Q3 - Reading 9.1

Audit Sampling

Definition of Audit Sampling

• ASA 530 defines audit sampling as applying audit procedures to less than 100% of items within a population such that all sampling units have a chance of selection.
• This provides a reasonable basis for auditors to draw conclusions about the entire population.
• Sampling can be used in tests of controls (examining purchase invoices) or substantive testing (checking invoices against receiving reports).

Sampling Risk vs. Non-Sampling Risk

• Sampling risk: The risk that the auditor's conclusion based on a sample may differ from the conclusion if the entire population were subjected to the same audit procedure.
• Non-sampling risk: The risk that the auditor reaches an erroneous conclusion for reasons unrelated to sampling risk (human mistakes, inappropriate procedures, reliance on wrong information).

Types of Sampling Risks:

• Risk of overreliance: Controls are more effective than they actually are.
• Risk of incorrect acceptance: A material misstatement does not exist when it actually does.
  • These risks affect audit effectiveness.
• Risk of under-reliance: Controls are less effective than they actually are.
• Risk of incorrect rejection: A material misstatement exists when it actually does not.
  • These risks affect audit efficiency.

Statistical vs. Non-Statistical Sampling

Statistical Sampling:

• Involves random selection of sample items.
• Uses probability theory to evaluate sample results, including measuring sampling risk.

Non-Statistical Sampling:

• Does not have the characteristics of statistical sampling.
• Auditor uses judgment to determine sample size and interpret results.

Key Difference:

• Sampling risk can be quantified in statistical sampling, while non-statistical sampling relies on auditor judgment.

Types of Testing

• Selecting All Items: Examining the entire population, which does not constitute audit sampling and reduces sampling risk to zero.
• Selecting Specific Items: Testing specific items based on the auditor's knowledge and characteristics of the population.

Steps for Audit Tests

1. Planning the sample.
2. Selecting and testing the sample.
3. Evaluating the results.

Planning the Sample:

• Determine the objectives of the test.
• Define what errors are being sought.
• Identify the population and sampling unit.
• Specify tolerable error, expected error, and required confidence level.
• Decide on the size of the sample.

Selecting the Sample:

• Each item in the population must have a chance of being selected.
• Methods include random, systematic, and haphazard selection.

Statistical Sampling Techniques

Attribute Sampling Plans:

• Used to test the operating effectiveness of controls by estimating the rate of deviation.
• Methods: attribute sampling, sequential sampling, and discovery sampling.

Variable Sampling Plans:

• Used in substantive testing to estimate monetary misstatement in an account balance.
• Types: unstratified mean-per-unit and difference estimation.

Probability-Proportional-to-Size (PPS) Sampling:

• Uses attribute sampling theory to express a conclusion as a monetary amount.
• Each dollar in the population is the sampling unit.

Non-Statistical Sampling Techniques

Rationale:

• Less costly and time-consuming.
• Lower training costs.
• Ease of implementation.
• Impracticality of random selection in some cases.
• Proposed adjustment based on qualitative analysis.

Formal vs. Informal Non-Statistical Sampling:

• Formal uses a structured approach.
• Informal is unstructured and relies on qualitative judgments.