revlsedB, In acteristic of the
increase In the assessed risk gf sample error the caseof testsof
't'd b. 0 mate'
au d tt evu ence su stantiating th
rate rnaY Iead to an
' .nal misstatem
case of tests of details, an une e initial assessment ~nt, un~essfurther
may cause the auditor to bXj.ectedlyhigh error ISobtained.In the
account balance is materially e.leve that a classa~ount in a sample
evidence that no material mis~IStstatedlin the abse~ctr~nfsactlonsor"
a ement eXists e 0 urtheraudit
. If the total amount ,of projected '
than but close to that which .the aU~i~rorplus anomalouserror is I
con~iders the persuasiveness of the sa: Ideemstol,erable,the aUd~~~
audl.t pr?cedures, and may Considerit aP e res.UltsIn the light of other
audit evidence. The total of projected ppropnateto obtainadditional
auditor's best estimate of error in th error Plus,anomalous error is the
, . ' ff e population H
resul~ are a ected by sampling risk. Th . owever,sampling
, error is close to the tolerable error 'the au~l~hen the ,bestestimateof
: a different sample would result in' a diffe~en~rb~ecognl,zes the riskthat
exceed, the tolerable error. Considering the st elststlmate that caul?
'd h I th' resu of other audit
proce udr~fsdd~t~S I e ad~tdlt~rto assess this risk, while the risk is
reduce I a Ilona au I evidence is obtained,
If the evaluation o~s~mple results indicatesthat the assessmentof
the releva.nt characteristic of the population needsto be revised,the
'auditor may: 11
1. Request management to investigate identified errors and the \ I
potential for further- errors, and to make any necessary
adjustments; and/or
2. Modify the nature, timing and extent of further ahuditPd~ocedu~esht'
For example, in the <:aseof tests of controls, t e au itor mig,
extend the sample size, test' an alternetive control or modify
related substanttve procedures; an.d/or
3. Consider the effect on theaudlt report.,
"

" I

IpSA 230, par. 54

4Q5
 , . Concepts
, . Alida Sampltng
Chapter Eleven - BaSIC
of Learnln
Summar .
__ --------- ....
-:".__~ . (sampling) involves the
r g. Audit sampll~g(1 100% of items within a
Define audit sa,:"P::cedures to lesSt :e such that all samplinq
1. applicationof aud.lt~ or account balan
cla.ssof tr~n~~~; of selection.. tions in obtaining audit
units have '. nt risk consldera 100% of the. items in a
2. Explain the ~I:!~retestlng lesS.tthansamplingrisk. Even if the
evidence. dit is subject o. the auditor still has to
pop~lation,th~o~~/oof the p?pUlatl~~'a rule, sampll~g ri7k is.
auditor tes.ts on-sampling nsk.. while non-sampling nsk is
contend wlt.h ~eaSingthe samplesized supervision of the audit
reducedby me h proper planning an t sts of controls (risk of
reduced;h:p~?ng risk .may applly t~e)eand to substantive tests
work. a . k of underreIan tance)
overrelianceand n,s , and risk of incorrect accep ,
. n-ectrejection
(risk 0f rnco non-statistlca . I samp I' mg.
O'fferentiate statistical f~O~se of probabilitY theory allows
3. S:atistical sampling invoIVs~Sm~I~ng risk. Non-statistical s~,:,pling
for the measurementof t to determine sample size and
relies on subjective Judgmen. .'
mple results. . ~
evaluatesa 'd other means of testing.
'I'ng approaches an . " I 0h
4. OiscuSSsamp I be' statistical or' non-statlst~ca . t ,er
SamplingapPrc:>~ch~s mda~100% examination, selecting specific
mean:; of testJng In~Iu '.
items or audit sampling.. .
, . for tests of controls. Sampling for te:;ts of
s. Illustrate samp!lng I the use of an attribute sampling plan.
controls usually mvo yes rf . ed:
Underthis plan, ~hefoHowingprocedures are pe arm .
a. Detenninethe objective(s) of the test.
efine the attribute and deviation conditions.
b. D
c. Definethe population. '
d. Choosean audit sampling approach / technique ..
e. ~etenn'ine-the sample size and sample selection method.
. .
f. Perform the sampling plan.
g. Evaluatesample results.
h. Comply with documentation requirements.
6. Illustrate sampling for substantive tests. Sampling for
substantive tests usuallv involves .the use of a variable sampling
plan. Under this plan, the following procedures are performed:
. .
a, Determine the objective(s) of the test.
b. Define "fair presentatlon" and "material misstatement"

c. Define the population.

d. Choose an audit sarnplinq approach / technique.

e. Determine t~e sample size and sample selection method.

406
 AUditing QI d
I ASsurance P .
nnc/ples
f. Perform the sampling plan.
g. Evaluate sample reSults.
h. Comply With documentar
. Ian requirements
. 7. Discuss the common proj'ect' .
b t t' t t IOn techni
su 5 an lYe es s, The comm . .ques for samplin' ,
sa~plin.g in subs.tan.tive tests ar~~ ~~~~~ctlontechniques use~ f~~
estimation. Difference estimat . ence estimation and ratio
estimated total misstatement am~~nt ~s used to measure the
is both a recorded value and an a d; ~n a POPUlationwhen there
sample. Ratio estimation is simila~ t~ed.;alue for each Item In the
that the point estimate of the POl ~r~~ce est,lmatlonexcept
determined by multiplYing the portion or~aamlpoln mlsstaten:'ent Is
h t t I
times teo a recorded population book valuee amount
U d misstated
unit estirne ,e .audltor is concerned with. then audited
. tiIOn, th' er mean'per-
value
rather than the (T'Ilsstate~ent amount of each item In the sample.
8. Define .pp~. samplin.g. In PPS sampling, the auditor randomly
selects individual pesos from a population and then audits the
balances, transactions, or documents - called logical units _ that
include the pesos selected. Eacn peso In the population has an
equal chance of being selected, but the likelihood of selecting any
one logical unit for testing is directly proportional to its size.
Iilentify other sampling considerations. PSA 530 (Redrafted)
9 ". includes the following considerations when performing audit
sampling: '
a. Nature and causes of errors
b. Projecting errors
-c. Evaluating sample results

important Terms and Concepts

- 100% Examination Population .
Probability-proportional-to-slze (PPS)
Anomaly.
Attribute Projection
Attributes sampling plan Random-number sampling
Audit risk Ratioestimation . hi h' 'I
Riskof assessingcontrolnsktoo ~
Audit sampling Riskof assessingcontrolfisktoo 10
Block selection Riskof incorrecta~ce~tance
Control risk Riskof incorrectrejection
Detection risk Risk of materialmisstatement
\.
Deviation . Samplingrisk .
Difference estim~tion Samplingunit .
Discovery sampling Selectingspecific.ltems
Expected error Sequentialsam~lIng
Error . Statislicalsampling
Haphazard sampling' " Stra.tification .
Inherent risk . . Systematicsampling
Mean-per-unit estimatIOn Totalerro.rhtedselection
Misstatemerif . Value-welg . Ian
Non-sampling nsk . . . bles samplingP
Varia
NOil-statistical sampling

.407
 - lir Concepts
. ., udit Samp /llg
Chapter Eleven - BaSIC A

.References

. Literature
. and Other Auditing, SC) PSA 315: Understanding the
Auditing Standards ce Standards Council '(~he Risk of Material Misstatement
Auditing and Assuran _ nt and Assessmg
Entity and Its EnVlronme. ' .
' Audit Matenallty . Response to Assessed RIsks
AASC. PSA 320 , r' procedures tn
AASC PSA 330: The Audlto s it Evidence .
AASC' PSA 500 (Revised): Au_d d Other Means of Testmg
' PSA 530: Audit Samplmfl an S dardS Board. 2008 IAASB Handbook
AASC . d Assurance tan
International Auditing an
.:
Books "of Auditing. 2001.,' '
Cabrera. Elenita 8.. Pnn,~ples d Assurance Services re, 2003
Ricchiute. David N. Audit!ng an_'(1 'Theory and concepts. 200,2
Santos. Petronilo S. BaSICA~~/tl gGleZen Auditing: An AssertIons Approach. r
Taylor. Donald H. and G, Wilham' ,
1997 K rt Pany Principles of Auditing 11e
Whittington. O. Ray and U

Websites _ 'Model (ABREMA) - by the Australian Educational

Activity-Based Risk Evaluation Offi ' I Website (www.abrema.netlabrema)
_Research Ply Ltd (AER) - lela

Discussion Questions

1. . Whatis auditsampling?
2. Definethe followingterms:
a Errorin the-contextof tests of controls
b: Errorin the contextof substantivetests
3. What are the two componentsof-pet~ction risk? Explain each
componentbriefly, '
4. Canyou eliminatesamplingrisk? Explain.
5. Describethe
. relationshipbetweensampling
. ,
risk andsample size.
6. Howis non-samplingrisk reduced? , '

7. In tests of controls,there are two types of sampling risk. For each

type, give a short description and identify whether it affects audit
efficiencyor audit effectiveness.
. -

8. In substantive tests, there -are two .types of sampling risk. For

each type, give a short description and identify whether it affects
audit efficiencyor audit effectiveness.
9. Whichone is of greater concern to the auditor: rtskaftectinq audit
effectivenesso~risk affecting audit effiCiency? Explain.
10. What are the risk constderatlons in obtain-ingaudit 'evidence?
11. Enumeratethe different means of selecting items for testing.
12; W~at.are the two general approaches to audit sampling? Explain
bnefly. ,

408
 , AUdit"
. Wh t . lllg Qnd
13. a are the d Ass II rQ 11
sampling? a vantages ce Principles
. and d'
14.
. Expla!n the folioWI ng sample Isadvant
. ages of t
a. Random numbe selection - s atistical
b. systematic-sar: ~ampling methods:
c. Block selection Piing
d. Haphazard
. sam Ping
I' '.,
15., What IS stratificatio
. n.?
16., What is value-weight ed select'
17, Give the steps involved' I Ion?
11"1 an attrib
18. Give at least three de ' utes samplin
controls. Relate each dterminants, of th g plan.
.' eterminant t e sample siz
19. Give the steps involved' 0 sample size e for tests of
, In a variables . '
20. Give at least three dete . Sampling plan
tests. Relate each determ~nants
rrrunam toof the samp Ie Sizefor
. . s b
21. What are other sam r ' sample size, u stantive
" p 11"19 considerations
. 22. When IS projection necessary? mentioned in PSA 530?

23. Discu~s the following projection

a. ' Difference estimation techniques:
b. Ratio estimation
c. Mean-:per-unit estimation
.24. . What
' is probabllitv-proportlonal-to-st size ( PPS) sampling?

Objective Questions

- Ell-l True or False

,,
1. Tests .performed on 100% or less than 100% of the I
items within a population involve sampling, '
. .
When designing an audit sample, the auditor should "

consider the specific audit objectives, the population 1\

from which. the auditor wishes to sample and the
sample size. . .
3. The audito'r defines the sampling unlit in orderh~oobttahine
. efficient and effective samp e to ac leve
an .
particular audit objectives.
b t ntive risk arises from the possibility that the .,
4. 5 usa . based on a sample, may be
a~ditor'S concluslo~~ncluslon that would be reached ~f
different from the. subjected to the same audit
the entire popu!atlon were
r ,
procedure.

409
 r, Concepts
, Audit Samplll1g
Chapter Eleven - Baste

, statistical or non-statistical Sampling

Whenusingelthe~torshoulddesign and select an aUdit
- 5. methods',the audauditproceduresthere~mand evaluate
sample,perform to provide sufficient appropriate
sampleresvlts so as
auditevid~nce. uance 'and the risk of incorrect
f under re I
6, The risk,
0 as t hev .wouId ordimarily
d't effiG:lency
rejectiona~~ct~uw'orkbeing performed by the auditor,
leadto additionalhi h would establish that the initial
or the entity, w IC .
conclusionswereincorrect. . .
" cted by the level of sampling risk the
7. Sample~Ize1~II.affe to accept from the results of the
auditor IS WI Ing
sample. '.
. the maximum error In the population
8. Tolerableen;~ IS would be willing to accept and still
that the ah~ t' tOhreresult from the sample has achieved
concludet a
the auditobjective. .
Smallersample sizes are justified when the popUlation
9. is.expectedto be error free.
risk the auditor is willing to accept, the
10 The Iower the '
, largerthe samplesize will need to be. '
11. The smaller the tolerable error, t~e greater the sample
sizewill needto be.
12. In substantive procedures, the tolerable ~rror is the
maximum rate 'of deviation from a prescribed control
'. procedurethat the a,uditor would be willing to. accept
basedon the preliminary ass~~smentof control risk.
13. If the auditor expects error. to be present in the
population, a larger sample than when, no error is
expected ordinarily needs to, be examined to conclude
that the actual error in the' population is not greater
than the planned error.
14. The auditor should select sample items ~n such a way
that the sample can be expected to be representattve of
the population. -
15, Systematic selectio~ ensures that' all items in the
population have an equal chance of selection.
16. Stratification may be inappropriate to asstst in the
efficient and effective design of the sample.
17. Th,e ~is~ of over .rellance and the risk of incorrect
reJ.ectfonaffect audit effectivenass ,and are more likely
to lead to an erroneous opinion 'on the financial
statements.

410
 At/diling ana '
Assurance p. ,
r1nclples
18. Having carried out
procedures that a ' on each sample it
objective, the re ,apprOpriateto theern, thOseaUdit
detected i th aUditor ShOUld a I particular audit
n e sample d naYZe any .
the sample to the POPula~~n.prOject the errors fO~~~O~~
19. The aUditor Would I '
of th: a So consider th
e errors, these includes th e qualitative aspects
error and the POssible effe e nature and causeof the
phases of the aUdit. ct of the error on other
20. T~ere is an inverse relationship
size and the tolerable rate, between the sample

21. Non-'statis,tical sa~pling can also use statistical formulas

and techniques aSide from the auditor's judgment.
22. Sa~pling for attributes is generally used in substantiv
testinq, It is deSigned to detect misstatements i~
account balances.

23. Haphazard selection may be an alternative to random

selection Plovided that the auditor attempts to draw a
,
I
I

representative sample from the entire population with. \

no intention to either include cr exclude specificunits.
24. One disadvantage of statistical sampling that cost may
exceed the benefits derived.

25. The auditor will require a la~ger sample size, if h.e

expects 'an error in the population. No sample size Will
be required if the population is expected to be error-
free .

.Ell-2 Multiple ChOice~ . ' rocedures to less than 100% Of.

1 This refers to applvinq aUldlt p or class of transactions such that
". '. hl account ba ance . 1\1,
. items Wit In a~ h a chance of selection: . I
all s-ampling ~mts ave .
A. Audit eVlde~ce.
B. Aud~t samphn~.
C. Selective. te~~nnt procedures.
D Risk assess ,
'" -
. . 9 IOVO I' ves audit sampling?
Which. of the follOWlOt procedures.
2. Risk assessmen
~. Analytical procedt~:tSieave no audit trail.
C'
0: Testing controls
None of these.
.

411
 I'ng' Concepts
B . Audit Sarnp I .
Chapter Eleven - aSIC

3 In certain Sl
.
. g situations
. h of the folloWIn
ting is considered by the aUdita
. .tuations, 100%. tes will most likely lead the auditor
.
r 0

:~I~OO% testing? . lation constitutes a small number of large

When the popu . . .
A. value items. .' nature of a calculation or other process
When the repetitive informati'on system makes a 100%
B. . d by a computer
performe ffective. .
examination cost e d -ontrol risks are HIGH and other
C When both inhere~t an ffi~ient appropriate audit evidence.
. means do not pro~lde S~JI most likely lead the auditor to use
All of these situations WI. . ,
0, 1000/0testing.
.' include selecting the following, except:
4. Selectingspecific Item:key items.
A LoWvalue or non. t
B' All itemS over a certain ~moun . .
C Items to obtain infonna~l~n:
. t test control activities
O. Items 0
. the following explanations best describe .the
S. ~hl.ch . of. ure of statistical sampling?
dlstlOgUishlO.9 featf measuring mathematically the. degree of
A It provides or . . I
. rt . ty that results from examining on y a ",art of the
unce am. _.
data. d f
It allows the auditor to have the. same egr~e 0 confidence
6-. as with.judgment sampling .but. with substa.ntlally les~ Work.
C. It allows the auditor to substitute samplmg techniques for
audit judgment. " .
D. It provides for" measuring the .abct:l~al mdlsstat~r:'ents in
financial statements in terms of relia I Ity an precisron.

6. Statistical sampling do not allow:

A. More efficient samples.
B. Measurement of sample reliability.
t. Replacement of the auditor's professional judgment.
D. Measurement of sample risk. .

.7. There are many. kinds of statistical estimates that an auditor may
find useful, but basically every accounting. estimate is either of a
quantity or of an error rate. The statistical terms that roughly'
correspond to "quantities" and "error rate", respectively, are
A. Attrtbutes and variables.
B. . .variables and att;ributes.
C. Constants and attributes.
D. Constants and variables.

8. The sampling method that is most useful when testing for

compliance is:
A. Judgment sampling:
B. Unr~stricted random sampling with replacement.
C. Attnbut~ sampling.
D. Stratified random sampling.

412
 AUditing and
Assurance Principles
9. The entire set' of data
conclusions,..is called about Whoh
IC th . '
A. Population e aUditorwishesto draw
B.. Sample. "
~. Samplingframe
. Sampli "
10. A sample in which the h ng unit.
as those of the popular c a,racteristicsin the sa I
A,. A random sample. Ion IS ' rnp e are the same
B. An attributes sample C. A variablesampl '
. D A e.,
. repreSentativesample
11. In sampling for tests of Contr " n
A. Deviations. ots, error refersto:'
-S. 'Misstatements.
C. Deviations and misstatem t
D. Nelith er deVlations
' en s.
nor rnisst t
a ements.
12. An error that arises from an isolated ev t th t h
th than 'ft I en a as not recurred
o er ~n speci rca I~ identifiable occasionsand Is thereforenot
representa~lve of erro~ In the population is called: .
,A. Sampling e,rror. C. Anomalouserror.
B. ~on-samp,lIng error. D. Projectederror.

, 13. Which of the following comments best illustrates the. conceptof

sampling risk?
A. A r.andomly chosen sample may not be representativeof the
'population as a whole on the characteristicof interest.
B. An auditor may' select audtt procedures, that are not
appropriate to achieve the specific objective. ,
'c. An auditor may fail to recoqnlze errors 'in the documents
examined for the chosen sample.
D. The documents related to the chosen sample may not be
. available for.tnspection. ~I i

14. One of the VtJaysto reduce .sampitnqrisk is.to

A Increase the sample size. d,
I'

B~ Carefully, design the a~~it procde?u~~~~o~e o~l~e'audit team.

id proper supervision an lOS
C. Provi e ]
D. Use variables samp 109
r rather than attribute sampling.
,.,', ,
I '.
\\
, f sampling error is ,;
15 One of the causes 0 non~ . ~ffective audit procedures.
'A The use of inappropriate or 10
. F ilure to draw a random sa":,p,
'le ' Ie '
,I
,~. F:ilure to draw a representl~t;~n~~~~ ~f variablessampling. t,
, D', The use of attributes samp In . '
. ' r risk IS through
o control non-samp 109 . client's employees.
16'. One of the ways t , 'on and instruction of the udit team.
A Proper superv~s~ and instruction of the ~ than variables
B:' Proper supervIs'~~ributes sampling rat er
C. Th~ use, of a drawn is randorn and
I'ng
samp I . h' h ensure t e h sample
D ' Control w Ie
. representative.
,413
 ConceplS
. A dil5amp Img
Chapler Eleven - BasIC U
n control risk too high -Is that the sample
17. The likelihood of asse~~19
selectedto test contro the auditor's, planned as~essed level of
A. Does not support h true operating effectiveness of the
control ns. k when t e such an assessmen t'.
. stifies
control structure JU ts that could be material to the
B. contains misstat~m~hen aggregated with misstatements in
fi.lancial statemen s s or transactions classes.
other account bal~nCetelYfewer deviations from prescribed
C. Contai ams proportlona
st cture policies or proce d ures t han exist in
internal control ru h I
. or clasSas a woe.
the baIance d'tor's planned assessed level of control risk
D. Supports the au elrating effectiveness of the control structure
when the true op
. does not justifY such an assessment.
. ce of assessing control risk too low relates to the
18. The consequen
A. Efficiency of the audit.
B Effectiveness of the audit.
c: Preliminary estimates of materiality levels.
D. Allowable risk of tolerable error.

19. While performing a substantive test of details during an audit, the

auditor determined that the sample results supported the
conclusion that the recorded acco.unt b~lance was .. materially -
misstated. It was, in fact, not materially misstated. This situation
illustrates the risk of
A. Incorrect rejection,
B. Incorrect .acceptance.
C. Assessing control risk too low.
D. Assessing control" risk too high.

20. The consequence of incorrect acceptance relates to the

A. Efficiency of the audit.
B. Effectiveness of the audit.
e.
Preliminary estimates of materiality levels.
D. Allowable risk o.f tolerable error. '
. .
21. A sample in which every possible combination of it . .
.population has an equal chance of constituting the sam ole i In the
A. . Representative sample. pels a '
B.. Statistical sample. .
e. Random sample.
D. Judgment sample.

22. The process which r~Quires th . .. .

selects the items based on th e .calculatlo~ of an interval and then
A. Statistical sampling. ,e size of the interval is .
B. Random selection.
C. Systematic selection.
D. Computerized selection;

414
 AUditing and As,
surance p ,
23. When performing a t Ylncip1cs
cas hi'reee pts, an aUdit
est of a Control W'th
with a start at an Or may Usea systl re~pectto Control
dl d y rand I ematlc sa I' OVer
sa vantage of this t om y selected' mpIng technique
population: YPe of samPling is t~tem, The biggest
A. Must be systernar at the Items in the
sampling. Ically replaced in th
B. May system at' I e Population after
lea Iy OCCUr
C. Must be recorded i more than once in th
can be drawn. n a systematic pattern bef~r~a~Ple,
D. May'" OCcur in a syst, ,e sample
sa I ematlc patter th
mp e randomness, n, Us destroying the

24. When the auditor goes throu h ' ' ,

the sample without regar3 ta pO~~Iatlo,nand selectsitems for
distinguishing Characteristics, it i~ c~,,:~. Size, source, or other
A. 'Block (cluster) selection, .
B. Random selection.
C. Systematic selection,
D. Haphazard selection, 'I
II
25. When selecting a stratified sample, the sample size is '
A. Determined for the unstratified population and then
apportioned to each stratum.
B. Determined for each stratum and'selected from that stratum. , '\\
\ .
C. Determined for each stratum and selected randomly from the \
entire unstratified population. '
D. Always larger than if unstratified sampling has been used.

26;/ Statistical sampling may be applied to test controls when a client's

control procedures
A., Depend primarily on segregation of duties. , "
8. Are carefully reduced to writing and are Included In, client
I I
accounting manuals. . ,
I
C Leave an audit trail a~ evidence of compliance. I
D. Enable the detection of fraud. I'

. . h t the' auditor means by

27 Which of the following best des<;:nbesw a lin plan? '\
. the rate of occurrence in the attnbut~ s~:~on~blY e~pected to be
A. 'The number of er.~ors that can e .
found in a populat~on. . a certain characteristic occlJ.rs
The frequency With :which . . . ..
B. . within a population. . pie is not representative of
The acceptable risk that the sam b
c., the population.
I f
. . which the true popu a Ion
total can e
The peso range wlthm ,
D. expected to fall.

415
 . concepts
. dif Samp/lng
BasIC Au
Chapfer Eleven - cts to find in the population,
tor expe
the audI
he'deviationrat~ns is calledthe
28. T t'ng begl, re
beforetes I 'ation ra .
Tolerabledevi. rate .
~. sampledeviatiOn deviationrate.
C . computeduPP~artion
I non deVI
rate.
I
D. popua I . mit in the popu ation and still
. te the auditor w~II~~~1of control risk Is called the:
29. Thedeviationr~uce the assesse
be willing to deviationrate. .
A. Tolerable ulation rate..
B. EstimatedfJ~~k of over-reliance.
C. Accep~a~l:v~ation rate.
D. Sampe . . ns for a compliance t~st is gene~ally.
I rable rate of deVlapecttlod rate of errors In the related
30. Theto e the ex e .
Lower than
A. accountingrecords~x:pectedrate of errors in the related
B Higher than the
. accounting records.
h expected rate of errors in the related
Identical to t e
C. accountingrecords.
. .... expected rate of errors in the related
unrelated to 1I,e
D. accountingrecords..
. below depiCts the auditor'S esti!T'ated
31. (AICPA) The .dl~gra~te 'compared with the tolerable rate, and
maximum deViation pulation deviation rate compared with the
also depicts the true po '. . .
tolerable rate.
True State of Population
Auditor's Estimate Deviation Rate Deviation Rate Less
Based on Stomple Exceeds Tolerable Than Tolerable Rate
Results Rate
Maximum Deviation
RateExcceds I - III
,
Tolerable Rate
Maximum Deviation -,
Rate is Less Than II -'
IV
Tolerable Rate J--
~ .
As a result of testing controls, the auditor assesses control risk too
high and thereby increases testing. This is illustrated by situation:
A. 1. C. III.
B. II. D. IV.

32. Which of the following combinations 'results in a decrease in

sample size for attributes?
A. Decrease in allowable risk of assessing control risk too low
B. Decrease in tolerable deviation rate' .
C. Decrease in expected population deviation rate
D. ~ann~t be determined without additional information

416
 Aud'lill1g
. and A
SSurance Prt
rinciples
33. Which of the fall . .
sampling in tests O~lng statements 0

A. The expected contro~si IScorrectconcer

on determ'l _POpulation de I . nlngstatistical
nlng vatlo{\
populations sample st ratehaslittle
B. As the pOP~1tl ze except for or no effect
double. a Ion size doubl . very small
C F' es, the sam I
. or a given tolerabl p e sl2ealsoshould
selected as th e rate, alar
decreases. e ,expected p;erUlsa~Ple sl2eshouldbe
D. The population' 0 P atlon deviation rate
size ha I'
sample size except f or asvery
Ittlesmallpop
or no eftIect on deterl')'1ining
34. An auditor is testin . u atlon. .
on an entitY's v~ul~ternalcontrolprocedures .
voucher numbers If hers by matching randthat areevidenced
voided voucher, 'the a/andom numbermatch~~thnumberswith
another voucher in the oucher should ordinarily be numberof a
. randomsam I of e replacedby
A . Constitutes deviatio pel the voucher
.B. Has been properly V~'idd
C. cannot be located. e 0

D. Represents an immaterial pesoamount.

35. The sample deviation rate equals

A. The number
sample size. of deviation in th e populatIOn
. divided by the 0

B. The number ~f ~tems in the population

number of devtations in the sample. multiplied by t~e
C. The nu~ber of deviations in the sample divided by the
sample Size.
D. The number of deviations in the populationdivided by the
population size.

36. When assessing the tolerable rate, the auditor should consider
that, while deviations from control proceduresincreasethe risk of
material misstatements, such deviationsdo not necessarilyresult
in errors. This explains why
A. A recor.ded disbursement that does not show evidenceof
required approval may neverthelessbe a transactionthat is
properly authorized and recorded. 0

B. Deviation would result in errors in the accoudntmg

;.~cord~.
only if the deviations and the errors occurre on I eren
transactions.
Deviations from pertinent control pro.ceduresat a gIVen.rate
0

C. ordinarily would be' expected to result in errors at a higher

rate. d' b sement that is properly authorized may

A recorded IS ur t' n that containsa material error.
D. neverth.eless be a transac 10

417
 . . Concepts
, Audit SamplIng
1 veil - Ba.~ic
Chapter . e . t of controls, an auditor's
. . I sampling foritet'~:1 conclusion concerning
. tatlstlCa stat s I
37 WhenuSings include a
. evaluation would . . were within an acceptable
whether: . . . the population . '
A. Deviations In f a certain predetermined
range. . ion is .In excess 0
B. MonetaryprecIS value is not in error by more
amount. . , total monetary .
opulatlons .
C. The p d mount. at least once In the
than a fixe a teristics occur .
D. population charac
population. t tistical sample for attributes
ditor's'evaluationof a ~~ in 4 deviations if tolerable
38. What is an ~uof100 documents r~sudeviation rate is 3%, and the
when a tes cted population .
t is 5% the expe . 20A?
~~IOewancefor samplingrisk ISs a~'support for planned reliance on
A cept the sample result ble rate less the allowance for
A. c e the tolera d . t' t
the control becaus cted population evra Ion ra e.
samplingrisk equal.sthe e~~he control because the sample
Modify planned reliance 0 for sampling risk exceeds the
B. deviation plus the allowance
tolerablerate. . on the control because the tolerable
C. Modifyplanned relillanc~cefor sampling risk exceeds the
rate plus the a owa . .
I tion deviation rate.
expectedpopu a I Its as support for planned reliance on
D. Acceptthe sample res~he sample (leviation rate plus the
the contrafl beCmaupsl'I~9
risk exceeds the tolerable rate.
allowance or sa .

39. The final step in the evaluation of the audit results. in tests of
controls is the dedsion to: .,
A. Determinethe error in eachsample. .
B. Determinesampling error and the total population error.
e. Projectthe point estimate.
D. Conclude whether ttie control tested is effective or is not
effective.
.~

40. In applying variables sampling, an auditor attempts to;

A. Estimate a qualitative characteristic of interest.
B. Determine various rates of occurrence for' specified
attributes. ,
e. Discover at least one instance of a critical deviation.
D. Predict a monetary' population value within a range of
precision.

41. Tolerable error is a measure of the maximum monetary error that

may exist In an account .balance without causing the financial
statements to be materially misstated, -and is directly related to:
A. Reliability of evidence.
B. Audit risk.
e. Materiality.
D. Cost-benefit ana,IySis.

418
 Audilin
42. The
b I risk which the g and Ass uranc p
a ance as correct aUditor" C "incip/es
greater than the t ~hen the t IS Willing t
A. The upper b 0 erable rn' rUeerror' 0 take of
B . Th e acceptable
oUnd. Isstaternentis
In the b aCce
alanceis Ptancea
C. The tolerabl . risk of in equalto or
b. The lower be risk.
Ound. Correctaccept
. ance.

43. WhichI of,the folloWing .'

samp e size for a sarnple I .
A. Expected arn~~b~tantivet~s~n~ingfactors
B. Measure of tolen bOfrnlsstatea detailsfor :OUldinfluenceth
C. Both a and b ra Ie rnisstat rnents speCificaccount')
e
O. None of these ernent .

44. A number of factors' ' ,

test of details of an Infl~ences the
which of the follow' account balancesamplesize for a .
A. Greater relian~~goW~Uld lead.to 'a ~~ other factors~~~stantive
B. Greater reliance n Internal controlsger samplesize? g equal,
C. Smaller expectedonfanalytical proced
D S II . requen ures
. ma er measure of to" cy of errors. '
. erable misstat
ement
45. HoW would increases i t I .
of control risk affect nthae e_rable
details? misstatement
sample size in a substant
and assessed-
level
,
A. Increase increase _ we test of
' , respectlvetvi
_ I ncrease, decrease
. re
' spectlvetv
,19'
B
C. D ecrease, Increase, respectively'.
D. Decrease, decrease, respectlvely.'

46. In statistical sampling methods used; .. \

would an auditor most -likely stratify n substa~tlv~testing, when
groups? a populationinto meaningful

A. If the population has highly variable record d

B. If probability .,
proportional to size sampil109~ amounts.
IS used.
. I t e auditor s estimated tolerable misstatement is \
C f h
extremely small ..
D. If the standard deviation of recordedamounts Is relatively 'I
small. ~ \\

47. An auditor wishes to sample 200 sales receipts from a population

of 5,000 receipts issued during the last year. The receipts have
preprinted serial numbers and are arranged in chronological(and
thus serial n~mber) order. The auditor randomly choosesa receipt
form the first 25 receiptS and then seleds ever 25'" receipt
thereafter. The sampling procedure describedhere is called
A. Random number sampling
6. systematic selection
C. Judgment interval sampling
O. Variables sampling

419
 . pIS
, . dit Sampling Conce
Chapter Eleven - Basic All
'ected to the population?
Id errors In the sarn.Pie be pro] . d b
f errors is require y generally
48. snou rojectlon 0
A Yes, becausep. tandards.
. pted accountmgs . statement is equal to the total
acce h sarnple mrs
B. No, becauset e . , .
rnisstaternent. . tatement in the sample IS not
the rnlss
C. Yes, because I rnisstatement.
necessarilythe tota Ie misstatement is larger than the total
D. No, becausethe sarnp
rnisstaternent.
. . I ation of the audit results in substantive
49. The final step in the eva u
tests is the decisionto:. as fairly stated or to require further
A. Accept the population
action. . . or and total population error.
B. Determinesarnpllngerr .
C. . project the point estimate'h sample
D. Determinethe error in eac .
'"erenCe estimation or ratio estimation sampling
SO.When wouId dIII' .
methods be inappropriate? .
A. If the average difference between the audit value and book
value of a population is large. .
B. If the average difference between the audit value and book
value of a population 'is small.' . ..
C. If differences between the book value and audit 'value of a
population are numerous. . . .
D. If differences between the book values and audit. values of a
population are rare.

S1. The mean-per-unit eSt:im~tion method calculates the estimated

total audited value of a population of accounts receivable as:
A. A summation of the total individual account values' in the
population.
B. The sample mean audited value multiplied by the number of
the items in the populatlon.
c. The estimated total audited value of the population
multiplied by the number of items in the sample.
D. The summation of the sample multiplied; by the number of
discrete samples in the population.

52. PPS sampling is most appropriate when the auditor"

A. Anticipates understatement errors.
B. Anticipates.overstatement errors.
C. Expects no errors.
D. Has assessed control risk as HIGH.
 AUditing and
Assuran ce Pri
rtllciples

case 1 - Ratio Estimat'IOn

(AICPA) Using statistical
accounts payable balanc:amplingto assi .
, following
, data: ' an external aUditorha
st ,In Verifyingthe year-end
Numberof s accumulated the
Accounts' Book
population 4,100 Balance Balance Determined b
Sample .200 P5,000,000 the Auditor y
p 250,000 ?
Requirement: Using ratio esti' ,P300,000
year-end accounts payablebaIance?
matlon technique , ' what wouldbe the

case 2 (Adapted) -.Compreh . .

enslVe Case on P .
.. ro]ectlon of Errors
An external auditor sent out poSlwe
't' confir .
customer-so Th e population size ' .matlonrequeststo 8600
recorded value of P1,900 000 piS 24,000 accounts,with a total
, . resentedb I
results of the examination of confi . e ow.are the summary
customers: IrmatlOnreplies r~ceivedfrom

Total book value of sample.tterns examined' P799,800

Total audited value of sample items examined 756,800

. Requirements:
1. Using ratio estimation, computefor the.following:
_ a. Estimated audited value
b. Projected misstatement
2. Using difference estimation, compute for the projected
misstatement.
Using mean-per-unit estimation, determine the estimated
3. population value. Assume an allowancefor sampling risK of
P200,OOO.

421