# Audit Chapter 9 Notes

What is Audit Sampling?

* Audit Sampling – applying a procedure to less than 100% of a population to estimate some characteristic of that population * Sampling Risk – risk that a sample may not be representative of the population * Risk that the auditor’s conclusion based on the sample may be different from the conclusion they would reach if they examined every item in the population * Non-sampling Risk – risk pertaining to non-sampling errors (due to human error) * The sample is good but the auditor simply misses a deviation from a control, or misunderstands the procedure * Can be reduced to low levels through effective planning and supervisions of audit engagements

SLIDE 9-3

Statistical Sampling

* Relies on the laws of probability, but does not eliminate judgment * Allows auditors to measure risk and control sampling risk, which helps: * Designs efficient samples – provides the smallest sample size for a given risk/confidence level * Measures sufficiency of evidence – adds an allowance for sampling risk depending on the confidence or risk level desired * Objectively evaluates sample results – indicates whether you’ve exceeded the tolerable deviation rate or tolerable misstatement

Non-statistical Sampling

* Auditor uses judgment, rather than statistical techniques * This provides no means of quantifying sampling risk

* Auditor may also sample haphazardly, which selects items on an arbitrary basis, but without any conscious bias. * Downside: sample may be larger or smaller than needed, making auditors unknowingly accept a higher than acceptable degree of sampling risk

Selection of Random Samples

* Random Selection – every items in the population has an equal chance of being selected * Deviation – if an item cannot be found

* Random sample results in a statistically unbiased sample, but it still may not be a perfect representation (because of sampling risk)

Random sample selection techniques:

1. Random Number Tables

2. Random Number Generators

3. Systematic Selection

a. Advantage: items do not have to be pre-numbered

Other Methods of Sample Selection

* Haphazard – select items on an arbitrary basis, but without any conscious bias. (not random) * Block – consists of all items in a selected time period, numerical sequence, etc. (not random, rarely used, and least desirable of the methods) * Stratification – technique of dividing a population into relatively homogeneous subgroups (called stratum) * If there is a lot of variability, then you would stratify the population

Types of Statistical Sampling Plans

* Attribute Sampling – used for sampling the characteristics of internal controls (check mark or initials) * Variables Sampling – used for substantive testing (looking for material misstatements) * Discovery – sampling for just 1 case of fraud

* Classical Variables – sampling for misstatements

* Mean-Per-Unit estimation

* Ratio estimation

* Difference estimation

* PPS (Probability-Proportional-to-Size) Sampling – sampling for misstatements based on the systematic selection methods

Allowance for Sampling Risk

* An amount used to create a range, set by + or – limits from the sample results, within which the true value of the population characteristic being measured is likely to lie between * Allows a greater range of precision: the wider the interval, the more confidence you’ll have * Allowance for Control Tests: a 7% deviation rate + or – 2% means the controls do not work between 9% and 5% or the time * Allowance for Substantive Tests: a $10,000 account balance + or - $1500 means the actual amount will likely lie between $11,500 and $8,500 * The more confident I want to be, the larger the number

Sample Size and Dual Purpose Tests

* Sample Size vs. Sampling Risk Inverse...

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