GROUP II

BASIC AUDIT
SAMPLING
CONCEPTS

What is Sampling?

Audit Sampling

is...

Why auditors sample?

The nature and materiality of the balance or
class does not demand a 100% audit;
A decision must be made about the balance
or class; and
The time and cost to audit 100% of the
population would be too great.

Testing procedures which

do not involve sampling
Tests performed on 100% of the items
within a population.
Inquiry and observation
Analytical procedures

Risk
Sampling risk
Non-sampling risk

Sampling risk
Sampling risk is the risk in which the auditor
reaches an incorrect conclusion because the
sample is not representative of the
population.

Types of sampling risk

Tests of Controls
Risk of Assessing Control Risk too Low
Risk of Assessing Control Risk too High

Substantive Tests
Risk of Incorrect Acceptance
Risk of Incorrect Rejection

Non-sampling risk
This refers to the probability that a
material error will not be discovered by the
auditor in the performance of the
substantive tests.

Statistical Sampling
It is a mathematically derived tool which provides the
auditor with an objective basis for expressing
conclusions about population characteristic based upon
a sample of items from the population.

Characteristics:
(a) Random selection of sample; and
(b) Use of probability theory to evaluate sample
results, including measurement of sampling risk.

Nonstatistical
sampling

Also known as Judgment Sampling

Procedures that are designed and
executed on the basis of the auditors
sound objective and judgment.

Summary

Haphazard sampling
A haphazard consists of sampling units without
any conscious bias that is without any special
reason for including or omitting items from the
sample size.
The sample should not consist of items selected
in a careless manner

Block Selection
A block sample consists of all
items in a selected time period,
numerical sequence or
alphabetical sequence.

Judgmental
sampling
The auditor selects large or unusual
items from the population and uses
some other judgmental criterion for
selection.

Means of selecting
items for testing to
gather audit evidence

Selecting all items (100% examination);

Selecting Specific Items (High value or
key items, all items over a certain
amount, items to obtain information,
items to test procedures); and
Audit sampling.

Attribute vs.
variables
Sampling Techniques

ATTRIBUTE
Attribute estimation
procedures measure
qualitative
characteristics

VARIABLE
Variable estimation
procedures measure
quantitative
characteristics

ATTRIBUTE SAMPLING
TECHNIQUE:

The Auditor uses attribute estimation sampling when

he or she is interested in measuring a qualitative
feature, such as the presence and absence of internal
control procedure.
*Risk Reliance risk that the audit sample supports reliance
on internal control when this reliance is unjustified.
*Risk Underreliance risk that the sample does not support
reliance on internal control when the true compliance rate
suggest that the auditor should rely on internal control

 In compliance testing of an attribute, the auditor

is interested in determining whether the
population rate of the occurrence exceeds a
tolerable amount.
*Tolerable Amount is the maximum rate of
exception that the auditor would be willing to
accept in a population without altering his or her
reliance on the attribute.
Once the auditor determines sample size, he or
she classifies them as either attribute or not
(deviations).

Upper Precision Limit is a rate of occurrence which

statistically exceeds the actual population error rate.
The auditor can determine the upper precision limit
by considering the
*Sample size
*Reliability
*Number of observed deviations

Compare upper precision limit to tolerable error to

determine whether the he/she can rely on internal
controls related to the attribute(s) examined.
If:
Upper Precision Limit < Tolerable Error
The auditor should rely on the internal control(s)
examined.

VARIABLES SAMPLING
TECHNIQUE:
It is used by the auditor during substantive
testing. This provides an estimate of peso range
within which the true audited value of the
population lies.

*Risk of Incorrect Rejection or alpha (a)

risk is the risk that the sample supports the
conclusion that the recorded account balance is
materially misstated when it is not materially
misstated.
*Risk of Incorrect Acceptance or beta (B)
risk is the risk that the sample supports the
conclusion that the recorded account balance is not
materially misstated. This is also referred to as
detection risk.

 Once the auditor plans the sampling

procedures (including selecting appropriate
levels of alpha and detection risk), he or she
then draws and appraise the sample, the audit
objective being to obtain an estimate of the
total audited value. If this audited value falls
within the decision internal, the auditor will
conclude that the book balances is fairly
stated.

Design of the sample:

1. Audit Objectives
2. Population and its Characteristics
3. Risk and Assurance
4. Tolerable Error
5. Expected Error in the population, and
6. Stratification

Audit objectives:
When designing an audit sample, the auditor
should consider the objectives of the test and the
attributes of the population from which the
sample will be drawn.
The auditor first considers:
*Objectives to be achieved
*Combination of audit procedures which is
likely to best achieve those objectives

 Consideration of the nature of the audit

evidence sought and possible error conditions
or other characteristics relating to that audit
evidence will assist the auditor in defining
what constitutes an error and what population
to use for sampling.

 Furthermore, when audit sampling is

appropriate, the nature of the audit
evidence sought and possible error
conditions or other characteristics
relating to that evidence will assist
auditor in defining what constitutes as
error and what population should be used
for sampling.

Example: when performing tests of

controls over an entitys purchasing
procedures, the auditor will be concerned
with matters such as whether an invoice
was clerically checked and properly
approved.

On the other hand, when performing

substantive procedures on invoices processed
during the period, the auditor will be concerned
with matters such as the proper reflection of the
monetary amounts of such invoices in the
financial statements.

Population:
The entire set of data from which the auditor desire
to sample in order to reach a conclusion constitutes
the population.
It is important for the auditor to ensure that the
population is:
APPROPRIATE
COMPLETE

 APPROPRIATE to the objective of the sampling

procedure, which will include consideration of the
direct testing.
COMPLETE. For example, if the auditor intends
to select payment vouchers from a file,
conclusions cannot be drawn about all vouchers
for the period unless the auditor is satisfied that all
vouchers have in fact been filed

Risk and assurance:

The auditor considers what conditions
constitute an error by reference to the
objective of the test.
In planning the audit, the auditor uses
professional judgment to assess the level of
audit risk that is appropriate.

This audit risk includes:

The risk that material errors will occur (inherent
risk)
The risk that the clients system of internal
control will not prevent or correct such errors
(control risk), and
The risk that any remaining material errors will
not be detected by the auditor (detection risk)

 Irrespective of audit sampling procedures applied,

inherent risk and control risk exist. Consideration
should also be given to detection risk arising from
(a)The uncertainties due to sampling (sampling risk),
and
(b)The uncertainties arising from factors other than
sampling (non-sampling risk) such as use of
inappropriate audit procedures or misinterpretation
on audit evidences.

The auditor is faced with sampling risk in both tests of

control and substantive procedures as follows:
Test of Control
Risk of Underreliance: the risk that, although the
sample result does not support the auditors
assessment of control risk, the actual compliance
rate would support such an assessment.
Risk of Overreliance: the risk that, although the
sample result supports the auditors assessment of
control risk, the actual compliance rate would not
support such an assessment

 Substantive Procedures:
*Risk of Incorrect Rejection: the risk that,
although the sample result supports the conclusion
that a recorded account balance or class of
transactions is materially misstated, in fact it is not
materially misstated.
*Risk of Incorrect Acceptance: the risk that,
although the sample result supports the conclusion
that a recorded account balance or class of
transactions is not materially misstated, in fact it is
materially misstated.

Note:

Risk of under reliance and risk of incorrect

rejection after audit as they would ordinarily
lead to additional work being performed by the
auditor, or the entity, which would establish that
the initial conclusions were incorrect.
Risk of over reliance and the risk of incorrect
acceptance affect audit effectiveness and are
more likely to lead to an erroneous opinion on
the financial statements than either the risk of
under reliance or the risk of incorrect rejection.

Tolerable error:
Tolerable error: is the maximum error in the
population that the auditor would be willing to
accept and will conclude that the result from the
sample has achieved his audit objective.
There is an inverse relationship between the
tolerable error and the required sample size.
the smaller the tolerable error, the larger the
sample size the auditor will require

 In compliance procedures, the tolerable

error is the maximum rate of deviation
from a prescribed control procedure that
the auditor would be willing to accept
without altering his planning reliance on
the control being tested.

 In substantive procedures, the tolerable error

is the maximum monetary error in an account
balance or class of transactions that the
auditor would be willing to accept so that he
considers the results of all audit procedures
he is able to conclude, with reasonable
assurance, that the financial information is
not materially in error.

Expected error in the

population:

When performing tests of control, the auditor generally makes a

preliminary assessment of the rate of error the auditor expects to
find in the population to be tested and the level of control risk.
These preliminary assessments are useful for designing an audit
sample and in determining sample size.
If errors are expected to be present, the auditor would normally
examine a larger sample to conclude whether the population
value is fairly stated to within the planned tolerable error or that
the planned reliance on a relevant control is justified. Smaller
sample sizes are justified when the population is expected to be
error free.

The following factors should be considered in

determining the expected error in population:
(a) error levels identified in previous audits
(b) changes in client procedures, and
(c) evidence available from his evaluation
of the system of internal control and from
results of analytical review procedures.

Stratification:
It is the process of dividing a population into
subpopulation, that is, a group of sampling units
which have similar characteristics (often
monetary value).
It enables auditor to direct his efforts towards the
items he considers would potentially contain the
greater monetary error.

 The objective of stratification is to reduce the

variability of items within each stratum and
therefore allow sample size to be reduced without
a proportional increase in sampling risk.
Sub-populations need to be carefully defined such
that any sampling unit can only belong to one
stratum.

 When performing substantive procedures,

an account balance or class of transactions
is often stratified by monetary value.
Similarly, a population may be stratified
according to a particular characteristic
that indicate higher risk of error.

 The result of procedures applied to a sample of

items within a stratum can only be projected to the
items that make up the stratum.
To draw a conclusion on the entire population, the
auditor will need to consider risk and materiality
in relation to whatever other strata make up the
entire population.

VALUE WEIGHTED SELECTION

It will often be efficient in substantive testing,
particularly when testing for overstatements, to
identify the sampling unit as the individual
monetary units (e.g., pesos) that make up an
account balance or class of transactions.

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.

 SELECTING THE SAMPLE

Statistical sampling requires that sample items are
selected at random so that each sampling unit has a
known chance of being selected. Sampling units
might be physical items or monetary units.
With non-statistical sampling, an auditor uses
professional judgment to select the items for the
sample.

 SAMPLE SELECTION METHODS

Most commonly used selection methods for statistical and
Nonstatistical Sampling are as follows:
(a) Random Sampling
* A simple random sample is a sample that is selected in
such a way that every item in the population has an equal
chance of being selected.
(b) Systematic Sampling
* The auditor counts through the population and selects
items on the basis of a sampling interval which is determined
by dividing the number of physical items in the population by
sample size.

(c) Stratified Random Sampling

* When a population is highly variable,
sampling without stratification requires a very
large sample size. To stratify, the auditor
groups the population into subpopulation, or
strata that are similar in amount. Samples are
drawn from each stratum using one of the
random selection methods.
.

(d) Sampling with Probability Proportional to Size

* This method of sampling emphasizes larger peso
items within an account balance. The probability of an
item being selected in this method is directly
proportional to its peso amount

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF CONTROL

Auditors may consider these factors when

determining the sample size for tests of control.
Factors may effect the judgement of the auditor to
either increase or decrease the need for the sample size
to be gathered by an auditor.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF CONTROL
Factor:
1. An increase in
the extent to
which the
auditors risk
assessment takes
into account
relevant control.

Effect:
Increase The more assurance the auditor
intends to obtain from the operating
effectiveness of controls, the lower
the auditors assessment of the risk of
material misstatement will be, and the
larger the sample size will need be.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF CONTROL
Factor:
2. An increase in
the tolerable rate
of deviation.

Effect:
Decrease The lower the tolerable rate of
deviation, the larger the sample size
needs to be.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF CONTROL
Factor:
3. An increase in
the expected rate
of deviation of
the population to
be tested.

Effect:
Increase The higher the expected rate of
deviation, the larger the sample size
needs to be so that the auditor is in a
position to make a reasonable
estimate of the actual rate of
deviation.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF CONTROL
Factor:
4. An increase in the
auditors desired
level of assurance
that the tolerable
rate of deviation is
not exceeded by the
actual rate of
deviation in the
population.

Effect:
Increase The greater the level of assurance that
the auditor desires that the results of
the sample are in the fact indicative of
the actual incidence of deviation in
the population, the larger the sample
size needs to be.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF CONTROL
Factor:
5. An increase in
the number of
sampling units in
the population.

Effect:
Negligible
effect

For large populations, the actual size

of the population has little, if any,
effect on sample size. For small
populations however, audit sampling
may not be as efficient as alternative
means of obtaining sufficient
appropriate audit evidence.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF DETAILS

Auditors may consider these factors when

determining the sample size for tests of details. Factors
may effect the judgement of the auditor to either
increase or decrease the need for the sample size to be
gathered by an auditor.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF details
Factor:
1. An increase in
the auditors
assessment of
the risk of
material
misstatement.

Effect:
Increase The higher the auditors assessment
of the risk of material misstatement,
the larger the sample size needs to be.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF details
Factor:
2. An increase in
the use of other
substantive
procedures
directed at the
same assertion.

Effect:
Decrease The more the auditor is relying on
other substantive procedure to reduce
to an acceptable level the detection
regarding a particular population, the
less assurance the auditor will require
from sampling and, therefore, the
smaller the sample size can be.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF details
Factor:
3. An increase in the
auditors desired
level of assurance
that tolerable
misstatement is not
exceeded by actual
misstatement in the
population.

Effect:
Increase The greater the level of assurance that
the auditor requires that the results of
the sample are in fact indicative of the
actual amount of misstatement in the
population, the larger the sample size
needs to be.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF details
Factor:
4. An increase in
tolerable
misstatement

Effect:
Decrease The lower the tolerable misstatement,
the larger the sample size needs to be.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF details
Factor:
5. An increase in
the amount of
misstatement the
auditor expects
to find in the
population.

Effect:
Increase The greater the amount of
misstatement the auditor expects to
find in the population, the larger the
sample size needs to be in order to
make a reasonable estimate of the
actual amount of misstatement in the
population.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF details
Factor:
6. Stratification
of the population
when
appropriate.

Effect:
Decrease When there is a wide range in the
monetary size of items in the
population, it may be useful to stratify
the population.

FACTORS INFLUENCING SAMPLE SIZE FOR

TESTS OF details
Factor:
Effect:
7. The number of Negligible
For large population, the actual size
sampling units in effect
of the population has little, if any,
the population.
effect on the sample size.

Performing the audit

procedure

The auditor should perform audit procedures

appropriate to the particular test objective on each
item selected.
If a selected item is not appropriate for the
application procedure, the procedure is performed on
a replacement item.

Performing the audit

procedure

Sometime the auditor is unable to apply the

planned audit procedures because:
Documentation relating to that item has been
lost.

Performing the audit

procedure

If suitable alternative procedures cannot be performed

on that item:
That particular item is considered to be in error.

Evaluation of sample results

Having carried out, on each sample item, those audit
procedures that are appropriate to the particular audit
objectives, the auditor should:
Analyze any error detected in the sample
Project the errors found in the sample to the
population
Assess the sampling risk

Analysis of errors in the

sample

The auditor should consider the sample results,

the nature and cause of any errors identified, and
their possible effect on the particular test objective
and on other areas of the audit.

Analysis of errors in the sample

When conducting tests of control, the auditor is primarily
concerned with the design and operation of the controls
themselves and the assessment of control risk. However,
when errors are identified, the auditor also needs to
consider matters such as:

Analysis of errors in the sample

The direct effect of identified errors on the
financial statements.
The effectiveness of the accounting and internal
control systems and their effect on the audit
approach.

Analysis of errors in the sample

When errors are discovered, the auditor may
observe that many have common feature.
Type of transaction
Location
Product line
Period of time

Analysis of errors in the

sample

Sometimes, the auditor may be able to establish

that an error arises from an isolated event that has
nor recurred other than on specifically identifiable
occasions and is therefore not representative of
similar errors in the population.

Analysis of errors in the sample

To be considered an anomalous error, the

auditor has to have a high degree of
certainty that such error is not
representative of the population.

Analysis of errors in the sample

In analyzing the errors detected in the

sample:
The auditor should determine that an
item in question is in fact an error.

Analysis of errors in the

sample

When documentation in support of specific

sample items cannot be located, the auditor may
be to obtain appropriate audit evidence through
performing alternative procedure related to the
missing sample items.

Analysis of errors in the sample

The auditor also should consider the qualitative
aspects of the errors. These include the nature and
cause of the error and the possible impact of the
error on other phase of the audit.

Analysis of errors in the sample

In assessing the errors discovered, the auditor may
conclude that many have a common feature.
Type of transaction
Location
Product line
Period of time
Other relevant feature

Projection of Errors:
PSA 530 (Clarified) provides for guidance in projecting errors as
follows:

For substantive procedures, the auditor should project

monetary errors found in the sample to the population,
and should consider the effect of the projected error on the
particular test objective and on the areas of the audit. The
auditor projects the total error for the population to obtain
a broad view of the scale of errors, and to compare this to
the tolerable error.

 When an error has been established as an

anomalous error, it may be excluded when
projecting sample errors to the population.
The effect of any such errors, if uncorrected,
still needs to be considered in addition to the
projection of the non anomalous errors.

 For tests of control, no explicit projection of

errors is necessary since the sample error rate
is also the projected rate of error for the
population as a whole.

The auditor should project the error results of

the sample to the population from which the
sample was selected. When the population is
divided into two or more sub population
(stratification), the projection of errors is done
separately for each sub population and the
results are added together.

Assessing Sampling Risk

The auditor should evaluate the sample results to
determine whether the preliminary assessment of the
relevant characteristics of the population is confirmed of
needs to be revised.
In the case of a test of controls, an unexpectedly high
sample errors rate may lead to an increase in the
assessed level of control risk, unless further evidence
substantiating the initial assessment is obtained.

 In the case of a substantive procedure, an

unexpected high error amount in a sample may
cause the auditor to believe that an account
balance or class of transactions is materially
misstated, in the absence of further evidence that
no material misstatement exists.

If the total amount of projected error plus

anomalous error is less than but close to that
which the auditor deems tolerable, the auditor
considers the persuasiveness of the sample
results in the light of other audit procedures,
and ,may consider it appropriate to obtain
additional audit evidence.

If the evaluation of sample results indicates that the preliminary

assessment of the relevant characteristic of the population needs
to be revised, the auditor may:
(a)Request management to investigate identified errors and the
potential for further errors, and to make any necessary
adjustments; and/or
(b)Modify planned audit procedures. For example, in the case of
a test of control, the auditor might increase the sample size, test
an alternative control or modify related substantive procedures;
and/or
(c)Consider the effect on the audit report.

Conclusion:

Having evaluated the sampling result, the

auditor should conclude as to the extent to
which he has obtained sufficient appropriate
audit evidence in support of the particular
characteristic of the account balance or class of
transaction with which he is concerned.

Detailed Audit Sampling Plans

Figure 16.2

Shows the various audit sampling plans

that the auditor can use.

Sequential
orEstimation
StopEstimation
or go
Attributes
Sampling
Sampling
Difference
in
AuditVariables
Sampling
Nonstatistical
Ratio

Definition / Description of Audit Sampling Plans

oAttributes Sampling Plans
- This is used to test an entitys rate of deviation (also called
rate of occurrence) from a prescribed control procedure. It is
an audit sampling in which auditors look for the presence or
absence of a control condition.
- For example, an auditor might use an attributes sampling
plan to test control for billing systems, disbursement
processing, inventory pricing and depreciation among other
things.

Definition / Description of Audit Sampling Plans

oVariables
-

Sampling Plan

This is used to test whether recorded account

balances are fairly stated.
For example, an auditor might use a variables
sampling plan to test recorded peso amounts for
receivables, inventory, fixed asset additions
among others.

Definition / Description of Audit Sampling Plans

oStatistical
-This

Sampling Plan

is a sampling technique in which an auditor uses

the laws of probability to select and evaluate a sample.
When using statistical sampling, auditors must select a
random sample, which means every item in the
population must have an equal chance of being included
in the sample.

oNonstatistical

Sampling Plan

- This plans rely exclusively on subjective

judgment to determine sample size and to
evaluate sample results.

Definition / Description of Audit Sampling Plans

oRegular
-

or Classical Attributes Sampling

This sampling plan enables the auditor to estimate the
rate of occurrence of certain characteristics in the
population.
For example, the auditor might use this plan to
estimate the percentage of cash disbursements
processed during the years that were not approved.

Definition / Description of Audit Sampling Plans

oDiscovery

Sampling

-. Discovery sampling is often used in situations in which the

auditors expect a very low rate of occurrence of some critical
deviation. The purpose of a discovery sample is to detect at
least one deviation, with a predetermined risk of assessing
control risk too low, if the deviation rate in the population is
greater than the specified tolerable deviation rate. One
important use of discovery sampling is to locate examples of a
suspected fraud. Example is when the auditor attempts to
locate a fraudulent cash disbursement.

Definition / Description of Audit Sampling Plans

oSequential

(Stop or Go) Sampling

- This is a sampling plan for which the sample is

selected in several steps, with the need to perform each
step conditional on the results of the previous steps.
That is, the results may either be so poor as to indicate
that the control may not be relied upon, or so good as to
justify reliance at each step.

Definition / Description of Audit Sampling Plans

oProbability

Proportional to Size (PPS)

- This technique, which is also referred to as peso unit

sampling, applies attributes sampling theory to develop
an estimate of the total peso amount of misstatement in
a population.

- Probability proportional to size sampling is used as an

alternative to classical variable sampling methods for
performing substantive tests of transactions or balances.
Unlike classical variable sampling techniques that define the
sampling unit as each transaction or account balance in the
population, PPS sampling defines the sampling unit as each
individual peso making up the book value of the population.
A transaction or account is selected for audit if a peso from
that transaction or account is selected from the population.
Therefore, each transaction or account has a probability
proportional to its size of being selected for inclusion in the
sample.

Definition / Description of Audit Sampling Plans

oClassical

Variables Sampling Models

-These use normal distribution theory to evaluate
selected characteristics of a population on the basis of a
sample of the items constituting the population.
- These sampling applications provide the auditors with
an estimate of a numerical quantity such as the peso
balances of an account. This technique is primarily used
by auditor to perform substantive tests.

Definition / Description of Audit Sampling Plans

oMean

per unit Estimation

- This is a classical variables sampling plan
enabling the auditors to estimate the average
peso value (or other variable) of items in a
population by determining the average value
of items in a sample.

Definition / Description of Audit Sampling Plans

oDifference

-This

Estimation

is a sampling plan that uses the difference

between the audited (correct) values and book
values of items in a sample to calculate the
estimated total audited value of the population.
-Difference estimation is used in lieu of ration
estimation when the differences are not nearly
proportional to book values.

Definition / Description of Audit Sampling Plans

oRatio

Estimation

-This is a sampling plan that uses the ration of audited

(correct) values to book values of items in the sample to
calculate the estimated total audited value of the
population.
- Ratio estimation is used in lieu of difference
estimation when the difference are nearly proportional
to book values.

Definition / Description of Audit Sampling Plans

oRegression

-The

regression approach is similar to the

difference estimation and ratio approaches.
- this approach has the effect of using both
the average ration and the average difference
in calculating an estimate of the total amount
for the population.

AUDIT SAMPLING
FOR TEST OF
CONTROLS
Group II

Audit Testing
Audit sampling is used for both tests
of controls (attributes sampling) and
for substantive procedures (usually,
variables sampling)

Substantive Procedures
Substantive procedures- provide evidence about
the existence of misstatement in an account
balance
Substantive procedures are concerned with
amounts and are of two types: analytical
procedures and tests of details.

 The purpose of substantive procedures is to

obtain audit evidence to detect material
misstatements in the financial statements.
When performing substantive tests of details, audit
sampling and other means of selecting items for
testing and gathering audit evidence may be used
to verify one or more assertions about a financial
statement amount or to make an independent
estimate of some amount.

Tests of Controls
Test of Controls- provide evidence that
indicates a misstatement is likely to occur.
Audit sampling for tests of control is generally
appropriate when application of the control leaves
evidence of performance.

Tests of controls and substantive procedures

Steps in the Application of

Sampling in Test of Controls

Steps in the Application of

Sampling in Test of Controls

Step 1. Determine the control

to be tested or audit objective
of the test.
The audit objective largely determines the
audit procedures to be applied.
Test of controls is performed to provide
evidence about the design or operating
effectiveness of the internal control structure
policies and procedures.

Step 2. Define the

attributes and deviations
conditions

Attributes- are characteristics that provide

evidence that an internal control procedure was
actually performed.
Deviations- occurs when a sample item does
not have one or more of the identified
attributes.

Step 3. Define the

population to be sampled
and the sampling unit
The auditor should determine that the
population (field) from which the sample
is to be selected is appropriate for the
specific audit objective.

Step 4. Specify the risk of assessing

control risk too low (overreliance) and
the tolerable deviation rate
Auditors apply professional judgment in determining the
appropriate risk of assessing control risk too low and the
tolerable deviation rate for a test of a control.
The risk of assessing control risk too low- the risk that the
actual deviation rate exceeds the tolerable deviation rate
- is a critical risk in tests of controls because it impacts
the effectiveness of the audit.

Auditors specify the tolerable deviation rate

based on:
1. Their planned assessed level of control risk
2. The degree of assurance desired from the
evidential matter in the sample

The lower the planned assessed level of control risk,

the lower the tolerable deviation rate.

Step 5. Estimate the

expected population
deviation rate

Expected population deviation rate- it represents the

rate that the auditors expect to discover in their
sample from the population.
sample results from prior years, as documented in
their working papers
experience with similar tests on other audit
engagements
by examining a small pilot sample.

6. Determine the initial sample size

Sample size- is affected by the level of sampling risk
that the auditor is willing to accept. The lower the
risk the auditor is willing to accept, the greater the
sample size will need to be.
- can be determined by the:
application of a statistically-based formula
through the exercise of a professional judgment
objectively applied to the circumstances.

Summary of Factors Influencing Compliance

Test Sample Size

Statistical Sample Size for Tests of Controls at 5 percent Risk of Assessing Control
Risk Too Low (with allowable number of deviations in parenthesis)

Step 7: Select the

Sample
Consider method of selection in the
determination of which items in the
population are to be selected for
examination with the expectation
that all sampling units have a chance
of selection.

Step 7: Select the

Sample

Sample items should have

characteristics typical of the
population.

Step 7: Select the

Sample
RANDOM SAMPLE
is one in which every sampling unit in
the population has an equal chance of
being included in the sample.

Step 7: Select the

Sample

RANDOM NUMBER
GENERATORS
are computer programs used to
provide any length list of random
numbers applicable to a given
population.

Step 7: Select the

Sample

Sampling with replacement

means that after an item has been selected
for inclusion in the sample, it is placed
back in the population so that it is subject
to selection again.
Sampling without replacement
Requires the selected items be included in
the sample only once.

Step 7: Select the

Sample
SYSTEMATIC SAMPLING
Involves selecting every 21th item in
the population following one or more
random starting points.

Step 8: Perform the test of

control procedures
When testing the sample items, an
auditor examines each sample item
for the attributes of interest.

Step 8: Perform the

test of control
procedures
Each item will be classified as to
whether it contains a deviation
from the prescribed internal
control procedure.

Step 8: Perform the

test of control
procedures
For each sample selected, perform
the relevant audit procedure. Take
note of any exception for
subsequent evaluation.

Compliance test Risk Matrix

____________________________________
Relevant Internal Control is in fact:
Compliance test
indicates reliance on
relevant internal
Control Should be:

Adequate for Planned

Reliance

Accepted

Correct Decision

Rejected

Risk of Underreliance

Inadequate for
Planned Reliance

Risk of
Overreliance
Correct
Decision

Step 9: Evaluate the sample

results
The auditor evaluates the nature and extent of
exceptions found in both the key items and other
items selected for the purpose of estimating the
actual level of exceptions that exist in the total
population: a qualitative evaluation (error
analysis) followed by a quantitative evaluation
(calculate the sample results)

Step 9: Evaluate the

sample results
Attributes Sampling
Evaluate sample results and
project to the entire population
from which sample was
selected:

Step 9: Evaluate the sample

results
qualitative evaluation an error
analysis to determine its nature, cause
and possible effect on the particular test
objective and other areas of the audit
quantitative evaluation calculation
deviation rate

Step 9: Evaluate the sample

results
VARIABLES SAMPLING
Evaluates sample results and
project to the entire population
from which sample was
selected:

Step 9: Evaluate the sample

results
qualitative evaluation an error analysis to
determine its nature, cause and frequency
of misstatement and their relationship to
other phases of the audit
quantitative evaluation calculation the
total projected monetary errors and any
adjustment made by the client

Step 9: Evaluate the sample

results
1. Determine the sample deviation
rate by using the formula:
Sample Deviation rate =
Number of deviations observed
Sample Size

Step 9: Evaluate the sample

results

2. Determine the upper deviation rate and the

allowance for sampling risk by using the following
relationship:
Upper Deviation rate =
Sample Deviation rate + Allowance for
Sampling Risk*
*Determined from the standard tables showing maximum deviation rates and specified risks of
overreliance.

3. Compare upper deviation rate and

the tolerable rate of deviation and
evaluate the effectiveness of a control
accordingly.

a. Under the statistical sampling plan

If:
Upper Tolerable deviation rate deviation
rate
it is implied that a control is effective and the
results would support assessing control risk
below the maximum or 100%

Conversely,
If:
Upper Tolerable deviation rate > deviation rate
it would suggest that a control is not effective
and the results would support assessing control
risk at maximum level or 100%

b. In a nonstatistical
sampling application, sampling
deviation rate is compared with
tolerable rate or expected
population deviation rate.

If:
Sampling or expected
Tolerable rate population
deviation rate

deviation rate

internal control is considered effective and would

support assessing control risk below maximum.

4. Consider qualitative
information such as evidence of
deliberate manipulation or
circumvention of internal control.

5. Reach an overall
conclusion. The auditor must
relate the assessed control risk
to detection risk for each
financial statement assertion.

Step 10: Document the

sampling procedures

Finally, the auditors will document

the significant aspects of the prior
nine steps in the working papers.

DOCUMENTATION OF THE RESULTS OF

TESTS OF CONTROL
ZZZ, Inc.
Attributes Sampling Summary Purchase Transaction
December 31, 2014
Objective of Test:
(1) To test the operating effectiveness of the procedures for matching
receiving reports with purchase invoices;
(2) To test the operating effectiveness of the procedures for matching purchase orders with purchase invoices;
(3) To test the operating effectiveness of the procedures for testing the clerical accuracy of purchase invoices

Population: Voucher registry entries for the first ten months of the year
Sampling Unit: Individual vouchers
Random Selection Procedures: Random Number Generator
Risk of assessing control risk too low: 5 percent

Size: 6,350

DOCUMENTATION OF THE RESULTS OF

TESTS OF CONTROL
Planning Parameters:

Sample Results:

Tolerable
Deviation
Rate

Expected
Deviation
Rate

Sample
Size

Number
Of
Deviations

Achieved
Maximum
Rate

1. Quantity and other data on receiving report agree

with purchase invoice

7%

1.5%

66

7%

2. Prices and other data on purchase order agree with

purchase invoice.

10%

1%

46

6.5%

3. Clerical accuracy of purchase invoice has been

verified

7%

0%

42

7%

Attributes Tested

Conclusion:
The results support the assessment of a low level of control risk for existence and valuation of purchases, inventory and accounts
payable.

Non Statistical Attributes

Sampling

Auditors who use non-statistical sampling

need to consider the risk of assessing
control risk too low and the tolerable
deviation rate when determining the
required sample size.

Non Statistical Attributes

Sampling
But this factors need not be quantified.
When evaluating results, the auditors
should compare the deviation rate of the
sample tolerable deviation rate.

Non Statistical Attributes

Sampling

If the sample size was appropriate

and the sample deviation rate is
somewhat lower than the tolerable
deviation rate, the auditors can
generally conclude that the risk of
assessing control risk too low is at an
acceptable level.

Non Statistical Attributes

Sampling

The auditor must use his professional

judgment to determine the point at
which the assessed level of control
risk should be increased above the
planned level.