Chapter 8Chapter 8Audit Sampling: Audit Sampling: An Overview and An Overview and

Application to Application to Tests of ControlsTests of Controls

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

IntroductionIntroduction

Auditing standards recognize and permit both statistical Auditing standards recognize and permit both statistical and nonstatistical methods of audit sampling.and nonstatistical methods of audit sampling.

Auditing standards recognize and permit both statistical Auditing standards recognize and permit both statistical and nonstatistical methods of audit sampling.and nonstatistical methods of audit sampling.

Two technological advances have reduced the number of times auditors need to apply sampling techniques to

gather audit evidence:

1Development ofwell-controlled,

automated accounting

systems.

1Development ofwell-controlled,

automated accounting

systems.

2Advent of powerful

PC audit software todownload andexamine client

data.

2Advent of powerful

PC audit software todownload andexamine client

data.

LO# 1

8-2

IntroductionIntroduction

However, technology will never eliminate the need for auditors to rely on sampling to some degree because:

1. Many control processes require human involvement.

2. Many testing procedures require the auditor to physically examine an asset.

3. In many cases auditors are required to obtain and evaluate evidence from third parties.

LO# 1

8-3

Definitions and Key ConceptsDefinitions and Key Concepts

1.1. Audit Sampling.Audit Sampling.

2.2. Sampling Risk:Sampling Risk:Type I and Type II errors.Type I and Type II errors.

Factors in determining sample size (items 3 and 4 below).Factors in determining sample size (items 3 and 4 below).

3.3. Confidence Level.Confidence Level.

4.4. Tolerable and Expected Error.Tolerable and Expected Error.

1.1. Audit Sampling.Audit Sampling.

2.2. Sampling Risk:Sampling Risk:Type I and Type II errors.Type I and Type II errors.

Factors in determining sample size (items 3 and 4 below).Factors in determining sample size (items 3 and 4 below).

3.3. Confidence Level.Confidence Level.

4.4. Tolerable and Expected Error.Tolerable and Expected Error.

LO# 2

8-4

Audit Evidence – To Sample or Audit Evidence – To Sample or Not?Not?

Relationship between Evidence Types and Audit Sampling

Type of Evidence Audit Sampling Commonly Used

Inspection of tangible assets YesInspection of records or documents YesReperformance YesRecalculation YesConfirmation YesAnalytical procedures NoScanning NoInquiry NoObservation No

LO# 3

8-5

Testing All Items with a Particular Testing All Items with a Particular CharacteristicCharacteristic

When an account or class of transactions is made up of a few large items, the auditor may examine all the items in the account or class of transaction.

When a small number of large transactions make up a relatively large percent of an account or class of transactions, auditors will typically test all the transactions greater than a particular dollar amount.

LO# 3

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Testing Only One or a Few Testing Only One or a Few ItemsItems

Highly automated information systems Highly automated information systems process transactions consistently unless the process transactions consistently unless the

system or programs are changed.system or programs are changed.

The auditor may test the The auditor may test the general controls over the general controls over the system and any program system and any program

changes, but test only a few changes, but test only a few transactions processed by transactions processed by

the IT system.the IT system.

The auditor may test the The auditor may test the general controls over the general controls over the system and any program system and any program

changes, but test only a few changes, but test only a few transactions processed by transactions processed by

the IT system.the IT system.

LO# 3

8-7

Types of Audit SamplingTypes of Audit Sampling

Auditing standards recognize and permit both statistical Auditing standards recognize and permit both statistical and nonstatistical methods of audit sampling.and nonstatistical methods of audit sampling.

Auditing standards recognize and permit both statistical Auditing standards recognize and permit both statistical and nonstatistical methods of audit sampling.and nonstatistical methods of audit sampling.

In nonstatistical (or In nonstatistical (or judgmental) sampling, the judgmental) sampling, the auditor does not use auditor does not use statistical techniques to statistical techniques to determine sample size, determine sample size, select the sample items, select the sample items, or measure sampling risk.or measure sampling risk.

In nonstatistical (or In nonstatistical (or judgmental) sampling, the judgmental) sampling, the auditor does not use auditor does not use statistical techniques to statistical techniques to determine sample size, determine sample size, select the sample items, select the sample items, or measure sampling risk.or measure sampling risk.

Statistical sampling uses Statistical sampling uses the laws of probability to the laws of probability to compute sample size and compute sample size and evaluate results. The evaluate results. The auditor is able to use the auditor is able to use the most efficient sample size most efficient sample size and quantify sampling risk.and quantify sampling risk.

Statistical sampling uses Statistical sampling uses the laws of probability to the laws of probability to compute sample size and compute sample size and evaluate results. The evaluate results. The auditor is able to use the auditor is able to use the most efficient sample size most efficient sample size and quantify sampling risk.and quantify sampling risk.

LO# 4

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Statistical Sampling TechniquesStatistical Sampling Techniques

1. Attribute Sampling.

2. Monetary-Unit Sampling.

3. Classical Variables Sampling.

LO# 4

8-9

Attribute Sampling Applied to Attribute Sampling Applied to Tests of ControlsTests of Controls

In conducting a statistical sample for a test of controls, auditing standards require the auditor to properly plan, perform, and evaluate the sampling

application and to adequately document each phase of the sampling application.

PlanPlan PerformPerform EvaluateEvaluate DocumentDocument

LO#

5, 6, & 7

8-10

PlanningPlanning

Planning1. Determine the test objectives.2. Define the population characteristics: • Define the sampling population. • Define the sampling unit. • Define the control deviation conditions.3. Determine the sample size, using the following inputs: • The desired confidence level or risk of incorrect acceptance. • The tolerable deviation rate. • The expected population deviation rate.

LO#

5, 6, & 7

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Performance and EvaluationPerformance and EvaluationPerformance and Evaluation

4. Select sample items: • Random-Number Selection. • Systematic Selection.5. Perform the Audit Procedures: • Voided documents. • Unused or inapplicable documents. • Inability to examine a sample item. • Stopping the test before completion.6. Calculate the Sample Deviation and Upper Deviation Rates.7. Draw Final Conclusions.

LO#

5, 6, & 7

8-12

Nonstatistical Sampling for TestsNonstatistical Sampling for Testsof Controlsof Controls

The only differences between The only differences between nonstatistical and statistical sampling nonstatistical and statistical sampling occur in the following steps:occur in the following steps:

• Determining the sample size.Determining the sample size.

• Selecting the sample items.Selecting the sample items.

• Calculating the computed upper deviation Calculating the computed upper deviation rate.rate.

LO# 8

8-13

Control Tests for Low Control Control Tests for Low Control FrequencyFrequency

The sample size tables in the chapter assume a large population. Sample size can be adjusted using the

“finite correction factor” in the Advanced Module or by using the table below for very small populations

(control performed less frequently):

LO# 8

Control Frequency Control Frequency and Population Sizeand Population Size Sample SizeSample Size

Quarterly (4)Quarterly (4) 22

Monthly (12)Monthly (12) 2-42-4

Semimonthly (24)Semimonthly (24) 3-83-8

Weekly (52)Weekly (52) 5-95-9

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End of Chapter 8End of Chapter 8

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