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The application of audit procedures to less than 100% of the items within an
account balance or class of transactions such that all sampling units have a
chance of selection.
Audit Sampling is performed on the assumption that the sample selected for
testing is the representative of the population. The auditor may decide that it
would be appropriate to examine the entire population (100% examination)
of items that make up an account balance since the population constitutes
a small number of large value items. Likewise, the auditor may decide to
apply audit procedures only to those items which have particular
significance (selective testing). The auditor needs to be satisfied that
sufficient appropriate evidence is obtained to meet the objectives of the test.
Risks in Sampling
Uncertainty of not detecting material errors in an account balance or
class of transactions may arise because of sampling and non-sampling
risks.
Sampling Risk
Refers to possibility that the auditor’s conclusion, based on a sample
may be different from the conclusion reached if the entire population
were subjected to the same audit procedures. This exist because the
sample selected for testing may not be truly representative of a
population.
Non-sampling Risk
Refers to the risk that the auditor may draw incorrect conclusions
about the account balance or class of transactions because of
human errors. This includes all aspects of audit risk that are not due to
sampling.
Determine
Determine
Define the the Select the Apply the Evaluate
the
Objective Sample Sample Procedure the Results
Procedure
Size
5. Apply procedures
After the sample items have been selected, the auditor applies the
planned audit procedure to the sample.
It is to be emphasized that steps (1), (2), (5), and (6) will be performed
whether the auditor uses audit sampling or not. Hence, the only
difference between audit sampling and 100% examination is that audit
sampling involves steps (3), (4), and (6)
PSA 530 has identified three principal methods of selecting samples namely,
(a) random number selection, (b) systematic selection, and (c) haphazard
selection.
Systematic selection
Haphazard selection
a) Voided documents
b) Missing documents
If the auditor encounters missing documents and he is unable to
determine whether the control has been properly performed such
item should be treated as a deviation for the purpose of evaluating
sample results.
Evaluation of Results
When evaluating sample results, both the qualitative and the quantitative
factors of deviations should be considered. Here are some general
guidelines:
2. Compare the sample deviation rate with the tolerable deviation rate
and draw an overall conclusion about the population.
This means that the sample results do not support the auditor’s
planned degree of reliance on internal control. Hence, control
risk will be assessed at a high level and more extensive
substantive tests should be performed.
If the sample deviation rate is less than the tolerable rate, the
auditor should consider the allowance for sampling risk- that is,
the possibility that these sample results could have occurred
even if the actual population deviation rate is higher than the
tolerable rate. As the sample deviation rate approaches the
tolerable deviation rate the allowance for sampling risk
decreases.
Sequential Sampling
- can be used as an alternative form of testing controls when an
auditor expects every few deviations within the population.
On the other hand, if one or few deviations are found, the auditor
may decide to go on with the examination of another set of sample
in attempt to obtain more evidence to support the planned
assessed level of control risk.
Discovery Sampling
- this form of attribute sampling is most appropriate when no
deviations are expected in the population and therefore even
deviation would cause concern.
- it is normally used when the auditor suspects that an irregularity
might have been committed.
- under this method, the auditor determines the sample size efficient
to discover at least one deviation to confirm whether an irregularity
has occurred.
Tolerable Misstatement
Tolerable misstatement is the maximum amount of misstatement the
auditor will permit in the population to and still be willing to conclude that
the balance is fairly stated. This is determined in the planning stage of the
audit and it is related to the auditor’s preliminary estimate of materiality.
There is an inverse relationship between the tolerable misstatement
and the sample size. A smaller measure of tolerable misstatement will
cause the sample size to increase.
Expected Misstatement
Expected misstatement is the amount of misstatements that the auditor
believes exists in the population.
Like the expected deviation rate in test of controls, the expected
amount of misstatements may be determined based on the results of
prior year’s substantive tests or pilot sample. As the expected
misstatement draws near the tolerable misstatements, the auditor
needs more precise information from the sample.
There is a direct relationship between the expected misstatement
and the sample size. An increase in the amount of the misstatement
that the auditor expects to be present in the population will cause
the sample size to increase.
Variation in the Population
The peso amount included in the population tends to vary significantly.
When using statistical sampling, this variability is measured by the standard
deviation.
Stratified Sampling
The auditor may divide or stratify the population into meaningful groups in
order to decrease the effect of variance within the population. When
selecting a stratified sample, the sample size should be determined for
each stratum and selected from that stratum.
It is useful to the auditor when performing substantive tests because
a) It decreases the effect of variance in the population and as a
result, decreases the sample size, and
b) It allows the auditor to give more emphasis to those items with
higher monetary value.
A summary of the essential audit sampling steps is presented on the next page