AUDITING THEORY notes

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Audit sampling
1. Audit sampling is performed on the assumption that the sample selected for testing is
representative of the population. Thus, an inference or conclusion can be drawn about the
characteristics of the population based on sample results.
2. 100 percent examination of the entire population may be more appropriate for small number
of large value items
3. Selective testing of sample may also be done. This is when auditors only want to apply audit
procedures to those items which have a particular significance. Example: all items over a certain
amount.
4. Regardless of the approach used, the auditor needs to be satisfied that sufficient appropriate
evidence is obtained to meet the objectives of the audit.
5. Not detecting material errors could be due to sampling and non sampling risk.
6. Sampling risk arises when the sample selected for testing may not be truly representative of a
population. Hence, the auditors evaluation will be erroneous. The errors in evaluation or
sampling risk are of two types: the alpha and beta risk.
7. Alpha risk arises when the auditor will become pessimistic that he will conclude that the
internal control is not reliable when in fact it is or that there is material misstatement (in case of
substantive test) when in fact there isnt.This affects the efficiency of the audit because the
auditor will perform procedures more than what is necessary. In internal control, it is called risk
of underreliance while in substantive test it is risk of incorrect rejection (you reject the account
balance as misstated when in fact it isnt).
8. Beta risk is the opposite of Alpha. In beta risk, auditor is optimistic and will conclude that the
internal control is reliable or that account balance is not materially misstated. This affects the
effectiveness of the audit. In case of internal control, it is risk of overreliance. In substantive test,
it is incorrect acceptance (you accept the account balance or transaction as not materially
misstated when in fact it is).
-the auditor is more concern with BETA error than alpha error because this affects the
effectiveness of the audit (actual cpa exam question). The auditor must be able to detect
misstatements.
9. Nonsampling risk is the risk when auditor will draw incorrect conclusion because of human
errors. This is not due to sampling.
10. Auditors cannot examine the entire population due to time and cost constraints so they
resort to sample selection. To minimize sampling risk in sample selection, auditors will increase
the sample size and use an appropriate sample selection method.
11. To minimize non-sampling risk or human errors, proper planning, of the engagement;
direction, review and supervision of the audit team are necessary.
12. Statistical and non-statistical are two sampling approaches that can be used by the auditor
to gather sufficient appropriate evidence.
13. Statistical sampling uses: (1) random-based selection of sample (2) law of probability to
measure sampling risk and evaluate sample results.
14. Nonstatistical purely uses the auditors judgement.
15. Both approaches cannot assure that the sample will be representative of the population.

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16. The only difference between statistical and non-statistical is the fact that statistical can
measure or quantify the sampling risks by using mathematical formula. thus, It helps the auditor
to: (1) design an efficient sample (2) measure the sufficiency of evidence obtained (3)
objectively evaluate the sample results.
17. When statistical sampling is used, the auditor may use either attribute or variable sampling
plan.
18. Attribute sampling is for the test of internal control wherein the frequency of occurrence of a
certain characteristic in a population (occurrence rate) and the estimated rate of deviation is
determined.
19. Variable sampling, on the other hand, is for substantive test used to estimate the peso value
of the population and the amount of misstatements in the financial statements.
20. Basic steps in audit sampling are: (1) define the objective (to determine whether AR is
existing) (2) Determine the procedure to be performed to satisfy the objective(sending
confirmation letter) (3) determine the sample size (4) select the sample (use random sampling
method) (5) apply the procedures (6) evaluate the result (is the account materially misstated?
additional procedures needs to be performed?).
21. Audit sampling is generally appropriate for test of controls when application of the control
leaves evidence of performance. Inquiries and observation would be appropriate for those
controls that leave no documentary evidence of performance.
22. 3 factors affecting the sample size: (1) acceptable sampling risk (2) tolerable deviation rate
(3) expected deviation rate.
23. Establishing tolerable deviation rate and acceptable sampling risk requires professional
judgment and involves consideration of: (1) importance of internal control (2) degree of reliance
to be placed on such control. It means that, if we are to rely on internal control because we
believe in its importance in providing reliable financial statement then we should lower down the
deviation and sampling risk to support lower assessment of control risk. This increases the
sample size to obtain more evidence that controls are working effectively.
24. The larger the expected deviation rate based on the prior years results or by examining few
items in the population, the larger the sample size. So, if sample size is large then acceptable
sampling and tolerable are low while expected deviation is high.
25. There are three principal methods of selecting samples: (1) random number (b) systematic
(3) haphazard
26. Under random number, random numbers generated by the random number table or a
computer software generator are matched with the population numbering system.
27. Under systematic, we use sampling interval to select sample. Sampling interval is
determined by dividing the population size by the sampling size.
28. Haphazard, on the other hand, does not follow organized or structured technique so it is
used for non-statistical.
29. if the auditor selects a voided or cancelled document but it is properly voided, then it should
be replaced by another sample item
30. if the auditor encounters missing document and he is unable to determine whether the
control has been properly performed, such item should be treated as a deviation
31. When evaluating sample results, both the qualitative and the quantitative factors of deviation
should be considered. In evaluating the sample results for test of controls, one should: (1)

AUDITING THEORY notes

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determine the sample deviation rate. this is obtained by dividing the number of deviations by the
sample number of sample items. (2) compare it with the tolerable deviation rate and draw an
overall conclusion about the population.
32. if the sample deviation rate exceeds the tolerable, control risk is assessed at high level and
therefore, extensive substantive tests should be performed.
33. If however, the sample deviation rate is lower than the tolerable rate, allowance for sampling
risk is considered before making any conclusion because it may be that the sample selected is
not truly representative of a population which has a higher deviation rate than the tolerable rate.
the risk na nagkataon lang na ang sample na napili is mas mababa kesa sa tolerable when in
fact, population taken as a whole ay mas mataas ang deviation kesa sa tolerable.
34. If the sample deviation rate is considerably lower than the tolerable rate, there is low risk
that the actual population deviation rate will exceed the tolerable. Thus, the sample result
supports the planned degree of reliance on internal control. Control risk is low.
35. If the sample deviation rate is not considerably lower than the tolerable rate, maximum
population deviation rate is obtained by adding the sample deviation rate plus the allowance for
sampling risk.
36. Sequential sampling can be used as an alternative form of testing controls when an auditor
expects very few deviations within the population. This also called the stop-or-go sampling. The
auditor makes a decision of whether to stop or go on with the sampling plan.
37. Discovery sampling is most appropriate when no deviations are expected in the population
and therefore, even one deviation would cause concern. Under this method, the auditor
determines a sample size sufficient to discover at least one deviation to confirm whether an
irregularity has occurred
38. For practical purposes, the auditor uses the acceptable level of detection risk as the
acceptable sampling
39. When using statistical sampling, variability in the population is measured by the standard
deviation.
40. When a population consists of highly variable recorded amounts, it may be difficult to select
a sample that will be representative of the whole population.. Consequently, a larger sample
size is required.
41. In sample selection methods of substantive, an additional method may be used such as the
stratified and value-weighted selection. They are similar to each other in that large monetary
value are given greater representation in the sample. Stratified decreased the effect of variance
in the population and as a result decreases the sample size while in value weighted selection,
overstatement errors is anticipated.
42. The amount of misstatement is valid only in so far as the sample selected is concerned.
Thus the auditor needs to project the identified misstatements to the population to evaluate its
impact on the entire population. This is accomplished using: (1) ratio estimation (2) difference
estimation.
43. Ratio estimatio uses the book value of the sample and the population size while difference
estimation uses the number of customers of population and the sample to project the
misstatement. Compare then the projected with the tolerable. If it the account is materially
misstated, auditor may: (1) examine additional units (2) perform suitable alternative procedures
or (3) request the client to adjust the account balance.

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44. Anomalous errors are not representative of errors in the population and should be excluded
when projecting sample errors to the population. However, it should be considered together with
the projected errors in evaluating the combined effects of the errors on the account balance.
45. Sample is just used to estimate the entire population characteristic