Chapter

EvectedLeaming Outcomes
After studying this chapter, you should be able to:
1. Understand the nature and purpose of
audit sampling.
2. Know the rationale for audit sampling.
3. Distinguish between sampling and
nonsampling risk.
4. Know the nature of nonstatistical and
statistical sampling.
5. Describe the various detailed audit
sampling plans.

6. Distinguish between attribute and

variables sampling techniques.

7. Enumerate and explain the factors

affecting sample design.
8. Understand the most commonly used
sample selection methods.
379 15

9. Know the basic concept of how sample

results are evaluated.

CHAPTER 15
BASIC AUDIT SAMPLING
CONCEPTS
INTRODUCTION

PSA 530, "Audit Sampling" establishes standards and provides

guidance when the auditor has decided to use audit sampling in
performing audit procedures. It deals with the auditor's use of
statistical and non-statistical sampling when deSigning and
selecting the audit sample, performing tests of controls and tests
of details, and evaluating the results from the sample.

PSA 530 defines audit sampling as the application of a

compliance or substantive procedure to less than 100% of the
items within an account balance or class of transactions to enable
the auditor to obtain and evaluate evidence of some characteristic
of the balance or class •and to form or assist in forming a
conclusion concerning that characteristic. In most—situations, the
volume of transactions processed is so great oi the control
systems in place are of such effectiveness that inspection of all
items is not feasible, economically justified or required, and the
use of audit sampling is appropriate.

NATURE AND PURPOSE OF AUDIT SAMPLING

Sampling is a processewherebvinformationvis gained

characteristics -of population (universe or field)
of items, by means ;oran examination of only a portion of
the items composing that population. Sampling is therefore
considered an inferential technique and it allows an auditor
to draw conclusions about transactions or account balances
without sustaining the time and Cost of examining all
available data.

WHY AUDITORS SAMPLE

Auditors use audit sampling when

(a) the nature and materiality of the balance or

class does not demand a 100% audit;
(b) a decision must be made about the balance or class;
and
(c) the time and cost to audit 100% of the population
would be too great.

TESTING PROCEDURES WHICH DO NOT

INVOLVE SAMPLING

It is important to recognize that certain testing procedures

do not come within the definition of sampling Examples of
these audit procedures are:

l. Tests performed on 100% ofthe items within a

population. For example, some audit plans include
the audit of all "large" accounts and a portion of the
small accounts. In such situations only the "small"
accounts would be subject to sampling. Applying
audit procedures to all items within a population
which have a particular characteristic (for example,
all items over a certain amount) does not qualify as
audit sampling with respect to the portion of the
population examined nor with regard to the
population as a whole, since the items were not
selected from the total population in a basis that
was expected to be representative. Such items
might imply some characteristics of the remaining
381 15

portion ofthe population but would not necessarily

be the basis for a valid conclusion about the
remaining portion of the population.

2. Inquiry and observation

a) Procedures that depend on segregation of duties or
that otherwise provide no documentary evidence.
b) Tracing one or a few transactions to obtain an
understanding of an accounting system and its
internal control. Procedures
performed to obtain.an
"understanding of the internal control structure
sumcient.to plan an audit" do not involve
sampling. However, many "tests of
controls" used to assess control risk do involve
sampling.

3. Analyticalprocedures
These involve the analysis of significant ratios and
trends including the resulting investigation of
fluctuations and relationship that are inconsistent
with other relevant information or deviate from
predicted amounts.
Basic Audit Sampling Concepts , 381

SAMPLING VS. NON-SAMPLING RISK

In every audit engagement a degree of risk is always

present even when all transactions and balances are
tested 100 percent. This uncertainty is referred to as
ultimate risk and is a combination of sampling and non-
sampling risks.
Sampling Risk

This refers to the risk that the auditor's conclusion based

on a sample might be different from the conclusion they
would reach if they examined every item in the entire
population. This is also the probability that a material
error will occur during the accounting process. Sampling
risk is a function of a client's internal accounting system.
In general, the stronger the internal accounting control
is, the lower the likelihood that a material error will
occur. There are two types of sampling risk.
(a) The risk the auditor will conclude, in the case
of a test of control, that control risk is lower than it
actually is, or in the case of a substantive test, that
a material error does not exist when in fact it does.
This type of risk affects audit effectiveness and is
more likely to lead to an inappropriate audit
opinion; and
(b) The risk the auditor will conclude, in the case of a
test of control, that control risk is higher than it
actually is, or in the case of a substantive test, that
a material error exists when in fact it does not.
This type of risk affects audit efficiency as it
would usually lead to additional work to establish
that initial conclusions were incorrect.

The mathematical complements of these risks are termed

confidence levels.

Non-Sampling Risk

This refers to the probability that a material error will not be

discovered by the auditor in the performance of the
substantive tests. Non-sampling risk arises from factors that
cause the auditor to reach an erroneous conclusion for any
reason not related to the size of the sample. For example,
most audit evidence is persuasive rather than conclusive, the
auditor might use inapptopriate procedures, or the auditor
might misintgrpret evidence and fail to recognize an error.
This risk is Controlled to a certain degree by the auditor's
quality of performance in testing the details of transactions
383 15

and balances and perfonning analytical review Procedures.

Non-sampling risk can generally be reduced to low levels
through implementation of appropriately designed quality'
control procedures by the CPA firm.
 If in detailed examination of the sample, material errors are discovered the
auditor should decide whether they represent unintentional clerical mistakes or
they indicate attempts to conceal a defalcation or to Qisstate the financial
statement.

If errors are material, the auditor cannot express an unqualified opinion unless
the statements are corrected. If no errors are found the auditor may consider the
whole area subjected to the test as acceptable without exception.

NONSTATISTICAL AND STATISTICAL SAMPLING

Nonstatistical Sampling

Nonstatistical or Judgment sampling procedures are designed .and executed

on the basis ofthe auditor's sound objective reasoningjudgment.

Although judgment sampling out involve arithmetic concepts, subjective

influence and probabilities reasoning, they are not formally derived from
mathematical sampling proofs and theorems. Findings from judgment sampling
must always be interpreted subjectively in the professional judgment of the
auditor.

Although sampling risk exists with nonstatistical sampling, no method for

objectively measuring it is available. However, properly designed nonstatistical
sampling methods can provide results as effective as those obtained from
statistical sampling methods.

Three common variations of nonstatistical sampling are block sampling,

haphazard sampling, and judgmental sampling. The succeeding sections

examine each of these.

l. Haphazard Sampling
A haphazard sample consists of sampling units without any conscious bias that
is without any special reason for including or omitting items from the sample. If
used, a haphazard sample should not consist of item s selected in a careless manner;
the sample should be expected to be a representative of the population. For
example, a haphazard sample Of vouchers contained in a file drawer might be
 385 Chapter 15
selected by pulling vouchers from the drawer without regard for the vouchers'
size, shape or location of the drawer.
Basic A udil Sampling Concepts 383
2. Block Selection
A block sample consists of all items in a selected time period,
numerical sequence or alphabetical sequence. For example, the auditor
might examine all cash disbursement transaction in the first week of
June or the last week of December. Due to the relatively large number
of blocks needed to form a reasonable audit conclusion block sampling
cannot generally be relied upon to efficiently produce a representative
sample and therefore is not acceptable for statistical or nonstatistical
audit sampling.

3. Judgmental Sampling
Under this selection method, the auditor selects large or unusual items from the
population and uses some other judgmental criterion for selection. Obviously,
this selection method has a conscious bias and cannot be considered a
representative selection method.
The fact that judgmental selection is not appropriate for audit sampling
does not mean that auditors should stop using judgment in selecting items to be
examined. The point is that the items selected using judgmental criteria are not
necessarily representative of the population, and conclusions based on items
selected judgmentally should not be extended to the population.

Statistical Sampling

Statistical sampling is a mathematically derived tool which provides the auditor with an
objective basis for expressing conclusions about population characteristic based upon a
sample of items from the population. Statistical sampling means any approach to
sampling that has the following characteristics:

(a) Random selection of a sample; and

(b) Use of probability theory to evaluate sample results, including
measurement of sampling risk.

A sampling approach that does not have characteristics (a) and (b) is considered non-
statistical sampling.

Auditors can use statistical sampling when performing test of controls for which
dOcumentary evidence exists that a procedure was performed. Examples of controls for
which documentary evidence exists are (l ) those that are related to
 approving transactions such as sales order that bears the credit manager's
signature indicating approval of credit, (2) keeping adequate documents and
records, and (3) making independent checks on performance.

The choice between statistical and nonstatistical sampling tmhniques depends

on the purpose of the procedures and on other factors. For example, when
obtaining an understanding of internal control, auditors may select a single
transaction Or a few transactions to walk through the System. When auditing
additions to property, plant and equipment, an auditor might examine all
individual material transactions and select a sample of others.

Auditors must take into account many of the same• factors when performing
statistical and nonstatistical sampling. The primary difference is that some aspects
of the procedures are quantified if statistical sampling is used. Nonstatistical
sampling does not provide quantified measures of risk comparable to those
provided in statistical sampling by the laws of probability.

Selecting Items for Testing to Gather Audil Evidence

When designing audit procedures the auditor should determine appropriate
means of selecting items for testing. The means available to the auditor are:
(a) Selecting all items (100%
examination); (b) Selecting specific items,
and (c) Audit sampling.

Whether auditors use statistical sampling or nonstatistical sampling methods,

auditors must decide on:
(l) selecting all items (100% examination),
(2) selecting specific items.
(3) which sampling techniques to use

and they must draw conclusions from their Sampling. By using statistical
sampling, an auditor can use probability theory to make statements about
controls

for a class of transactions and measure sampling risk. Likewise, statistical

sampling assists the auditor in determining sample size and in evaluating
sample results.
 387 Chapter 15
Basic Audit Sam 'ling Conce ts J8S

auditor may decide that it will be most appropriate to examine the entire
population of items that make up an account balance or class of transactions (or a
stratum within that population). 100% examination is unlikely in the case of tests of
control: however. it is more conunon for substantive procedures. For example.
100% examination may be appmpriate when the population constitutes small
number of large value items, when both inherent and control risks are high tind
other means do not provide sutlieient oppmpriate audit evidence, or when ihe
repetitive nature of a calculation or other process performed by a computer
information system makes a 100% examination cost effective.

Selec(ing $neci/?c
The auditor may decide to select specific items from a population based on such
factors as knowledge of the client's business, prelitninary assessments of inherent
and control risks, and the characteristics of the population being tested. The
judgmental selection of specific items is subject to non-sampling risk. Specific
items selected may include:

• High value or key items. The auditor may decide to select specific items
within a population because they are at high value, or exhibit some other
characteristic, for example items that are suspicious, unusual, particularly
risk-prone or that have a history oferror.

• All items over a certain amount. The auditor may decide to examine items
whose values exceed a certain amount so as to verify a. large proportion of
the total amount of an account balance or class of transactions.

• Items to obtain information. The auditor may examine items to obtain

information about matters such as the client's business. the nature of
transactions, accounting and internal control systems.

• Items to test procedures. The auditor may use judgment to select ond
examine specific items to determine whether or not a particular procedure
is being performed.

While selective examination of specific items from an account balance or class of

transactions will often be an ellicient means of gathering audit evidence. it does not
constitute audit sampling. The results of procedures applied to itetns selected in
this way cannot be projected to the entire population. The auditor considers the
need to obtain appropriate evidence regarding the remainder of the population
when that remainder is material.
Audit Santpling

In performing audit tests in accordance with Standards on Auditing, the auditor

may use either nonstatistical or statistical sampling or both. Both sampling types
require the exercise of professional judgment in planning, selecting the sample,
executing the sampling plan and evaluating the results. The primary benefit of
statistical methods is the quantification of sampling risk. For example, a 95%
confidence level provides a 5% sainpling risk. In nonstatistical sampling, the
auditor does not quantify stunpling risk. Instead conclusions are reached about
populations on a more judginental basis. Figure 15-1 shows the relationship
between nonstatistical and statistical sampling.

Figurc 15-1. Relationship between Nonstatistical and Statistical Sampling

 389 Chapter 15

ATTRIBUTE AND VARIABLES SAMPLING TECHNIQUES

The auditor may use sampling procedures to measure both qualitative and quantitative
characteristics of a population.

Attribute Sampling Technique

Attribute estimation procedures measure 90alitative characteristics, while variables

estimation procedures measure quantitative characteristics.

The auditor uses altribule estimation sampling when he or she is interested in

measuring a qualitative feature such as the presence or absence of internal
control procedure. When conducting tests of controls, the auditor must consider
both the risk of overreliance and the risk of underreliance. The risk
ofoverreliance is the risk that the sample supports reliance on internal control
when this reliance is unjustified. The risk of underreliance is the risk that the
sample does not support reliance on internal control when the true compliance
rate suggests that the auditor should rely on internal control. If this happens,
the result will be decreased efficiency in the form of increased substantive
testing procedures.

In compliance testing of an attribute, the auditor is interested in determining

whether the population rate of occurrence exceeds a tolerable rate. The tolerable
rate is the maximum rate of exception that the auditor would be willing to accept in
a population without altering his or her reliance on the attribute. Once the auditor
determines sample size using his or her desired reliability, tolerable rate of
occurrence and expected rate of occurrence and selects items for examination, he or
she classifies them as either possessing the attribute or not (deviations). Based on the
number of sample items containing deviations the sample rate of occurrence can he
calculated.

The auditor can determine the upper precision limit by considering the (l)
sample size, (2) reliability, and (3) number of observed deviations. The upper
precision limit is a rate of occurrence which statistically exceeds the actual
population error rate. The auditor then compares the upper precision limil to
tolerable error to determine whether he or she can rely on internal controls
related to the attribute(s) examined. If the upper precision limit is less than
the tolerable error the sample results suggest that the auditor should rely on the
internal control(s) examined.
 Basic udit Sampling Concepts 390

Variables Sampling Technique

Variables estimation sampling is used by the auditor during substantive

testing. This provides an estimate of a peso range within which the true
audited value of the population lies. For example, the auditor uses variables
estimation sampling to determine whether the book value of an account
balance is fairly stated.

As in sampling for attributes, variables estimation sampling exposes the

auditor to two aspects of sampling risks: (l ) the risk of incorrect rejection and
(2) the risk ofincorrect acceptance.

The risk Q/ incorrect rejection or alpha (a) risk is the risk that the sample supports
the conclusion that the recorded account balance is materially misstated when it is
not materially misstated.

The risk of incorrect acceptance or beta (P) risk is the risk that the sample supports
the conclusion that the recorded account balance is not materially misstated. This is
also referred to as detection risk.

Once the auditor plans the sampling procedures (including selecting

appropriate levels of alpha and detection risk). he or she then draws and appraises
the sample the audit objective being to obtain an estimate of the total audited value. If
this audited valets falls within the decision internal, the auditor will conclude that the
book balance is fairly stated.

Design of the Sample

The factors that the auditor should consider in designing an audit sample are:

Audit objectives

2. Population and its characteristics

3. Risk and assurance
4. Tolerable error
5. Expected error in the population and

6. Stratification
Audit Objectives
 391 Chapter 15
When designing an audit sample, the auditor should consider the objectives of the
test and the attributes population from which the sample will be drawn.

The auditor, first considers the specific objectives to be achieved and the
combination of audit procedures which is likely to best achieve those objectives.
consideration of the nature of the audit evidence sought and possible error
conditions or other characteristics relating to that audit evidence will assist the
auditor in defining what constitutes an error and what population to use. for
sampling.

Furthermore, when audit sarnpling is appropriate, the nature of the audit

evidence sought and possible error conditions or other characteristics relating to
that evidence will assist the auditor in defining what constitutes as error and
what population should be used for sampling. For example, when performing
tests of controls over an entity's purchasing procedures, the auditor will be
concerned with matters such as whether an invoice was clerically checked and
properly

approved. On the other hand, when performing substantive procedures on invoices

processed during the period, the auditor will be concerned with matters such as the
proper reflection of the monetary amounts of such invoices in the financial
statements.

Population

It is important for the auditor to ensure that the population is:

(a) Appropriate to the objective of the sampling procedure, which will
include consideration of the direction of testing. For example, if the
auditor's objective is to test for overstatement of accounts payable, the
population could be defined as the accounts payable listing. On the other
hand, when testing for understatement of accounts payable, the
population is not the accounts payable listing but rather subsequent
disbursements, unpaid invoices, suppliers' statements, unmatched
receiving reports or other populations that provide audit evidence of
understatement of accounts payable; and

(b)Complete. For example, if the auditor intends to select payment vouchers

from a file. conclusions cannot be drawn about all vouchers for the
period unless the auditor is satisfied that all vouchers have in fact been
 Basic udit Sampling Concepts 392

filed. Similarly, if the auditor intends to use the sample to draw

conclusions about the operation of an accounting and internal control

system- during the financial reporting period, the populatiqn needs to

include all relevant items from throughout the entire period. A different
approach may be to stratify the population and use sampling only to draw
conclusions about the control during, say, the first 10 months of a year. and
to use alternative procedures or a separate sample regarding the remaining
two months.

The entire set of data from which the auditor desires to sample in order to
reacts a conclusion constitutes the population. The auditor should
determine that the population from which he draws the sample is
appropriate for the specific audit objectives. For example, if the auditor's
objective was to test for understatements of accounts payable, his
population would be subsequent payments, unpaid invoices, unmatched
receiving reports or other population that would provide audit evidence of
understatement of accounts payable.

Risk and Assurance

The auditor considers what conditions constitute an error by reference to the

objectives of the test. A clear umderstanding of what constitutes an error is important
to ensure that all, and only, those conditions that are relevant to the test objectives are
included in the projection of errors. For example, in a substantive procedure relating
to the existence of accounts receivable, such as confirmation, payments made by the
customer before the confirmation date but received shortly after that date by the client
are not considered an error. Also, a •misposting between customer accounts does not
affect the total accounts receivable balance• Therefore, it is not appropriate to consider
this an error in evaluating the sample results of this particular procedure, even
though it may have an important effect on other areas of the audit, such as the
assessment of the likelihood of fraud or the adequacy of.the allowance for doubtful
accounts.

In planning the audit, the auditor uses professional judgment to assess the level Of
audit risk that is appropriate. This audit risk includes the risk that
material errors will occur (inherent risk),
the risk that the client's system of internal control will not prevent or risk), and
errors(control
the risk that any remaining material errors will not be detected by the
(detectionrisk).
 393 Chapter 15

Irrespective of audit sampling procedures applied inherent risk and control risk
exist. Consideration should also be given to detection risk arising from
(a) the uncertainties due to sampling (sampling risk), and
(b) the uncertainties arising from factors other than sampling (non-sampling
risk) such as use of inappropriate audit procedures or misinterpretation of
audit evidences.

sampling risk arises from the probability that the auditor's conclusion based on a
sample, may be different from the conclusion that would be reached if the
entire population were subjected to the same audit procedure.

The auditor is faced with sampling risk in both tests of control

and substantive procedures as follows:

(a) Tests ofControl:

Risk of Underreliance: the risk that, although the sample result does
not support the auditor's assessment of control risk, the actual
compliance rate would support such an assessment.
(ii) Risk of Overreliance: the risk that, although the sample result
supports the auditor's assessment, of control risk, the actual
compliance rate would not support such an assessment.

(b) Substantive Procedures:

Risk of Incorrect Rejection: the risk that, although the sample
result supports the conclusion that a recorded account balance or class of
transactions is materially misstated, in fact it is not materially
misstated.
(ii) Risk of Incorrect Acceptance: the risk that, although the sample result
supports the conclusion that a recorded account balance or class
of transactions is not materially misstated, in fact it is materially
misstated.

The risk of under reliance and the risk of incorrect rejection affect audit efficiency
as they would ordinarily lead to additional work being performed by the auditor, or the
 Basic udit Sampling Concepts 394
entity, which would establish that the initial conclusions were incorrect. The risk of over
reliance and the risk of incorrect acceptance affect audit effectiveness and are more likely
to lead to an erroneous opinion on the financial statements than either the risk of under
reliance or the risk of incorrect rejection.
395 Chapter 15
Sample size is affected by the level of sampling risk the auditor is willing to
accept from the results of the sample. The lower the risk the auditor is willing
to accept. the greater the sample size will need to be.

Tolerable error
This is the maximum error in the population that the auditor would be willing to
accept and still conclude that the result from the sample has achieved his audit
objective. There is an inverse relationship between the tolerable error and the
required sample size. The smaller the tolerable error, the larger sample size the
auditor will require.

In compliance procedures the tolerable error is the maximum rate of deviation

from a prescribed control procedure that the auditor would be willing to accept
without altering his planning reliance on the control being tested. In substantive
procedures, the tolerable error is the maximum monetary error in an account

balance or class of transactions that the auditor would be willing to accept so

that he considers the results of all audit procedures he is able to conclude, with
reasonable assurance, that the financial information is not materially in error.

Expected Error in the Population

When performing tests of control, the auditor generally makes a preliminary
assessment of the rate of error the auditor expects to find in the population to be
tested and the level of control risk. This assessment is based on the auditor's prior
knowledge or the examination of a small number of items from the population.
Similarly, for substantive tests the auditor generally makes a preliminary
assessment of the amount of error in the population. These preliminary
assessments are useful for designing an audit sample and in determining sample
sire. For example, if the expected rate of error is unacceptably high tests Of
control will normally not be performed. However, when performing substantive
procedures, if the expected amount of error is high, 100% examination or the use
of a large sample size may be appropriate.

If errors are expected to be present, the auditor would normally examine a larger
sample to conclude whether the population value is fairly stated to within the
planned tolerable error or that the planned reliance on a relevant control is
 Basic udit Sampling Concepts 396
justified. Smaller sample sizes are justified when the population is expected to be
error free.

The following factors should be considered in determining the expected error in population:
a) error levels identified in previous audits,
b) changes in client procedures, and
c) evidence available from his evaluation of the system of internal control and from
results of analytical review procedures.

Stratification

stratification is the process of dividing a population into subpopulation, that is, a

group of sampling units which have similar characteristics (often monetary value).
The reduction in variability within each stratum results in a smaller overall sample
size. Then one of the random selection methods is used to select sample items from
each stratum. Stratification enables the auditor to direct his efforts towards the
items he considers would potentially contain the greater monetary error.

Audit efficiency may be improved if the auditor stratifies a population by dividing it into
discrete sub-populations which have an identifying characteristic. The objective of
stratification is to reduce the variability of items within each stratum and therefore
allow sample size to be reduced without a proportional increase in sampling risk. Sub-
populations need to be carefully defined such that any sampling unit can only
belong to one stratum.

When performing substantive procedures, an account balance or class of transactions is

often stratified by monetary value. This allows greater audit effort to be directed to the
larger value items which may contain the greatest potential monetary error in terms of
overstatement. Similarly, a population may be stratified according to a particular
characteristic that indicates a higher risk of

error, for example, when testing the valuation of accounts receivåble, balances may be
stratified by age.

The results of 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 risk and materiality in relation to
Whatever other strata make up the entire population. For example, 20% of the items
in a population may make up 90% of the value of an account balance. The auditor
397 Chapter 15
may decide to examine a sample of these items. The auditor evaluates the results of
this sample and reaches a conclusion on the 90% of value separately from the
remaining 10% (on which a further sample or other means of gathering

evidence will be used, or vvhich may be considered immaterial).

Value Weighted Selection

It will often be efficient in substantive testing, particularly when testing for
overstatements, to identify the sampling unit as the individual monetary units
(e.g., pesos) that make up an account balance or class of transactions. Having
selected specific monetary units from within the population for example, the
accounts receivable balance, the auditor then examines the particular items, for
example, individual balances, that contain those monetary units. This approach
to defining the sampling unit ensures that audit effort is directed to the larger
value items because they have a greater chance of selection, and can result in
smaller sample sizes. This approach is ordinarily used in conjunction with the
systematic method of sample selection (described in Appendix 4 of PSA 530)
and is most efficient when selecting from a computerized database.

Selecting the Sanple

The auditor should select items for the sample with the expectation that all
sampling units in the population have a chance of selection. Statistical sampling
requires that sample items are selected at random so that each sampling unit has a
known chance of being selected. The sampling units might be physical items (such
as invoices) or monetary units. With non-statistical sampling an auditor uses
professional judgment to select the items for a sample. Because the purpose of
sampling is to draw conclusions about the entire population, the auditor
endeavors to select a representative sample by choosing sample items which have
characteristics typical of the population, and the sample needs to be selected so that
bias is avoided.

Sample Selection Methods

Sample items should be selected in such a way that the sample can be expected
to be representative of the population. Therefore, all items in the population
should have an opportunity to be selected.

Most commonly used selection methods for Statistical and Nonstatistical

Sampling are as follows:
 Basic udit Sampling Concepts 398
a. Random Sampling
A simple random sample is a sample that is selected in such a way that
every item in a population has an equal chance of being selected. This is
accomplished by using a printed table of random numbers or computer
software that generates tandom numbers. To use this method, it is
necessary to establish correspondence between the population and the
399 Chapter 15

randotn numbers. For exatnple, if the auditor is selecting a smnple of sales

invoices. correspondence has to be established between the invoice
nutnbers and the digits in the random number table.

b. Systematic Sampling
In using this method, the auditor counts through the population and selects
items on the basis of a sampling interval which is determined by dividing
the number of physical items in the population by sample size.

The interval tuay also be based on certain number of itetns (e.g. every
25th voucher nutnber) or on monetary totals (e.g. every PI in the
cumulative value of the population). The auditor should. however,
exetvise caution about the possibility ol' the population being arranged in
an order that corresponds to the size of the sampling interval. If this

correspondence exists, the smnple will not be representative. One precaution that
can be taken is to use several random starts.

c. Stratified Random Sampling

As previously explained, when a population is highly variable, sampling
without stratification requires very large sample size. To stratify, the
auditor groups the population into subpopulation, or strata that are
similar in amount. Samples are then drawn from each stratum using one of
the random selection methods.

d. Sampling M'ith Probability Proportional to Size

This method of sampling emphasizes larger peso items within an account
balance. The probability of an item being selected in this method is directly
proportional to its peso amount. For example, a PI 0,000 item has twice the
chance being selected as a P5,000 item and ten times the chance of a P 1,000
item. Each individual peso in the account balance has an equal chance of
selection, but each physical unit does not.

Sample Size

In determining the sample size, the auditor should consider whether sampling risk
is reduced to an acceptably low level. Sample size is affected by the level of
 Basic Concepts 400

Sampling risk that the auditor is willing to accept. 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 statisticalty-based
formula or through the exercise of professional judgment objectively applied
to the circumstances. Appendices 2 and 3 of PSA 530 indicate the influences
that various factors typically have on the determinntion of sample size, and
hence the level of sampling risk. These are discussed in Chapters 18 and 19.
The size of the sample has a direct effect upon both the (l ) allowance for
sampling risk and (2) sampling risk. Generally, with a very small sample, we
cannot have low sampling risk unless we allow a very large allowance for
sampling risk (precision). As the sample size decreases, both the sampling
risk and allowance for sampling risk increase.

Sample size is also affected by three (3) certain characteristics of the population
being tested. As the population increases in size, the sample size necessary to

estimate the populatiqn with specified sampling risk and allowance for sampling
risk increases. In attributes sanpling, sample size also increases as the expected
population deviation rate increases.

Examples ofFactors Influencing Sample Sizefor Tests of Control

The following are factors that the auditor may consider when determining the
sample size for tests of controls. These factors, which need to be considered
together, assume the auditor does not modify the nature or timing of tests of
controls or otherwise modify the approach to substantive procedures in response to
assessed risks.

FACTOR EFFECT
ON
SAMPLE
SIZE
401 Chapter 15

1. An increase in the Increase The more assurance the auditor intends to

extent to which the obtain from the operating effectiveness of
auditors risk controls, the lower the auditors assessment
assessment takes will the risk of material misstatement will
into account be, and the controls larger the sample size
relevant controls will need to be.

When the auditor's assessment of the risk

of material misstatement at the assertion
level includes an expectation of the
operating effectiveness of controls, the
auditor is required to perform tests Of
controls. Other things being equal, the
greater the reliance the auditor places on
the o eratin effectiveness of controls in
A lidit Sam ling

the risk assessment, the greater is the

extent of the auditors tests of controls
(and therefore, the sample size is
increased .
2. An increase in the Decrease The lower the tolerable rate of deviation,
tolerable rate of the larger the sample size needs to be.
deviation
3. An increase in the Increase The higher the expected rate of deviation,
expected rate of the larger the sample size needs to be to
deviation of the that the auditor is in a position to make a
population to be reasonable estimate of the actual rate of
tested deviation. Factors relevant to the auditors
consideration of the expected rate of
deviation include 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 intemal 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.
 Basic Concepts 402

4. An increase in the Increase The greater the level of assurance that the
auditor's desired level auditor desires that the results of the
of assurance that the sample are in fact indicative of the actual
tolerable rate of incidence of deviation in the population
deviation is not the larger the sample size needs to be.
exceeded by the
actual rate of
deviation in the
ulation
Examples of Factors Influencing Sample Sizefor Tests ofDetails

The following are factors that the auditor may consider when determining the
sample size for tests of details. These factors, which need to be considered together,
assume 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.
403 Chapter 15

FACTOR EFFECT ON
SAMPLE SIZE
1. An increase in the Increase The higher the auditor's assessment of the
auditor's assessmerit of risk of material misstatement, the larger the
the risk of material sample size needs to be. The auditor's
misstatement assessment of the risk of material
misstatement is affected by inherent risk
and control risk. For example, if the auditor

does not perform tests of controls, the

auditor's risk assessment cannot be reduced
for the effective operation of internal
controls with respect to the particular
assertion. Therefore, in order to reduce
audit risk to an acceptably low level, the
auditor needs a low detection risk and will
rely more on substantive procedures. The
more audit evidence that is obtained

from tests of details (that is, the lower the

detection risk), the larger the sample size
will need to be.

2. An increase in the use of Decrease The more the auditor is relying on other
other substantive substantive procedures (tests of details or
procedures directed at substantive analytical procedures) to reduce
the same assertion to an acceptable level the detection risk
regarding a particular population, the less
assurance the auditor will require from
sampling and, therefore, the smaller the
sample size can
be
 Basic Concepts 404

3. An Increase in the The greater the level of assurance that the

auditor's desired auditor requires that the results of the
level of sample are in fact indicative of the actual
assurance that
tolerable amount of misstatement in the population,
Increase the larger the sample size needs to be.
misstatement is
not
exceeded by actual
misstatement in the
ulation
4. An increase in tolerable Decrease The lower the tolerable misstatement, the lar
misstatement er the sam le size needs to be
5. An increase in the Increase The greater the amount of misstatement the
amount of misstatement auditor expects to find in the population, the
the auditor expects to larger the sample size needs to be in order to
find in the population make a reasonable estimate of the actual
amount of misstatement in the population.
Factors relevant to the auditor's
consideration of the expected misstatement
amount include the extent to which item
values are determined subjectively, the
results of risk assessment procedures, the
results of tests of control, the results of audit
procedures applied in prior period>, and the
results of other substantive r edures.

6. Stratification of Decrease When there is a wide rang (variability) in the

the population monetary size of items in e population, it
when appropriate may be useful to stratify the population.
When a population can be appropriately
stratified, the aggregate of the sample sins
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 o ulation.

7. The number of sampling Negligible effect For large populations, the actual size of the
units in the population 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.
405 Chapter 15

Performing the Audit Procedure

The auditor-should perform audit procedures appropriate to the particular test

objective on each item selected.

If a selected item is not appropriate for the application of the procedure, the
procedure is ordinarily performed on a replacement item. For example, a voided
check may be selected when testing for evidence of payment authorization. If the
auditor is satisfied that the check had been properly voided such that it does not
constitute an error an appropriately chosen replacement is examined.

Sometimes however, the auditor is unable to apply the pictured audit procedures to
a selected item because, for instance, documentation relating to that item has been
lost. If suitable alternative procedures cannot be performed on that item the auditor
ordinarily considers that item to be in error. An example of a suitable alternative
procedure might be the examination of subsequent receipts when no reply has been
received in response to a positive confirmation request.

Evaluation ofSample Results

Having carried out, on each sample item, those audit procedures that are appropriate
to the particular audit objective, the auditor should:

• analyze any error detected in the sample,

• project the en-ors found in the sample to the population, and
• assess the sampling risk.

Analysis of Errors in the Sample

The auditor should consider the sample results, the nature and cause of any errors
identified, and their possible effect on the particular test objective and on other
areas ofthe audit.

When conducting tests of control, the auditqr is primarily concerned with the
design and operation of the controls themselves and the assessment of control
 Basic Concepts 406

However, when errors are identified, the auditor also needs to•consider matters

(a) The direct effect of identified errors on the financial statements; and
(b) The effectiveness of the accounting and internal control systems and their
effect on the audit approach when, for example, the errors result from
management override ofan internal control.

In analyzing the errors discovered, the auditor may observe that many have a
common feature, for example, type of transaction, location, product line or peiiod
of time. In such circumstances, the auditor may decide to identify all items in the
population that possess the common feature and extend audit procedures in.that
stratum. In addition, such errors may be intentional, and may indicate the
possibility of fraud.

Sometimes, the auditor may be able to establish that an error arises from an isolated
event that has not recurred other than on specifically identifiable occasions and
is therefore not representative of similar errors in the population (an anomalous error).
To be considered an anomalous error, the auditor has to have a high degree of certainty
that such error is not representative of the population. The auditor obtains this certainty
by performing additional work. The additional work depends on the situation, but is
adequate to provide the auditor with sufficient appropriate evidence that the error does
not affect the remaining

part of thé populatiön. One example is an error caused by a computer breakdown

that is known to have occurred on only one day during the period. In that case, the
auditor assesses the effect of the breakdown, for example' by examining specific
transactions processed on that day, and considers the effect of the cause Of the
breakdown on _audit procedures and conclusions. Another example iy an error that
is found to be caused by use Of an incorrect formula in calculating all inventory
values at one particular branch. To establish that this is an anomalous error, the
auditor needs to ensure the correct formula has been used at other branches.
407 Chapter 15

In analyzing the errors detected in the sample. the auditor should determine that
item in question is in fact an error. In desighing the sample, the auditor will have
defined those conditions that constitute an error by reference to his audit
Objectives. For example, in a substantive procedure relating to the recording of
accounts receivable, a misposting betweencustomer accounts does not affect the
total accounts receivable. Therefore, it may be inappropriate to consider this an
error in evaluating the sample results of this particular procedure, even though it
may have an impact on other areas of the audit. such as the assessment of doubtful
accounts.
When Oocumentation in support of specific sample items cannot he located,
the auditor may be able to obtain appropriate audit evidence through
performing alternative procedure related to the missing sample items. For
example, if a positive confirmation has been circularized in respect to a
customer account receivable and no reply was obtained, the auditor may be
able to obtain appropriate audit evidence that the customer. receivable is
valid by reviewing subsequent payments from the customer. If the auditor
does not or is unable to perform alternative procedures related to the missing
sample item (customer receivable), he should treat this item as an erro? for the
purpose of his evaluation of audit evidence provided by the audit sample.

The auditor also should consider the qualitative aspects of the errors. These
include the nature and cause of the error and the possible impact of the error
on other phase of the audit, for example, the amount of planned reliance on
internal control procedures.

In assessing the errors discovered, the auditor may conclude that many have a
common feature, for example, type of transaction, location, product line, period of time
or other relevant feature. In such circumstance, the auditor may decide to identify all
items in the population which possess the common feature, thereby producing a sub-
population, and extend his procedures in this area. He should then perform separate
evaluations based on the items examined for each subpopulation.

Projection of Errors

PSA 530 provides for guidance in projecting errors,as follows:

• For substantive procedures, the auditor should project monetary

errors found in the sample to the population, and should consider
the effect Of the projected error on the particular test objective and on other
 Basic Concepts 408

areas Of the audit. The auditor projects the total error for the population to
obtain a btoad view of the scale of errors, and to compare this to the tolerable
error. For substantive procedures, tolerable error is the tolerable

misstatelnent, and will be an amount less than or equal to the auditods

preliminary estimate of materiality used for the individual account balances
being audited.
A

When an error has been established as an anomalous error, it may be

excluded when projecting sample errors to the population. The effect of
any such error,.if uncorrected, still needs to be considered in addition to
the projection of the non-anomalous errors. If an account balance or class
of transactions has been divided into strata, the error is projected for each
stratum separately. Projected errors plus anomalous errors for each
stratum are then combined when considering the possible effect of errors
on the total account balance or class of transactions.

• For tests of control, no explicit projection of errors is necessary since the

sample error rate is also the projected rate of error
for the population as a whole.

The auditor should project the error results of the sample to the population from
which the sample was selected. There are several acceptable methods of
projecting the error results. However, in all cases the method of projection should
be consistent with the method used to select the sampling unit. When
error results, the auditor should keep in mind the qualitative aspects of the errors
found. When the population is divided into two or more sub-populations
(st/atification), the projection of errors is done
separately for each sub-population and the
results are added together.

Assessing Sampling Risk

The auditor should evaluate the sample results to determine whether the preliminary

assessment of the relevant characteristic of the population is confirmed or needs to be ,

revised. In the case of a test of controls, an unexpectedly high sample error rate.may lead
to an increase in the assessed level of control risk, unless further evidence
substantiating the initial assessment is Obtained. In the case of a substantive procedure,
an unexpectedly high error amount in a sample may cause the auditor to believe that an
 409 Chapter 15

account balance or class of transactions is materially misstated, in the absence of further

evidence that no material misstatement exists.

If the total amount of projected error plus anomalous error is less than but close to that
which .the auditor deems tolerable, the auditor considers the persuasiveness of the såmple results

n the light of other audit procedures, and may consider it appropriate to obtain
additional audit evidence. The total of Projected error plus anomalous error is the auditor's best
estimate of error in the Population. However, sampling results are affected by sampling risk.
Thus, when the best estimate of error is close to the tolerable error, the auditor recognizes
he risk that a different sample would result in a different best estimate that could
exceed the tolerable error. Considering the results of other audit procedures
helps the auditor to assess this risk, while the risk is reduced if additional
audit evidence is obtained.

If the evaluation of sample results indicates that the preliminary assessment of the
relevant characteristic of the population needs to be revised, the auditor may:
(a) request management to investigate idetltified errors and the potential for
further errors, and to make any necessary adjustments; and/or
(b) modify planned audit procedures. For example, in the case of a test of
control, the auditor might increase the sample size, test an alternative
control or modify related substantive procedures; and/or (c) consider the
effect on the audit report.

The auditor should consider whether errors in the population might exceed the
tolerable error. To accomplish this. the auditor should compare the projected
population error to the tolerable error and also then compare the sample results
to the evidence obtained from other relevant audit procedures when forming his
conclusion about an account balance, class of transactions or specific control.
The projected population error used for this comparison should be net of
adjustments made by the client. As projected error approaches tolerable error.
the risk of incorrect acceptance or over reliance increases, The auditor should
therefore reconsider the sampling risk and if he determines that the risk is
unacceptable, he should consider extending his audit procedures or
alternative audit procedures.
 Basic Concepts 410

In compliance procedures, the evaluation of the errors may result in the auditor
concluding that the sample results do not support his planned degree of reliance
on a control procedure. In this case, he may ascertain that there is another
appropriate control on which he might rely after applying appropriate
compliance procedures. Alternatively, he may modify the nature, timing and
extent of his substantive procedures.

Conclusion

Having evaluated the sampling result, the auditor shoüld conclude as to the
extent to which he has obtained sufficient appropriate audit evidence in
support of the particular characteristic of the account balance or
class of transaction with which he is concerned.

Detailed Audit Sampling Plans

Figure 15-2 shows the various audit sampling plans that the auditor can use.

Figure IS-2 Detailed Audit Sampling Plans

Audit Sampling

Statistical

Regular

or
Mean per Difference Ratio Regression unit
Estimation Estimation

Definition / Description of Audit Sampling Plans

411 Chapter 15

Attributes Sanpling Plan

This is used to test an entity's rate of deviation (alsb called rate of occurrence)
from a prescribed control procedure. It is an audit sampling in which auditors look
for the presence or absence of a control condition. For example, an auditor might
use an attributes sampling plan to test controls for billing systems, disbursement
processing. inventory pricing and depreciation among other things.

Variables Sampling Plan

This is used to test whether recorded account balances are fairly stated. For
example, an auditor might use a variables sampling plan to test recorded peso
amounts for receivables, inventory, fixed asset additions among others.
Statistical Sampling Plan
This is a sampling technique in which an auditor uses the laws Of probability
to select and evaluate a sample. When using statistical sampling. auditors must
select a random sample, which means every item in the population must havé
an equal chance of being included in the sample.

Nonstatistical Sampling Plan

These plans rely exclusively on subjective judgment to determine Sample size
and to evaluate sample results.

Regular or Classical Attributes Sampling

This sampling plan enables the auditor to estimate the rate of occurrence of
certain characteristics in the population. For example. the auditor might
use this plan to estimate the percentage of cash disbursements processed
during the year that were not approved.

Discovery Sampling
This form of attributes sampling is designed to locate at least one deviation
(exception) in the population. Discovery sampling is often used in situations in
which the auditors expect a very low rate of occurrence of some critical
deviation. The purpose of a discovery sample is to detect at least one deviation,
with a predetermined risk of assessing control risk too low, if the deviation rate
in the population is greater than the specified tolerable deviation rate. One
 Basic Concepts 412

important use of discovery sampling is to locate examples of a suspected fraud.

Example is when the auditor attempts to locate a fraudulent cash disbursement.

Sequential (Stop or Go) Sampling

This is a sampling plan for which the sample is selected in several steps, with
the need to perform each step conditional on the results of the previous steps.
That is, the results may either be so poor as to indicate that the control Inay not
be relied upon, or so good as to justify reliance at each step.

Probability Proportional to Size (PPS)

This technique, which is also referred to as peso-unit sampling, applies
attributeS satnpling theory to develop an estimate of the total peso amount of
misstatement in a population. Probability-proportional-to-sin sampling is used
as an alternative to classical variable sampling methods for performing
substantive tests Of transactions or balances. Unlike classical variable sampling
techniques that
413 Chapter 15

define the sampling unit as each transaction or account balance in the population,
PPS sampling defines the sampling unit as each individual peso making up the
book value of the population. A transaction or account is selected for audit if a peso
from that transaction or account is selected from the population. Therefore, each
transaction or account has a probability proportional to its size of being selected for
inclusion in the sample.

Classical Variables Sampling Models

These use normal distribution theory to evaluate selected characteristics of a
population on the basis of a sample of the items constituting the population. These
sampling applications provide the auditors with an estimate of a numerical quantity
such as the peso balances of an account. This technique is primarily used by
auditorSto perform substantive tests.

Mean-per-unit Estimation
This is a classical variables sampling plan enabling the auditors to estimate the
average peso value (or other variable) of items in a population by determining the
average value of items in a sample.

Difference Estimation
This is a sampling plan that uses the difference between the audited (corregt)
values and book values of items in a sample to calculate the estimated total
audited value of the population. Difference estimation is used in lieu of ratio
estimation when the differences are not nearly proportional to book values,

Ratio Estimation
This is a sampling plan that uses the ratio of audited (correct) values to book values
of items in the sample to calculate the estimated total audited value of the
population. Ratio estimation is used in lieu of difference estimation the differences
are nearly proportional to book values.

Regression
The regression approach is similar to the difference and ratio approaches. This
approach has the effect of using both the average ratio and the average difference in
calculating an estimate of the total amount for the population.
REVIEW QUESTIONS

Questions
 Basic Sampling Concepts 414
l . What is meant by audit sampling?
2. Why do auditors use audit sampling?
3. Distinguish between sampling risk and nonsampling risk.
4. Why must an audit sample be representative of the population from
which it is drawn?
5. Distinguish between attribute estimate procedures and variables
estimation procedures.
6. What are the factors to be considered in designing an audit sample?
7. What is meant by stratification in audit sampling?
8. What are the advantages of using stratification?
9. Give and explain briefly the most commonly used sample selection
methods for statistical and nonstatistical sampling?
10. How can the auditor control sampling risk?

l l . Explain briefly the different audit sampling plans that the auditor can
use.

12. Discuss briefly the steps involved in evaluating sample results.

Multiple Choice Questions

1. In an audit sampling application, an auditor:

a. performs procedures on all the items in a balance and makes a
conclusion about the whole balance.
b. performs procedures on less than 100 percent of the items in a
balance and formulates a conclusion about the whole balance.
c. performs procedures on less than 100 percent of the items in a
class of transactions for the purpose of becoming familiar with the
client's accounting system.
d. performs analytical procedures on the client's unaudited financia l
statements when planning the audit.
Audit
2. Auditors consider statistical sampling to be characterized by the
following:
415 Chapter 15
a. representative sample selection and nonmathematical consideration of the
results.
b. carefully biased sample selection and statistical calculation of the
results. c. representative sample selection and statistical calculation of
the results.
d. carefully biased sample selection and nonmathematical consideration of the
results.

3. In audit sampling applications, sampling risk is:

a. characteristics of statistical sampling applications but not of

nonstatistical applications.
b. the probability that the auditor will fail to recognize effoneous accounting in
the client's documentation.
c. probability that accounting errors will arise in transactions and enter the
accounting system.
d. the probability that an auditor's conclusion based on a sample might be
different from the conclusion based on an audit of the entire population.

4. Which of the following should be considered an audit procedure for

obtaining evidence?
a. An audit sampling application in accounts receivable selection.

b. The accounts receivable exist and are valued properly.

c. Sending a written confirmation on a customer's account balance.
d. Nonstatistical consideration of the amount of difference reported by a
customer on a confirmation response.

5. Which of the following elements in the audit risk model is/are a product

of the auditors professional judgment?

a. Control risk.
b. Analytical procedures risk.
c. Test of details risk of incorrect acceptance.
d. All of the above.

6. Which of the following is an element of sampling risk?

 Basic Sampling Concepts 416
a. Choosing an audit procedure that is inconsistent with the audit
objective.
b. Concluding that no material misstatement exists in a materially
misstated population based on taking a sample that includes no
misstatement.
c. Failing to detect an error on a document that has been inspected by an
auditor.
d. Failing to perform audit procedures that are required by the sampling
plan.

7. In assessing sampling risk, the risk of incorrect rejection and the risk of
assessing control risk too high relate to the:
a. efficiency of the audit. c. selection of the sample.
b. effectiveness of the audit. d. audit quality controls.

8. In planning a statistical sample for tests of controls, an auditor incrmses

the expected population exception rate from the prior year's rate because
of the results of the prior year's tests of controls. As a result, the auditor
would most likely increase the planned
a. tolerable exception rate.
b. allowance for sampling risk.
c. acceptable risk of assessing control risk too low.
d. sample size.
9. From a random sample of items listed from a client's inventory count, an
auditor estimates with a 90 percent confidence level that the computed
upper exception rate (CUER) is between 4 percent and 6 percent. The
auditor's major concern is that there is one chance in twenty that the true
exception rate in the population is
a. more than 6 percent. c. more than 4 percent.

b. less than 6 percent. d. less than 4 percent.

10. If, from a random sample, an auditor can state with a 5 percent
acceptable risk of assessing control risk too low (ARACR) that the
exception rate in the population does not exceed 20 percent, he or she
can state that the exception rate does not exceed 25 percent with
a. 5 percent risk.
417 Chapter 15
b. risk greater than 5 percent.
c. risk less than 5 percent.
d. This cannot be determined from the information provided.

Cases

Case 1
The use of statistical sampling techniques in an audit of financial statements
does not eliminate judgmental decisions.

Required:
a. Identify and explain four areas in which judgment may be exercised by

CPAs in planning a statistical test of controls. b. Assume that the

auditors' sample shows an unacceptable deviation rate.
Discuss the various actions that they may take based upon this finding.

c. A nonstratified sample of 80 accounts payable vouchers is to be selected

from a population of 3,200. The vouchers are numbered consecutively
from I to 3,200 and are listed, 40 to a page, in the voucher register.
Describe four different techniques for selecting a random sample of
vouchers for inspection.
(AICPA Adapted)

Case 2
Sampling for attributes is often used to allow an auditor to reach a
conclusion concerning a rate of occurrence in a population. A common use
in auditing is to test the rate of deviation from a prescribed internal control
procedure, to determine whether the planned assessed level of control risk
is appropriate.

Required:

a. When an auditor samples for attributes, identify the factors that should
influence the auditors' judgment concerning the determination of:
 Basic Sampling Concepts 418
(l) Acceptable level of risk ofassessing control risk too low.
(2) Tolerable deviation rate.

(3) Expected population deviation rate.

b. State the effect on sample size of an increase in each of the following

factors, assuming all other factors are held constant:
(l) Acceptable level of the risk of assessing control risk too low.
(2) Tolerable deviation rate.
(3) Expected population deviation rate.

c. Evaluate sample results of a test for attributes if authorizations are found to be

missing on 7 check requests out of a sample of 100 tested. The population
consists of 2,500 check requests, the tolerable deviation rate is 8 percent, and
the acceptable level of risk of assessing control risk too low is 5 percent.

d. How may the use of statistical sampling assist the auditors in' evaluating
the sample results described in c above?

(AICPA Adapted)