7. Sampling

Question 1

samples help…

Answer 1

• to develop effective and efficient audit procedures
• to measure the persuasiveness of results
• to conclude the quality/characteristics of the population from the sample

Question 2

Sampling vs. 100% analyses

Answer 2

• Less time
• Less costs
• Testing can be “destructive” in terms of the sampled items (however, less a problem in auditing)
• Complete analyses are frequently impossible

Question 3

How is a representative sample?

Answer 3

• A representative sample is one in which the characteristicssample are approximately the same as those of the population
• In practice, an auditor never knows whether a sample is representative, even after all testing is complete

Question 4

What is the sampling risk?

Answer 4

• Probability that a sample is not representative and the auditor reaches an incorrect conclusion because the sample is not representative of the population

Question 5

What is the non-sampling risk?

Answer 5

The risk that the auditor reaches an incorrect conclusion for any reason not related to sampling risk. The auditor might fail to recognize an exception, even if exceptions
exist

Question 6

What is an attribute sampling?

Answer 6

• Used to estimate the percent of items in a population containing a characteristic or attribute of interest
• This percent is called the occurrence rate or exception rate, i.e., the ratio between the number of items exhibiting the attribute and the number of items in the population

• The auditor is interested in the following types of exceptions in populations of accounting data:
– Deviations from the client’s established internalcontrols
– Monetary misstatements in populations of transaction data
– Monetary misstatements in populations of account balance details

Question 7

Steps for planning a sample

Answer 7

(1) State the objectives of the audit test
(2) Decide whether audit sampling applies
(3) Define attributes and exception conditions
(4) Define the population
(5) Define the sampling unit
(6) Specify the tolerable exception rate
(7) Specify acceptable risk of overreliance
(8) Estimate the population exception rate
(9) Determine the initial sample size

Question 8

Tolerable Exception Rate (TER)

Answer 8

• TER represents the highest exception rate the auditor will permit in the control being tested and still be willing to conclude the control is operating effectively
– TER can have a significant impact on sample size. A larger sample size is needed for a low TER than for a high TER
– Since a lower TER used for significant account balances, the auditor requires a larger sample size to gather sufficient evidence about the effectiveness of the control or absence of monetary misstatement

Question 9

Acceptable Risk of Overreliance

Answer 9

• The risk that the auditor concludes that controls are more effective than they actually are is the risk of overreliance
• • Vs. risk of under reliance – risk that the auditor will erroneously conclude that the controls are less effective than they actually are

• ARO measures the risk the auditor is willing to take of accepting a control as effective (or a rate of misstatements as tolerable) when the true population exception rate is greater than TER.
– ARO represents the auditor’s measure of sampling risk
– An ARO of 5%, leads to a confidence level of 95%
– ARO is based on the assessed control risk: the lower the assessed control risk, the lower ARO
– Like for TER, there is an inverse relationship between ARO and planned sample size

Question 10

Estimate Population Exception

Rate

Answer 10

• EPER represents the exception rate the auditor estimates in advance of the audit to plan the appropriate sample size
– In case the auditor expects exceptions in the population, more sample items must be examined, in order to confirm that the actual exception rate in the population does not exceed the planned TER
– To determine EPER, the auditor has to consider:
 Exception rates of prior audits
 Changes in procedures of the unit audited
 Information available from other procedures

Question 11

How is the sample size determined?

Answer 11

• The sample size is influenced by the amount of sampling risk the auditor is willing to accept
 The lower the accepted sampling risk, the larger the sample size
• To determine the initial sample size, the auditor should consider:
 The sampling risk
 The tolerable error
 The expected error
 The size of the population

Question 12

Sample Exception Rate (SER)

Answer 12

– Actual number of exceptions divided by the actual sample size

Question 13

Computed Upper Exception Rate (CUER)

Answer 13

– Maximum exception rate that is probable in the population at a given ARO
– CUER is derived from a table

Question 14

The CUER is influenced by which factors?

Answer 14

• Three factors influence the CUER
– ARO
– SER
– Sample size

Question 15

Relationships betrween ARO CUER and TER

Answer 15

• Important:
– TER and ARO → determined by the auditor before selecting the sample
– CUER → results from the sample

If CUER (based on the current 
sample size) ≤ TER (based on 
ARO), the population can be 
accepted and the control risk can 
be lowered 

If CUER > TER, one of four 
courses of actions must be followed: 
– Revise TER or ARO
– Expand the Sample Size
– Revise Assessed Control Risk
– Communicate with the Audit 
Committee or Management
The pop is not accepted