TOPIC 6: AUDIT SAMPLING

6.0 AUDIT SAMPLING (ISA 530)

 This involves the application of audit procedures to less than 100% of the items within an
account balance or class of transactions to enable an auditor to form an opinion.
 Audit sampling is achieved by statistical or non-statistical approach and the choice
depends on the auditor’s professional judgement and the circumstances that exist.
 Statistical sampling follows a random selection and the use of probability theory to
evaluate the sample result and risk.
 Sample risk is the risk that the auditor could reach another conclusion based on the
sample than when the entire population is examined.
 There are two types of sampling risk:
o Risk of under-reliance
This is based on the tests of controls that the controls are less effective than they
actually are, or based on test of detail (substantive tests) that a material
misstatement exists when this is not the case. This could lead to inefficiency.
o Risk of over-reliance
This is the risk that, based on the tests of controls, the controls are more effective
than is actually the case or based on test of detail (substantive tests) that there is
no material misstatements while it in fact exists. This could lead to an
inappropriate audit opinion on the financial statements.

6.1 Statistical and other sampling methods

i) Random sampling
o This is a statistical approach to sampling
o Computer programmes which have an automatic random number generator
function are used to randomly select items from a specific population

ii) Systematic sampling

o This is a statistical sampling approach where a sampling interval is calculated by
dividing the number of sampling units in the population by the sample size
o Items are then selected according to the sampling interval

iii) Haphazard sampling

o No structured technique is followed by the auditor in the selection of items and it
is regarded as a non-statistical approach to sampling
o The auditor should be cautious of any bias or partiality when using this method

iv) Block sampling

 o This methods involves the selection of blocks of consecutive items from the
population.
o The blocks can be selected following either a statistical or a non-statistical
sampling approach.
o This is not regarded as an appropriate method when the auditor intends to draw
valid inferences about the entire population based on the sample.

6.2 Application of sampling

Sampling must be:

o Easy to understand and legally justifiable

o Easy to apply and feasible
o Cost-effective and reliable

6.3 Steps in the process of sampling applications

i) Define the population (e.g. sales invoices or delivery notes)

ii) Define the purpose of the test ( test of controls or substantive tests)
iii) Establish:
a. The number of items to be tested (statistically/judgemental)
b. What will constitute an error
c. The procedure to perform on the selected items
iv) Select the items of the sample from the population (judgemental/random/systematic)
v) Perform audit procedures on the selected items
vi) Evaluate the results of the items tested and draw a conclusion

6.4 Judgemental sampling

- Involves the determination of the number of items to be tested, the selection of the items
and the determination of the acceptability of the results of the test, based on the auditor’s
professional judgement.

6.4.1 Advantages of non-statistical sampling

i) The approach has been used for many years therefore it is well refined by experience
ii) The auditor can bring his judgement and expertise into play
iii) No special knowledge of statistics is required
iv) No time is spent on playing with mathematics since all the audit time is spent on auditing

6.4.2. Disadvantages of non-statistical sampling

 i) It is not scientific
ii) It is wasteful if samples are too large
iii) No quantitative results are obtained
iv) Personal bias in the selection of samples is unavoidable
v) There may be no real logic to the selection of the sample or its size
vi) The sample selection may be slanted to the auditor’s needs

6.5 Statistical sampling

- Involves the use of mathematical and statistical applications to determine the number of
items to be tested , the selection of items and the evaluation of the acceptability of the
population

6.5.1 Advantages of using statistical sampling

a) It is scientific.
i) It provides precise mathematical statements about probabilities of being correct
ii) It is efficient as very large samples are not taken
iii) This might be a cheaper technique due to the smaller sample used
iv) Quicker availability of information than with other techniques
v) It tends to create uniform standards among different audit firms
vi) It can be used by lower grade staff who would be unable to apply the judgement needed
by judgemental sampling
vii) An objective selection of items is done since human factors play no role
viii) The computer can be used to a large extent to select items and to perform
calculations
ix) Emphasis can be placed on important items, (for example, higher value items if
stratification is used).

6.5.2 Disadvantages

i) Where the items in the sample are not sequential the search for the items can be time
consuming and expensive
ii) The conclusion reached is only applicable to the population from which the items were
selected
iii) Only one aspect of the audit can be tested at a certain time
iv) This can be an expensive technique due to the time it takes to determine and select the
sample
v) Special training of personnel is necessary especially where audit personnel changes
regularly it may involve large costs for the auditor.
vi) This is usually not successful in small undertakings since lack of internal controls forces
the auditor to test everything or to perform extended substantive tests.
6.6 Procedures with statistical sampling

- Determine the nature of the test Tests of control/substantive tests

- Determine the purpose of the test What the test intends to prove e.g. whether
purchase orders are authorised

- Define the population e.g. number of purchase orders or purchase

amount per purchase journal

- Define the sample units e.g. purchase orders from the purchases
journal

- Define what is regarded as error e.g. purchase order not signed by purchase
manager

- Determine the sample size This requires the auditor to:

a) Define the required assurance level

e.g. the greater the degree of assurance

required, the larger the sample size will be

b) Define the precision level

This is the degree with which the conclusion,

based on the tests may deviate from the true
characteristics of the population and still be
acceptable to the auditor. e.g. the lower the
precision level, the larger the sample size will
be

c) Expected error

This is the expected rate of errors in the

population e.g. the larger the expected errors,
the larger the sample will be

d) Population size

the population has little effect on the sample

 size

e) tolerable error

This is the maximum error in the population

that the auditor would be willing to accept
and is calculated as expected error ± the
precision level.

- Selecting the items to be tested Use the following methods:

a) Random selection
b) Systematic selection
c) Weighted monetary value selection –
this method will select higher value
items and is mainly used for
overstatement testing and is not
appropriate for understatement testing.
d) Judgemental selection

- Testing the items Apply audit procedures on the selected items

- Evaluation of the results and Involves the calculation of the potential error
determination of the potential error in in the population, expressed as the total errors
the population found in relation to the total items tested.

- Form an opinion on the population Compare potential error and tolerable error
then decide either to accept the population
and report the errors found to management or
if potential error is larger than tolerable error,
enlarge the test and determine whether the
new potential error rate is acceptable or
calculate the value of the population (by
means of estimation sampling for variables)
and determine the value of error in the
population.
6.7 Reliance on internal auditors other specialists

6.7.1 Internal audit

The main function of the internal audit department is to examine, evaluate and report to
management and directors on the adequacy and effectiveness of internal control. They will play a
major part in designing internal control system and will report on departures from that system
and give suggestions about where it can be improved.

6.7.2 Internal audit functions

- The typical functions of an internal audit department:
- Helps achievement of corporate objectives (how could a company make profits if it
doesn’t safeguard its assets or properly record transactions?)
- Aids risk assessment and management.
- Improves efficiency, effectiveness and economy.
- Designs internal control system.
- Checks operation of internal controls system.
- Value for money audits.
- Test IT controls.
- Liaises with external auditors/shares work.
- Testing information technology controls is also part of internal audit responsibilities.
- And finally internal audit often plays a major part in liaising with external auditors and
sharing work.
- A lot of audit work is achieved by the internal audit department and the external auditors
will review the working papers and findings of internal audit.

6.7.3 Relying on the work of 3rd parties

Using the work done by internal audit is one example of where auditors rely on the work of
3rd parties. Other examples include:
- Having to rely on experts such as estate agents, actuaries, lawyers.
- Relying on the work of other external auditors (for example, if some companies in a
group have different auditors)
- The auditors should ensure that the third parties are:
o Qualified
o Experienced
o Independent
o Professional
The auditors should also be willing to challenge experts’ opinions, show professional skepticism
and, if necessary, bring additional experts in for a second opinion.

The following should be agreed upon in writing:

- Nature, scope and objectives of work
 - Respective responsibilities
- Nature, scope and timing of communications
- That the expert observes confidentiality

Auditor must examine the expert’s work with respect to:

- Consistency with other evidence. For example, if a property valuer reported a decrease in
the value of a client’s property portfolio, yet the newspapers were full of news about a
property boom, the auditor should challenge the valuer’s results.
- Assumptions made. For example about the rate of returns that might be earned on
pension funds.
- Use and accuracy of source data. To value property the valuer must start with an up-to-
date list of the properties the company owns.