Sampling

What is audit sampling?

• Selection and evaluation of less than 100% of a population.

  • such that the auditor expects the sample to be representative of the pop. & provide a reasonable basis for conclusions about the pop

  • 2 methods of sampling: statistical and nonstatistical.

What is non-sampling risk?

• Evaluation of results is inappropriate or test does not meet the audit objective.

What is sampling risk?

• The possibility that the sample is not rep. of the pop.

Type of Sampling Risk: Risk of incorrect rejection

• In a test of internal controls: The risk that the sample supports a conclusion that the control is not operating effectively when, in fact, it is operating effectively.

• In substantive testing: The risk that the sample indicates that the recorded balance is materially misstated when, in fact, it is not.

Type of Sampling Risk: Risk of incorrect acceptance

• In a test of internal controls: The risk that the sample supports a conclusion that the control is operating effectively when, in fact, it is not operating effectively.

• In substantive testing: The risk that the sample supports the recorded balance when it is, in fact, materially misstated.

3 Important Factors for Determining Sample Size

1. The desired level of assurance in the results (confidence level).

2. Acceptable defect rate (tolerable error).

3. The historical defect rate (expected error).

What is non-statistical sampling?

• Nonstatistical (or judgmental) sampling: The auditor does not use statistical techniques to determine sample size, select sample items, or measure sampling risk.

What is Statistical sampling

• Uses the laws of probability to compute sample size & evaluate results.

  • —> able to use the most efficient sample size and quantify sampling risk.

What is attribute sampling?

• Used in testing for "attributes" (specified characteristics).

• Controls is a popular use.

  • Population is the number of times a control should have operated during the period.

What is sampling risk?

(risk of overreliance) the likelihood that the decision made based on the sample differs from the decision that would have been made if the entire population were tested.

What is tolerable deviation rate

1. the maximum deviation rate from a prescribed control that the auditor is willing to accept and still consider the control effective. 

2. 5-10%

What is the expected population deviation rate

1. the rate the auditor expects to exist in the population. The larger the expected population deviation rate, the larger the sample size must be

2. 0%

How do you select sample items? 2 Techniques

1. Random-Number Selection: Every item in the population has the same probability of being selected as every other sampling unit in the population.

2. Systematic Selection: dividing the population by the sample size. A starting number is randomly selected in the first interval and every n-th item is selected thereafter.

What is Monetary Unit Sampling MUS

• estimates the % of monetary units in a pop. that might be misstated and then multiplies this percentage by an estimate of how much the dollars are misstated.

• Uses attribute-sampling theory to express a conclusion in dollar amounts rather than as a rate of occurrence

• Every dollar has an equal probability of being selected rather than every transaction.

What are 4 advantages of MUS

1. If little misstatement is expected, it usually results in a smaller sample size than classical variables sampling.

2. Does not require assumptions about the distribution of misstatements.

3. Selects transactions/components reflecting larger dollar amts

4. Effective in identifying overstatement errors (asset/revenue accounts)

What are 5 disadvantages to MUS

1. Selection of zero/negative balances requires special design consideration.

2. Expanding sample is difficult if initial conclusion is to reject the account balance

3. Assumes the audited amount is not in error by more than 100%.

4. Not effective for understatement/omission errors (liabilities/expenses).

5. Provides a conservative (higher) estimate of the misstatement

What are 4 things the Auditor should do if materially misstated?

1. Increase sample size.

2. Perform other sub. procedures.

3. Request the entity adjust the account balance.

4. If management refuses, consider a qualified/adverse opinion.