Scope and objectives
The auditing standards that apply when an auditor uses audit sampling in performing audit procedures. Audit sampling involves testing a subset of items within a population of audit relevance, with the goal of providing the auditor with a reasonable basis on which to draw conclusions about the entire population.
The objective of audit sampling is to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected. To achieve this objective, the auditor must consider both sampling risk and non-sampling risk. Sampling risk is the risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Non-sampling risk is the risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk, such as using inappropriate audit procedures or misinterpreting audit evidence.
The several definitions relevant to audit sampling, including the definition of terms such as population (the entire set of data from which a sample is selected), sampling unit (the individual items constituting a population), and anomaly (a misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population).
SA 530 also distinguishes between statistical sampling (an approach to sampling that involves random selection of sample items and the use of probability theory to evaluate sample results, including measurement of sampling risk) and non-statistical sampling (a sampling approach that does not have these characteristics). The text notes that stratification (the process of dividing a population into sub-populations with similar characteristics) can be useful in designing and selecting audit samples.
Finally ,SA 530 defines tolerable misstatement (a monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population) and tolerable rate of deviation (a rate of deviation from prescribed internal control procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population). These concepts are important in designing audit samples and evaluating the results of audit testing.
Sample Design, Size and Selection of Items for Testing
The process of designing and selecting a sample for an audit is when an auditor is conducting an audit; they may choose to test only a portion of the items in a population to draw conclusions about the entire population. This is known as sampling.
The auditor should consider the purpose of the audit procedure and the characteristics of the population from which the sample will be drawn when designing an audit sample. The auditor should also consider the nature of the audit evidence sought and possible deviation or misstatement conditions or other characteristics relating to that audit evidence to define what constitutes a deviation or misstatement and what population to use for sampling.
In considering the characteristics of a population, the auditor may determine that stratification or value-weighted selection is appropriate. The decision whether to use a statistical or non-statistical sampling approach is a matter for the auditor’s judgment, and sample size is not a valid criterion to distinguish between statistical and non-statistical approaches.
The auditor must determine a sample size sufficient to reduce sampling risk to an acceptably low level. The lower the risk the auditor is willing to accept, the greater the sample size will need to be. The sample size can be determined by the application of a statistically-based formula or through the exercise of professional judgment.
The auditor must select items for the sample in such a way that each sampling unit in the population has a chance of selection. Sample items can be selected using random selection, systematic selection, or haphazard selection. With statistical sampling, sample items are selected in a way that each sampling unit has a known probability of being selected. With non-statistical sampling, judgment is used to select sample items. The auditor should select a representative sample to avoid bias by choosing sample items which have characteristics typical of the population.
Performing Audit Procedures
The auditor must perform audit procedures appropriate to the purpose on each item selected. This means that the auditor needs to apply the appropriate audit procedures to each item that has been selected for testing.
The audit procedure is not applicable to the selected item, the auditor needs to perform the procedure on a replacement item. This means that if the selected item cannot be tested using the prescribed audit procedure, the auditor must test another item that is similar to the selected item and perform the audit procedure on that replacement item instead.
They provide some example of when it is necessary to perform the procedure on a replacement item. In this case, if a cancelled cheque is selected while testing for evidence of payment authorization, the auditor must examine a replacement item if satisfied that the cheque has been properly cancelled and does not constitute a deviation.
The auditor is unable to apply the designed audit procedures or suitable alternative procedures to a selected item, the auditor must treat that item as a deviation from the prescribed control for tests of controls or a misstatement for tests of details.
If when the auditor is unable to apply the designed audit procedures to a selected item. In this case, if the documentation relating to that item has been lost, the auditor cannot perform the audit procedures on that item, and therefore, the item is treated as a deviation from the prescribed control or a misstatement.
SA 530 also provides an example of a suitable alternative procedure that could be used in certain circumstances. In this case, the auditor can examine subsequent cash receipts together with evidence of their source and the items they are intended to settle when no reply has been received in response to a positive confirmation request. This means that the auditor can use an alternative procedure to obtain evidence of the selected item when the prescribed procedure is not applicable or feasible.
Nature and Cause of Deviations and Misstatements
The auditor is required to investigate any deviations or misstatements identified during the course of an audit. This means examining the cause of the deviation or misstatement and evaluating its potential impact on the audit purpose and other areas of the audit. For instance, if a misstatement or deviation is found in the financial statements, the auditor must investigate the cause of the error, determine whether it is indicative of a larger problem, and evaluate its impact on the audit opinion.
In certain situations, deviations or misstatements may have a common feature, such as a type of transaction, product line, location, or time period. In such cases, the auditor may decide to identify all items in the population that share the common feature and extend audit procedures to those items. This approach can help the auditor identify additional deviations or misstatements and ensure that they are properly addressed.
It’s important to note that some deviations or misstatements may be intentional and indicative of the possibility of fraud. For instance, if a company’s financial statements are consistently misstated in a particular area, such as revenue recognition, this could indicate that the company is engaged in fraudulent activity. As such, the auditor must be vigilant in investigating deviations or misstatements, particularly those that are recurring or seem suspicious.
In extremely rare cases, the auditor may encounter a misstatement or deviation that appears to be an anomaly, meaning it is not representative of the population as a whole. In such cases, the auditor must obtain a high degree of certainty that the misstatement or deviation does not affect the remainder of the population. This requires performing additional audit procedures to obtain sufficient appropriate audit evidence to support this conclusion.
When conducting tests of details, the auditor is required to project any misstatements found in the sample to the population. This means that the auditor needs to consider the potential impact of the misstatements found in the sample on the overall financial statements. However, it’s important to note that the projection of misstatements alone may not be sufficient to determine the amount that needs to be recorded in the financial statements. Additional audit procedures may be required to establish the amount of any adjustments required.
If a misstatement is found to be an anomaly, then it may be excluded when projecting misstatements to the population. An anomaly is a misstatement that is identified during the audit process, but the auditor believes is not representative of the population as a whole. However, even if the misstatement is excluded from the projection, the auditor still needs to consider the impact of the misstatement on the financial statements if it remains uncorrected.
For tests of controls, no explicit projection of deviations is necessary because the sample deviation rate is also the projected deviation rate for the population as a whole. In other words, the auditor can assume that the rate of deviations found in the sample is representative of the rate of deviations in the population as a whole.
Overall, the auditor’s responsibility when projecting misstatements is to obtain a broad view of the scale of misstatement in the financial statements and to determine whether any adjustments need to be made to ensure that the financial statements are fairly presented.
Evaluating Results of Audit Sampling
When performing audit procedures, the auditor often tests a sample of items instead of examining every single item in a population. The results of the sample are then used to draw conclusions about the entire population. It is important for the auditor to carefully evaluate the results of the sample to ensure that they provide a reasonable basis for conclusions about the population.
In order to do so, the auditor must consider both the results of the sample and whether the use of audit sampling has provided a reasonable basis for conclusions about the population that has been tested. The auditor must also evaluate whether any deviations or misstatements found in the sample are indicative of larger issues within the population.
In the case of tests of controls, if the sample deviation rate is unexpectedly high, this may indicate an increased risk of material misstatement. The auditor must obtain further audit evidence to substantiate the initial assessment before increasing the assessed risk of material misstatement.
For tests of details, if an unexpectedly high misstatement amount is found in the sample, the auditor may conclude that a class of transactions or account balance is materially misstated, unless further audit evidence is obtained to show otherwise.
In the case of tests of controls and tests of details, the projected misstatement plus any anomalous misstatements found in the sample is the auditor’s best estimate of misstatement in the population. If this amount exceeds the tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.
If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about the population that has been tested, they may request management to investigate identified misstatements and the potential for further misstatements and to make any necessary adjustments. Alternatively, the auditor may tailor the nature, timing, and extent of further audit procedures to best achieve the required assurance. This may involve extending the sample size, testing an alternative control, or modifying related substantive procedures.
Stratification and Value-Weighted Selection
The use of stratification and value-weighted selection techniques in audit sampling is that the Stratification is a technique where the population is divided into sub-populations or strata based on some identifying characteristic. This can help reduce the variability of items within each stratum and allows for a more targeted and efficient audit approach. For example, when performing tests of details, the population may be stratified by monetary value, with more audit effort directed towards larger value items that have the greatest potential misstatement in terms of overstatement.
However, it’s important to note that the results of audit procedures applied to a sample of items within a stratum can only be projected to the items that make up that stratum. To draw a conclusion on the entire population, the auditor will need to consider the risk of material misstatement in relation to whatever other strata make up the entire population. Therefore, if a class of transactions or account balance has been divided into strata, the misstatement is projected for each stratum separately, and then combined when considering the possible effect of misstatements on the total class of transactions or account balance.
Value-weighted selection is another technique that can be used in conjunction with stratification. This approach defines the sampling unit as the individual monetary units that make up the population. The auditor may then examine specific items, such as individual balances, that contain those monetary units. One benefit of this approach is that audit effort is directed towards larger value items, as they have a greater chance of selection, potentially resulting in smaller sample sizes. This technique may be used with random selection to ensure an unbiased approach.
Factors Influencing Sample Size for Tests of Controls
The factors that may influence the sample size for tests of controls in an audit. Here is an elaboration of each factor:
- An increase in the extent to which the auditor’s risk assessment takes into account relevant controls: The more assurance the auditor intends to obtain from the operating effectiveness of controls, the lower the auditor’s assessment of the risk of material misstatement will be, and the larger the sample size will need to be. If the auditor’s risk assessment includes an expectation of the operating effectiveness of controls, the auditor is required to perform tests of controls. The greater the reliance the auditor places on the operating effectiveness of controls in the risk assessment, the greater the extent of the auditor’s tests of controls (and therefore, the sample size is increased).
- An increase in the tolerable rate of deviation: The tolerable rate of deviation is the maximum rate of deviation from a control that the auditor is willing to accept without modifying the planned assessed level of control risk. The lower the tolerable rate of deviation, the larger the sample size needs to be.
- An increase in the expected rate of deviation of the population to be tested: The expected rate of deviation is the rate of deviation that the auditor expects to find in the population based on the auditor’s understanding of the business (in particular, risk assessment procedures undertaken to obtain an understanding of internal control), changes in personnel or in internal control, the results of audit procedures applied in prior periods and the results of other audit procedures. High expected control deviation rates ordinarily warrant little, if any, reduction of the assessed risk of material misstatement.
- An increase in the auditor’s desired level of assurance that the tolerable rate of deviation is not exceeded by the actual rate of deviation in the population: The greater the level of assurance that the auditor desires that the results of the sample are in fact indicative of the actual incidence of deviation in the population, the larger the sample size needs to be.
- An increase in the number of sampling units in the population: 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
The factors mentioned in the statement refer to the considerations that auditors should take into account when determining the sample size for tests of details. These factors should be considered together, and they assume that the auditor does not modify the approach to tests of controls or otherwise modify the nature or timing of substantive procedures in response to the assessed risks.
- An increase in the auditor’s assessment of the risk of material misstatement: If the auditor’s assessment of the risk of material misstatement is high, then the sample size for tests of details should also be high. In other words, if the auditor’s assessment of risk is high, they will need more evidence to provide reasonable assurance about the financial statements.
- An increase in the use of other substantive procedures directed at the same assertion: If the auditor is relying on other substantive procedures, such as analytical procedures or tests of details, to reduce detection risk, then they will require less assurance from sampling, and therefore the sample size can be smaller.
- An increase in the auditor’s desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population: If the auditor requires a higher level of assurance that the results of the sample are indicative of the actual amount of misstatement in the population, then the sample size needs to be larger.
- An increase in tolerable misstatement: If the tolerable misstatement is lower, then the sample size needs to be larger.
- An increase in the amount of misstatement the auditor expects to find in the population: If the auditor expects to find a higher amount of misstatement in the population, then the sample size needs to be larger to make a reasonable estimate of the actual amount of misstatement in the population.
- Stratification of the population when appropriate: If there is a wide range of monetary sizes of items in the population, it may be useful to stratify the population. When a population can be appropriately stratified, the aggregate of the sample sizes from the strata generally will be less than the sample size that would have been required to attain a given level of sampling risk, had one sample been drawn from the whole population.
- The number of sampling units in the population: For large populations, the actual size of the population has little, if any, effect on sample size. Thus, for small populations, audit sampling is often not as efficient as alternative means of obtaining sufficient appropriate audit evidence. However, when using monetary unit sampling, an increase in the monetary value of the population increases sample size unless this is offset by a proportional increase in materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances, or disclosures).
Sample Selection Methods
The selection of samples is an important step in the auditing process as it helps the auditor to draw conclusions about the entire population based on the sample selected. The passage identifies five different sample selection methods: random selection, systematic selection, monetary unit sampling, haphazard selection, and block selection.
Random selection is a method of selecting a sample where each item in the population has an equal chance of being selected. This method is often used in statistical sampling and can be carried out using random number generators or tables.
Systematic selection involves dividing the total number of sampling units in the population by the sample size to give a sampling interval. For example, if the population has 1,000 items and the sample size is 50, then the sampling interval would be 20. Starting at a random point, every 20th item is then selected. Systematic selection can be used to achieve a more representative sample and is often used in non-statistical sampling.
Monetary unit sampling is a type of value-weighted selection that considers the value of each item in the population. The sample size, selection, and evaluation are all based on monetary amounts, allowing for more accurate and efficient sampling.
Haphazard selection is a method where the auditor selects the sample without following a structured technique. However, the auditor must still avoid conscious bias or predictability to ensure that all items in the population have a chance of being selected. This method is not suitable for statistical sampling.
Block selection involves selecting contiguous items from within the population. However, this method is rarely used as items within a sequence can be expected to have similar characteristics to each other and different characteristics from items elsewhere in the population, making it difficult to draw conclusions about the entire population based on the sample.
The choice of sample selection method depends on the nature of the population being audited, the objectives of the audit, and the level of assurance required by the auditor. The auditor should carefully consider which method of sample selection is most appropriate for the given circumstances to ensure that the sample is representative of the entire population.
Quiz: Audit Sampling
- Which of the following best describes the objective of audit sampling?
a. To examine every item in a population
b. To provide a reasonable basis for drawing conclusions about the entire population
c. To eliminate sampling risk entirely
d. To identify all instances of deviations or misstatements
2. Sampling risk is defined as:
a. The risk of errors in the sampling process
b. The risk of reaching an erroneous conclusion based on a sample
c. The risk of not selecting a representative sample
d. The risk of using inappropriate audit procedures
3. Which approach involves random selection of sample items and the use of probability theory to evaluate sample results?
b. Statistical sampling
c. Non-statistical sampling
d. Value-weighted selection
4. What is the purpose of stratification in audit sampling?
a. To reduce the variability of items within each stratum
b. To increase the sample size
c. To eliminate non-sampling risk
d. To select a representative sample
5. How should an auditor select items for an audit sample in statistical sampling?
d. Based on professional judgment
6. If the designed audit procedure cannot be applied to a selected item, what should the auditor do?
a. Ignore the selected item and proceed with the remaining sample
b. Replace the selected item with another item for testing
c. Disregard the entire sample and select a new one
d. Conclude that the audit procedure is not applicable to the population
7. When conducting tests of details, what should the auditor do if an unexpectedly high misstatement amount is found in the sample?
a. Conclude that the entire population is materially misstated
b. Increase the sample size and retest the items
c. Seek additional audit evidence before making a conclusion
d. Exclude the misstatement from the projection and proceed with the audit
8. Which factor does not influence the sample size for tests of controls in an audit?
a. The auditor’s desired level of assurance
b. The auditor’s risk assessment of relevant controls
c. The auditor’s professional judgment
d. The number of sampling units in the population
9. Which of the following factors should an auditor consider when determining the sample size for tests of details?
a. The auditor’s desired level of assurance
b. The expected amount of misstatement in the population
c. The use of other substantive procedures
d. All of the above
10. What is the purpose of stratification in audit sampling?
a. To reduce the sample size required for tests of details
b. To allocate more audit effort to larger value items
c. To ensure a representative sample is selected
d. To eliminate non-sampling risk
11. Which of the following best defines population in the context of audit sampling?
a. The entire set of data from which a sample is selected
b. The sample items selected for testing
c. The characteristics of the audit evidence sought
d. The individual items constituting a population
12. When selecting a sample for an audit, the auditor should consider:
a. The size of the population
b. The nature of the audit evidence sought
c. The purpose of the audit procedure
d. All of the above
13. What is the purpose of value-weighted selection in conjunction with stratification?
a. To ensure a random sample is selected
b. To reduce the variability of items within each stratum
c. To allocate more audit effort to larger value items
d. To eliminate non-sampling risk
14. How should an auditor determine the sample size for an audit?
a. By applying a statistically-based formula
b. By exercising professional judgment
c. By considering the size of the population
d. Both a and b
15. If the auditor is unable to apply the designed audit procedures to a selected item, the item should be treated as:
a. A deviation from prescribed control for tests of controls
b. A misstatement for tests of details
c. A replacement item for further testing
d. An anomaly that can be excluded from the audit report
16. When evaluating the results of an audit sample, an unexpectedly high misstatement rate may indicate:
b. Increased reliability of the audit procedures
c. Decreased reliance on the population
a. Increased risk of material misstatement
d. Decreased need for further audit evidence
Answer: a. Increased risk of material misstatement
17. In projecting misstatements to the population, the auditor should consider:
a. The potential impact of misstatements on the financial statements
b. The estimated amount of adjustments required
c. The proportion of misstatements in the sample
d. Both a and b
18. What should the auditor do if audit sampling has not provided a reasonable basis for conclusions about the population tested?
a. Modify the related substantive procedures
b. Increase the sample size for further testing
c. Request management to investigate identified misstatements
d. All of the above
19. How does an increase in the auditor’s assessment of the risk of material misstatement affect the sample size for tests of details?
a. The sample size decreases
b. The sample size increases
c. The sample size remains unchanged
d. The auditor’s risk assessment does not impact the sample size
20. Which sample selection method considers the value of each item in the population for sample size, selection, and evaluation?
a. Random selection
b. Systematic selection
c. Monetary unit sampling
d. Haphazard selection