Sampling Audit (Paper)

Auditing: A Journal of Practice & Theory
Vol. 32, Supplement 1

2013
pp. 99129
American Accounting Association

DOI: 10.2308/ajpt-50394
Audit Sampling Research: A Synthesis and

Implications for Future Research
Randal J. Elder, Abraham D. Akresh, Steven M. Glover, Julia L. Higgs, and
Jonathan Liljegren
SUMMARY: While research has influenced auditing standards for audit sampling,
academic research provides limited insights into the current use of audit sampling. We
synthesize relevant research based on a sampling decision framework and suggest areas
for additional research. Important judgments include determining if sampling applies, what
type of sampling to apply (e.g., attribute or monetary sampling), whether to use statistical
or nonstatistical techniques, appropriate inputs to determine sample size, and evaluation
of results, particularly when errors are observed in the sample. Several of these
judgments may be influenced by environmental factors, such as regulation, litigation,
competition, culture, and technology, and there are a number of research opportunities
available in exploring how these environmental factors influence audit sampling decisions.
Research indicates that auditors may underestimate risks and required assurance in
order to reduce the extent of testing, although some of this research predates current risk
assessment standards, as well as recent regulatory changes. Research also indicates
auditors sometimes fail to project sample errors, and are prone to decision biases when
evaluating nonstatistical samples. More recent research finds low rates of sample errors
in many sampled populations, indicating that some sampling concerns may be mitigated
Randal J. Elder is a Professor at Syracuse University, Abraham D. Akresh is a Certified Public Accountant
and Certified Government Financial Manager, Steven M. Glover is a Professor at Brigham Young University,
Julia L. Higgs is an Associate Professor at Florida Atlantic University, and Jonathan Liljegren is a Manager
at Freddie Mac.
The authors thank Jeff Cohen (editor) and two anonymous reviewers for their helpful comments that substantially
improved the paper.
To facilitate the development of auditing and other professional standards and to inform regulators of insights from the
academic auditing literature, the Auditing Section of the American Accounting Association (AAA) decided to develop a
series of literature syntheses for the Public Company Accounting Oversight Board (PCAOB). This paper (article) is
authored by one of the research synthesis teams formed by the Auditing Section under this program. The views expressed
in this paper are those of the authors and do not reflect an official position of the AAA or the Auditing Section. In
addition, while discussions with the PCAOB staff helped us identify the issues that are most relevant to setting auditing
and other professional standards, the author team was not selected or managed by the PCAOB, and the resulting paper
expresses our views (the views of the authors), which may or may not correspond to views held by the PCAOB and its
staff.
Editors note: Accepted by Jeffrey R. Cohen.
Submitted: April 2012

Accepted: January 2013
Published Online: January 2013
99
Elder, Akresh, Glover, Higgs, and Liljegren
100
in the post-Sarbanes-Oxley (SOX) environment.
Keywords: audit sampling; audit evidence; post-SOX environment.

Data Availability: Please contact the authors.
INTRODUCTION
udit sampling is a pervasive audit testing technique. The American Institute of Certified
Public Accountants (AICPA) and International Auditing and Assurance Standards Board
(IAASB) have recently updated audit standards and audit guides (e.g., AICPA [2011c]
AU-C 530 and the AICPA [2012a] Audit Sampling Audit Guide), and regulators such as the U.S.
Public Company Accounting Oversight Board (PCAOB) are currently considering various issues
related to the use of audit sampling, such as the advantages of statistical and nonstatistical sampling,
and under what conditions one approach might be more preferable than another. We provide a
synthesis of academic and practitioner research on audit sampling that will be useful for standard
setters in considering revisions to guidance and standards, and we identify areas for future research
opportunities.
We provide a framework of the audit sampling process based on existing auditing standards
and guidance. We then review relevant literature for each step in the audit process. A fairly
extensive literature exists on some sampling issues, such as determination of sample size and
projection of misstatements found in the sample. An extensive, but generally dated, literature also
exists on various statistical sampling techniques. However, limited evidence exists for many
issues related to audit sampling, which raises a number of potential research questions.
Auditing standards and guidance on audit sampling have not changed significantly since SAS
No. 39 (AICPA 1981) and the first Audit Sampling Accounting and Auditing Guide (AICPA 1983).
However, a review of the literature suggests there have been major changes in sampling practices
over the last three decades. Limited evidence exists as to the reasons for these changes, and the
effect of the legal and regulatory environment in the U.S. and other countries on sampling
decisions. Research into the nature and reasons for these changes and comparisons of sampling
techniques across variations in a number of environmental factors, such as private versus public
company audits, regulatory regimes, competition, technology, cultures, and countries, would
provide insight into factors impacting auditors sampling decisions.
Current standards allow the use of both statistical and nonstatistical sampling methods, and
auditors use of statistical sampling appears to have varied over time. Limited research evidence
exists on the extent of the use of statistical and nonstatistical sampling for tests of controls and tests
of details, and how use of these methods has changed over time or across client characteristics or
other environmental factors. Little research evidence also exists as to the effectiveness of audit
sampling relative to other audit procedures, or the effectiveness of nonstatistical audit sampling
relative to statistical audit sampling in providing sufficient audit evidence in practical audit settings.
Research into the determinants of current sampling practices would help inform standard setting,
practice, future research, and audit education. Furthermore, when auditors select samples
statistically (e.g., randomly) and evaluate the results nonstatistically, research suggests they may
be prone to decision biases, particularly when they do not use a decision aid or template (Butler
1985). This may result in incorrect acceptance of populations. Additional research could examine
how auditors evaluate sample results nonstatistically.
Studies also indicate that auditors often select samples haphazardly (e.g., Hall et al. 2002).
There is some evidence that haphazard samples may not be selected in a way that would be
expected to be representative of some population characteristics (Hall et al. 2001, 2000). However,
there is little evidence on the effect of haphazard selection on the representativeness of the
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101
selections with respect to the primary characteristic of interest in practical settingserror in the
population. Additional evidence is needed on how auditors select samples for tests of controls and
tests of details and whether the selection method leads to bias with respect to the primary
characteristics of the test.
A relatively recent development in the U.S. is the requirement for auditors to report on the
effectiveness of internal control over financial reporting. This requirement has increased the extent
and relative importance of tests of the operating effectiveness of internal controls over financial
reporting. However, we find that limited evidence exists on how auditors determine sample sizes
and evaluate sample results for attribute sampling in tests of controls. We do not know how the
inputs to sample size or other sampling decisions have changed over time or in response to
increases in the prevalence of automated controls. Although significant research has been
performed on auditor reporting on internal controls over financial reporting, we encourage research
into the underlying auditor testing of operating effectiveness of internal controls and whether the
audit sampling methods and decisions are different when testing the operating effectiveness of
controls for public and private companies, as well as in different reporting and regulatory
jurisdictions.
There is research indicating that auditors often underestimate risks in order to minimize the
extent of testing in tests of details (e.g., Kachelmeier and Messier 1990; Elder and Allen 2003),
which could potentially compromise audit effectiveness. Further research is needed on how
auditors risk assessment, audit strategy, and materiality judgments affect the application of audit
sampling in terms of when and how sampling is used, the level of assurance typically sought via
audit sampling, inputs to sample size, as well as selection and evaluation techniques.
Several studies (e.g., Burgstahler and Jiambalvo 1986; Elder and Allen 1998; Burgstahler et al.
2000) find that auditors may not consistently project sample misstatements as required by auditing
standards, which could lead to incorrect acceptance of accounting populations. However, more
recent research by Durney et al. (2012) suggests that when decision aids such as templates are used,
auditors do usually project misstatements observed in the sample to the population. Additional
research could examine current rates of error projection and why some auditors choose not to
project misstatements.
The next section briefly describes our research method, followed by a discussion of how
environmental factors influence audit sampling. The following section provides a summary of the
findings from the review of existing research. The final section presents our summary and
conclusions, as well as suggestions for future research.
METHOD
We first develop a model of the audit sampling process based on auditing standards and related
guidance, as well as some of the environmental factors that impact the use of audit sampling. These
environmental factors include the legal and regulatory environment, client complexity and use of
technology, and changes in audit approaches. These factors affect several parts of the audit
sampling process illustrated in Figure 1, especially the decision to use sampling, the form of
sampling used, and the sample size.
Based on the account and assertions to be tested, the nature of the population, and the
assurance needed, the auditor first determines whether sampling is necessary. Additional
considerations include whether the tests are designed to obtain evidence of control effectiveness,
substantive assurance, or dual-purpose, and whether the test is to be the primary source of evidence
about the assertion, or one of several tests of the assertion. The auditor then determines the
objectives addressed by the sampling application and specifies deviation or misstatement
conditions. If sampling applies, the auditor also decides whether to use statistical or nonstatistical
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FIGURE 1
General Audit Sampling Process

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103
sampling, and whether the sample is intended to gather evidence on binary characteristics (i.e.,
attribute sampling) or on monetary balances for tests of details.
The auditor then determines the necessary sample size based on various inputs and selects the
sample items for testing. Auditing standards (e.g., PCAOB AU 350) indicate that sample items
should be selected in a manner that is expected to be representative of the population, and suggest
two methods of obtaining representative selections: haphazard and random-based selection
methods.1 After performing the audit procedures, the auditor then determines the underlying cause
of deviations or misstatements (e.g., error or fraud). The auditor then projects the errors observed in
the sample to the population and draws conclusions. Figure 2 provides further detail on the specific
steps involved in audit sampling for attribute sampling and monetary tests of details sampling
applications.
ENVIRONMENTAL FACTORS IMPACTING AUDIT SAMPLING
Audit sampling is one of the most fundamental testing procedures used to gather audit
evidence, and it has undergone significant change during the history of modern auditing. Before
the start of the twentieth century, many audits included an examination of every transaction
included in the financial statements. As companies increased in size, auditors often applied audit
sampling. In 1955, the American Institute of Accountants (predecessor to the AICPA) published
A Case Study of the Extent of Audit Samples, which was one of the first publications on audit
sampling, and also recognized the relationship between the extent of testing and the effectiveness
of internal control. As the use of sampling increased, so did interest in applying statistical
sampling.
The 1970s and 1980s saw extensive use of statistical sampling, and many research studies were
published that addressed the performance of various statistical sampling approaches. However,
research did not address factors impacting auditors sampling decisions, such as budgetary or
competitive pressure, legal jurisdictions, regulation, or technology on the decision to use statistical
sampling, as well as the judgments and techniques involved in effectively using audit sampling. In
1981, the AICPAs Auditing Standards Board (ASB) issued SAS No. 39, Audit Sampling, and in
1983, the AICPA issued its first Audit Sampling Audit Guide.
SAS No. 58 changed the wording of the standard unqualified audit report to include
terminology that audit procedures are performed on a test basis, although this term is not defined.
Asare and Wright (2012) administered a company scenario involving an audit report to auditors,
bankers, and investors. The bankers and investors believed that test basis involved examining
larger samples than auditors actually use. Notably, the current audit report, under the AICPA
clarified auditing standards (AU 700-C) effective for periods ending on or after December 15,
2012, and IAASB auditing standards (ISA 700), no longer uses the term test basis (AICPA
2011d, IAASB 2009). The report does state the procedures selected depend on the auditors
judgment, including the assessment of the risks of material misstatement of the financial statements,
whether due to error or fraud (AU 700-C, A.58). We recommend further research similar to Asare
1
Random-based selection includes random selection, stratified random selection, probability proportional to size
selection, and systematic selection with random start(s). A random-based selection, regardless of how the extent
of testing was determined, can be evaluated formally using statistical techniques or nonstatistically based on
auditor judgment. A haphazard selection, which is selection without any conscious bias (that is, without any
special reason for including or omitting items from the sample), is not careless, and is selected in a manner that
can be expected to be representative of the population. A haphazard sample is evaluated nonstatistically,
although a statistical evaluation could be used to inform auditor judgment as long as formal statistical
conclusions are not drawn.

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FIGURE 2
Specific Steps of Audit Sampling Processes

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105
and Wright (2012) to address how financial statement users perceive the extent of audit sampling
implied in current audit report wording.
Despite the importance of audit sampling and significant changes in how it is applied, there is
almost no research that examines how audit sampling has changed over time and the reasons for
these changes. For example, recent increases in regulation and inspection, as well as weak global
economic conditions and increased audit competition, may have influenced the use of audit
sampling and sample sizes. Further, even though a common understanding of statistical concepts
and the use of technology such as off-the-shelf audit sampling software would suggest a similar
application of sampling with similar sample sizes across clients, industries, countries, and cultures,
the application of sampling requires significant auditor judgmentparticularly in determining when
to use audit sampling, as well as the inputs to sample size (e.g., level of desired assurance, tolerable
error, expected error). There are a number of research opportunities to examine how these
environmental factors have influenced the use of audit sampling, as well as the comparability of
sample sizes and evaluation approaches. For example, is audit sampling more or less common for
public versus private companies? Are sample sizes larger for public company audits than for private
company audits? How is sample size influenced by culture, regulation, technology, and
competition?
Sullivan (1992) was the first to note that the then-Big 6 firms were using nonstatistical
sampling for almost all testing. However, other than noting that nonstatistical sampling is likely less
expensive to apply and can provide sufficient evidence, he did not provide any explanation why the
largest audit firms moved from statistical to nonstatistical sampling. Elder and Allen (2003) found
decreasing risk assessments and sample sizes during the 1990s, which they attribute to increased
competition, although that period was also associated with decreases in auditor legal liability, which
may also have resulted in reduced testing. However, little research has considered how factors such
as regulation, technology, or competition have influenced the use of statistical versus nonstatistical
sampling or resulting sample sizes.
For example, Trompeter and Wright (2010) suggest that regulation and inspection may
motivate auditors to use detail testing and audit sampling more, because it is easier to document and
justify than techniques such as substantive analytical procedures. Trompeter and Wright (2010)
surveyed 34 practicing auditors to assess how the uses of analytical procedures have changed as
audit approaches and use of technology have changed. The change in the wording of the standard
audit report appears to reflect a current emphasis on designing audit procedures to address
significant risks, and suggests that detail tests may involve procedures that target larger or more
risky items for testing. This typically would not involve audit sampling because audit sampling
requires the use of a selection technique that will produce a representative sample. Archival studies
similar to the approach in Elder and Allen (2003) could address whether auditors have increased or
decreased the number of sampling applications and increased or decreased risk-based targeted
selection techniques. Similarly, surveys of experienced partners could assess whether they are more
or less likely to use audit sampling (including statistical sampling) to obtain audit assurance in the
current environment compared to the pre-SOX environment, and whether the use of statistical
sampling and sample sizes has changed as a result of the clarified audit standards or PCAOB
inspection process.
As the ASB and IAASB have completed their clarity and convergence projects, audit
sampling standards and audit reporting are mostly similar for U.S. nonpublic entities and
international entities. While the global network firms use consistent sampling methodologies for
all entities across the globe, we encourage research that addresses how differences in the U.S. and
international legal, regulatory, and competitive environments impact the use and application of
audit sampling. For example, do risk assessments and sample sizes vary depending on the legal
and regulatory environment across countries? Similarly, will auditors from the same global firm,
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106
but from different countries that are culturally distinct, reach the same decision on what
constitutes an appropriate audit sample? Has the use of sampling and sample sizes increased in
the U.S. due to PCAOB oversight? Have sample sizes decreased due to increased audit fee
competition, and have the changes been uniform across audit firms, borders, and regulatory
environments? Do firms use different sample sizes or approaches for public company and private
company audits or public company audits subject to PCAOB oversight versus other regulatory
oversight?
RELEVANT FINDINGS FROM RESEARCH
We review and summarize relevant literature for each step in the audit sampling process. There
is an extensive, but dated, literature that primarily examines refinements in statistical sampling
techniques. Much of the research prior to 1985 is summarized in Akresh et al. (1988), who
discussed many research questions related to audit sampling. Aldersley et al. (1995) summarized
the history of audit sampling at many of the firms and the collaboration of academics and
practitioners in audit sampling through 1995. This publication contains an extensive chronological
bibliography, including studies going back to 1933. Because both Akresh et al. (1988) and
Aldersley et al. (1995) contain extensive bibliographies, we include earlier studies only if they
relate to the research questions in this study.
While some aspects of the sampling process have been extensively studied, limited evidence
exists for other parts of the process. A number of studies are summarized in Table 1 and are
organized by steps in the sampling process.
Where Sampling Applies
PCAOB auditing standards (AU 350.01) define audit sampling as the application of an audit
procedure to less than 100 percent of the items within an account balance or class of transactions for
the purpose of evaluating some characteristic of the balance or class. Our first discussion question
addresses auditors use of sampling to obtain audit evidence:
DQ1: What factors impact auditors decisions to use audit sampling to obtain evidence
regarding the effectiveness of controls or the accuracy of the monetary amount of a class
of transactions or account balance? How do auditors use those factors in reaching their
decisions?
AU-C 330.A6571 (AICPA 2011a) notes that items selected for testing include (1) selecting all
items (100 percent examination), (2) selecting specific items, and (3) audit sampling. Although any or
a combination of approaches may be appropriate in the circumstances, the first two approaches are not
sampling. In particular, the selective examination of specific items from a class of transactions or
account balance will often be an efficient means of obtaining audit evidence, but does not constitute
audit sampling, as the selection of specific items is not intended to be representative of the population.
Audit sampling is designed to enable conclusions to be drawn about an entire population on the
basis of testing a sample drawn from the population. The AICPA (2012a) Audit Sampling Audit
Guide provides several categories of audit procedures that may not involve audit sampling.
Sampling may not be appropriate when a population is small or when it is difficult to define a
homogeneous population, such as some inventory observation settings or the search for unrecorded
liabilities. Sampling is also not used when audit procedures are applied to every item in a
population, such as certain clerical accuracy and comparison tests applied to the entire population
using computer-assisted auditing techniques (CAATs).
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Purpose
Research Methods

Supplement 1, 2013
Study the precision and

reliability of various
statistical estimators.
Messier et al.
(2001)
Reexamine Kachelmeier and

Messier (1990) to assess
whether auditors determine
sample sizes consistent with
revised AICPA audit
sampling guide.
Determine Sample Size

Elder and Allen Determine whether sample
(2003)
sizes are sensitive to risk
assessments.
Neter and
Loebbecke
(1975)
Experimental study involving

149 experienced auditors.
Collected data from work

papers from three firms, for
235 sampling applications
involving 53 audits in 1994
and 1999.
Evaluate four accounting

populations with high and
moderate error rates.
Decide Whether to Use Statistical or Nonstatistical Sampling

Hall et al.
Assess sampling methods used Surveyed 600 auditors and
received 223 usable
(2002)
by auditors in public
responses.
accounting, industry, and
government.
Citation
Nonstatistical methods used
in 85 percent of sampling
applications.
MUS most common
statistical method.
Auditors evaluated many
samples statistically, even
though they were selected
nonstatistically.
Sample sizes were only

weakly associated with risk
assessments.
Risk assessments and
sample sizes declined over
the period.
Recommended sample sizes
are closer to recommended
sample sizes, but still
contain evidence of
working backward.
MUS is preferable for

populations with low error
rates.
Findings
Selected Studies Addressing Audit Sampling
TABLE 1
(continued on next page)
Has the relationship between risk and

sample sizes changed following
adoption of risk assessment
standards?
Does working backward still exist
when risks are established in
planning as part of risk assessment
procedures?
What are current risk assessment levels

and sample sizes?
Do sample sizes vary depending on
the regulatory environment?
To what extent are auditors currently

using nonstatistical and statistical
methods?
How similar are statistical and
nonstatistical approaches in practice?
Are there different approaches to
statistical sampling?
Are there differences internationally in
the use of statistical and
nonstatistical sampling?
How extensively is MUS used, and for
what types of accounting
populations?
Research Opportunities

107
Assess whether auditors

determine sample sizes
consistent with AICPA
audit sampling guide.
Purpose
Determine if novice auditors

can select haphazard
samples without bias.
Perform Audit Procedures

Waggoner
Determine whether non(1990)
sampling risk arises from
auditors failure to detect
errors.
Caster et al.
Evaluate the extent to which
(2008)
confirmations are effective
in detecting accounts
receivable errors.
Hall et al.
(2000)
Select Sample Items

Hall et al.
Examine whether doubling
(2001)
haphazard sample sizes
reduces bias in the
haphazard sample selection.
Kachelmeier and
Messier
(1990)
Citation
Auditors appear to work
backward and select risk to
achieve a desired sample
size.
Experimental study involving

161 auditors.
What are the primary causes of nonsampling risk (e.g., time pressure,
incompetence) and what factors
would help mitigate bias?
Many misstatements are not
detected by confirmation
procedures.
Literature review of
confirmation studies and
Accounting and Auditing
Enforcement Releases.
How extensive are nonsampling risks

relative to sampling risks?
Auditors failed to detect 45
percent of the errors in the
sample.
Does the selection bias noted in

research relate to the primary
characteristic of interesterror rate
or misstatement?
What methods are currently used by

auditors to select samples for tests
of controls and tests of details?
Do auditors use random selection
techniques with nonstatistical
sampling methods?
Provided 25 auditors with 25

disbursement packages
seeded with errors.
Student subjects were asked to Increasing sample sizes

somewhat mitigates bias in
select inventory items and
haphazard selection, but
vouchers from storage units
doubling sample sizes, as
with known population
suggested in the literature,
characteristics.
does not appear to be an
effective solution for
reducing misrepresentation
in the sample.
Student subjects were asked to Despite debiasing instructions,
sampling units selected
select inventory items and
tended to be larger, brightly
vouchers from storage units
colored, conveniently
with known populations
located, and had fewer
characteristics.
adjacent neighbors.
Findings
Research Methods
TABLE 1 (continued)
108

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Purpose

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Test whether auditors

decisions to project sample
errors are related to the
frequency of the error and
the extent of information on
error containment.
Investigate extent to which
auditors project sample
errors.
Dusenbury et al.
(1994)
Behavioral experiment in
which practicing auditors
were provided with seven
hypothetical error projection
decisions.
Behavioral experiment based

on Burgstahler and
Jiambalvo (1986), modified
to address error frequency
and containment.
Reviewed work papers for 235

sampling applications from
53 audits of medium-sized
companies performed by
three large audit firms.
Investigate evaluations of
samples for 160 applications
involving an international
accounting firm.
Research Methods
Conclude on Acceptability of Population Based on Sample

61 audit seniors from a Big 5
Burgstahler et al. Assess whether auditors
accounting firm were
(2000)
evaluations of samples are
provided with three sets of
affected by consideration of
materials with successively
error projection and
more complete information
sampling risk.
regarding sample results.
Burgstahler and
Jiambalvo
(1986)
Investigate auditors actual

error projection decisions.
Elder and Allen

(1998)
Evaluate Sample Results

Durney et al.
Assess evaluations of samples
(2012)
in the post-SOX
environment.
Citation
Most samples did not

contain errors.
97 percent of errors were
projected.
Findings
Auditors were more likely to

require an audit adjustment
when they were specifically
required to consider error
projection and sampling
risk.
Auditors failed to project 33

percent of sample errors.
Immateriality was the most
common reason for not
projecting an error.
Auditors often used
containment to limit an
error to a subpopulation.
Auditors were more likely to
project errors that were
more frequent, and less
likely to project errors when
they had been contained to
a subpopulation.
Auditors failed to project 67
percent of the sample errors.
TABLE 1 (continued)
How do auditors consider sampling

risk when performing nonstatistical
sampling?
What can audit firms do to improve
auditor performance (e.g., decision
aids, training, expert review)?
What are typical error rates in

accounting populations for public
companies required to comply with
SOX 404, and for private and small
public companies?
What factors support high rates of
error projection by auditors? What
can audit firms do to improve
auditor performance (e.g., decision
aids, training)?
What reasons are currently used by
auditors to justify not projecting an
error?
To what extent do auditors believe it
is appropriate to treat an error as
being an anomaly?

109
Blocher and
Bylinski
(1985)
Citation
Findings
Subjects subjective confidence
intervals were narrower than
statistical confidence
intervals.
Research Methods
Experiment administered to 30
auditors from regional and
national firms based on data
in Neter and Loebbecke
(1975).
Purpose
Evaluate auditors
nonstatistical evaluation of
error confidence intervals.
TABLE 1 (continued)
110

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111
For similar reasons, paragraph 1.12 of the Sampling Guide indicates cutoff tests often do not
involve audit sampling applications, because auditors often define a small cutoff population and
then test all items in the population. However, the Sampling Guide does acknowledge that, one
could design cutoff tests using audit sampling when the volume of transactions during the period of
interest is high (AICPA 2012a, 4). For example, in some industries (e.g., financial services), there
may be thousands of transactions that occur in a very short period of time around year-end. In such
cases, the auditor may define the cutoff population by time (i.e., the last and first day of the period)
and choose to apply audit sampling.
Ham et al. (1985) study error rates and distributions for 20 audits for five years. They found that
cutoff errors represented the most likely source of material error for inventory, accounts receivable,
and accounts payable. Elder and Allen (1998) found that auditors often did not project cutoff errors,
but do not indicate whether this is because the auditor did not consider the test to be a sampling
application, or because it was difficult to monetarily measure the population for projection.
As this discussion illustrates, determining whether an audit procedure involves or does not
involve sampling is more complicated than it initially appears. However, we are unaware of
research that addresses the decision to use audit sampling. There is a need for academic research
that examines the extent to which sampling is currently applied in tests of controls and tests of
details. How has test of controls sampling changed with increased automation of controls and the
issuance of audit opinions on internal control? To what extent has sampling for tests of details
decreased because other evidenceincluding risk assessment procedures, consideration of related
controls, and analytical proceduressupports the conclusion that an account does not contain a
material misstatement? Future academic research could address these issues of when sampling is
appropriate and where other tests provide sufficient evidence.
Comparison of Statistical and Nonstatistical Sampling
International, AICPA, and PCAOB auditing standards allow the auditor to apply either statistical
or nonstatistical sampling. PCAOB AU 350 notes that sampling risk is present in both nonstatistical
and statistical sampling, and all audit sampling involves judgment in planning and performing the
sampling procedure and evaluating the results of the sample. Further, paragraph 2.24 in the AICPA
(2012a, 14) Sampling Guide indicates that a properly designed nonstatistical sample that considers
the same factors considered in a properly designed statistical sample can provide results that are as
effective as those from a properly designed statistical sampling application. One advantage of
statistical sampling is that it allows the auditor to explicitly quantify the level of sampling risk.
However, when the populations tested via audit sampling contain zero or trivial misstatement, the
advantage of statistical sampling may be less important to the auditor, as auditing standards require
the sample sizes for statistical and nonstatistical sampling to be comparable (PCAOB AU 350).
Colbert (1991) argues that statistical sampling is more defensible than nonstatistical
sampling. Gray et al. (2011) conducted focus groups with financial statement users, and some
users expressed disappointment that sample sizes were not larger and selected more
scientifically. Gilberston and Herron (2003) administered an experimental instrument to 122
jurors and students asking them to determine liability and assess damages in a liability case
involving 800 fictitious sales transactions out of a population of 12,000 transactions. The
auditors examined 100 sales invoices and found no discrepancies. Subjects were not more
likely to find the auditors guilty in the nonstatistical sampling condition compared to the
statistical sampling condition. However, damages were significantly larger in the nonstatistical
sampling condition.
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Our second discussion question addresses the extent to which statistical and nonstatistical
sampling techniques are used, and their effectiveness in evaluating audit evidence:
DQ2: To what extent do auditors use statistical and nonstatistical sampling to obtain audit
evidence? Are there differences in the effectiveness of the two types of audit sampling?
If so, what are those differences?
Auditor use of statistical sampling appears to have varied over time periods. Statistical sampling
was used more in the 1970s and early 1980s as compared to later periods, around the time of the
issuance of Statement on Auditing Standards No. 39, Audit Sampling (AICPA 1981).2 In 1978, the
AICPA surveyed 200 firms believed to be using statistical sampling (Akresh 1980). Thirteen of the 15
largest firms responded. Nine of these large firms indicated they were using monetary unit sampling
(MUS) or classical variables sampling or both; 12 of the 13 were using attributes sampling.
Nonstatistical audit sampling is now common in practice, although it is often used in ways to
approximate a statistical approach. PCAOB and AICPA auditing standards require statistical and
nonstatistical approaches to be similar. For example, as noted above, PCAOB audit standards
indicate that when a nonstatistical sampling approach is applied properly, the resulting sample size
will be comparable to, or larger than, the sample size resulting from an efficient and effectively
designed statistical sample (AU 350.23a).
By the early 1990s, it appears that most of the larger firms were primarily using nonstatistical
methods (Sullivan 1992; Elder and Allen 1998). There are two primary reasons why statistical
sampling may have fallen out of favor. First, increased emphasis on inherent risk (e.g., Houghton
and Fogarty 1991) suggested auditors could use knowledge and expertise to identify high-risk
transactions or balances (e.g., large unusual items, transactions near period end, areas where
material misstatements have been discovered in the past) and test these risky items 100 percent,
rather than rely on random or haphazard selection.
The second reason relates to poor linkage between the applied audit setting and traditional
statistical sampling applications. In most scientific statistical applications, a high degree of
confidence, say 95 to 99 percent, is required. However, in an audit context, the auditor may need
only a low or moderate level of confidence or assurance (e.g., 50 to 80 percent) because evidence
gathered from other audit procedures provides additional assurance. Although sampling guidance
allows for lower confidence levels, some audit firms simply moved to nonstatistical sampling with
guidance based primarily on judgment. These judgments may not have always been consistent with
standards or statistical theory, and were likely motivated in some cases by a desire to reduce testing.
Discussions by some members of the author team with large audit firms indicate that in recent
years, these firms have updated their nonstatistical sampling approaches to be more consistent with
statistical theory. For example, these firms indicate their attribute sampling applications use sample
sizes grounded in statistical theory, but the firms sampling policies and practice aids simplify many
of the judgments necessary to determine sample size.3 The input choices, in terms of levels of
assurance, importance of the control, and expected deviation rate, may contain only a few choices
2
Carpenter and Dirsmith (1993) analyzed the use of statistical sampling from an institutional and sociological
perspective. Statistical sampling was part of a movement away from an emphasis on auditors detection of fraud,
and was favored by firms that followed more structured auditing approaches. Statistical sampling raised the
stature of auditing in academia, and Smith and Krogstad (1984) reported that three statistical sampling studies
were the most cited articles in Auditing: A Journal of Practice & Theory at that time. The Carpenter and Dirsmith
(1993) study suggests that statistical sampling may influence audit approaches beyond its effect on sampling
procedures.
For example, a national auditing services partner at one firm characterized their sampling for tests of controls as
nonstatistical guided by statistical theory in compliance with auditing standards that require a nonstatistical
sample size to ordinarily be comparable to a statistical sample size.

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113
(e.g., moderate or high assurance, moderate or high importance) to simplify the judgments and to
improve consistency in the application of the sampling approach. For example, a recurring manual
control may have a sample size of 25 to 40 items, and the results are deemed acceptable if no
deviations are found in the sample. These characteristics of attribute sampling lead to more
common or universal approaches across firms and relatively simple sample size tables. For an
illustration of how such simple sample size tables are developed, see Chapter 11 in the AICPA
(2012b) Audit Guide: Government Auditing Standards and Circular A-133 Audits.
Hall et al. (2002) surveyed 600 auditors in public accounting, industry, and government in
1997 and received 223 usable responses. Respondents were asked how they determined sample
sizes, selected samples, and evaluated samples for all sampling applications they had completed
over the previous six months. Nonstatistical methods were used in 85 percent of the sampling
applications, with monetary unit sampling (MUS) being the most common statistical method used.
The auditors indicated that they selected 15 percent of their samples using statistical sampling
techniques, but evaluated 36 percent of the samples using statistical sampling techniques. The
authors interpret this as indicating improper use of statistical evaluation in 21 percent of the
sampling applications, although a haphazard sample can be evaluated statistically for information
purposes to assist the auditor in evaluating the test results, as long as the auditor does not draw
formal statistical conclusions. We discuss the evaluation of sample results later in this study.
Thus, this research may indicate a potential need for auditing standards and related guidance to
clarify the relation between the method used to select and evaluate a sample. In many
circumstances, use of statistical sampling guidance can be helpful in determining an adequate
sample size and selection of a sample that is suitable for the objectives of the test, even if the sample
is evaluated using nonstatistical techniques. Several research opportunities exist in this area,
including research into how auditors are applying statistical and nonstatistical sampling in the
current environment. Auditors may be more likely to apply statistical sampling post-SOX if sample
sizes have increased in response to regulation, or if statistical sampling is believed to be more
defensible to regulators. This suggests several research questions. Due to regulatory oversight, is
the use of audit sampling increasing, and is statistical sampling more likely to be used for public
company audits? Are sample sizes larger for public company audits? Are auditors more likely to
apply sampling and even statistical sampling for audits subject to PCAOB oversight than they are
for public company audits in other jurisdictions?
Choice of Statistical Methods for Substantive Tests of Details
The auditor can choose from several statistical sampling methods for substantive tests of
details. These methods include monetary unit sampling (MUS) and classical variables methods
including ratio estimation, difference estimation, and mean-per-unit estimationwith MUS being
the most common for the reasons discussed below.
Table 2 summarizes some of the more significant research on statistical sampling. Panel A
identifies research that has significantly influenced current audit practice, while Panel B lists other
relevant studies that have not significantly impacted current practice, along with suggestions for
additional research in the area.
As noted in Table 2, Panel A, Neter and Loebbecke (1975) studied the precision and reliability
of several statistical estimators in sampling four accounting populations. Two of the populations
had high error rates and two had moderate error rates.4 The study concluded that MUS is preferable
4
In order to evaluate the effectiveness of ratio and difference estimation, the populations selected were required to
contain errors. Thus, the study was not intended to provide evidence on representative populations of accounts,
including low-error accounts, tested via audit sampling.

Supplement 1, 2013
Monetary Unit Sampling
Classical Variables
Sampling
Classical Variables
Sampling
Hypothesis Testing
Sequential Sampling
Leslie et al. (LTA 1979)

and various papers by
these authors
Neter and Loebbecke

(1975)
Roberts (1978)
Elliott and Rogers (1972)
Akresh and Finley

(1979); Roberts (1978)
Area of Practice
Stringer (1963)
Research
Panel A: Studies Significantly Influencing Current Audit Practice

Effect on Practice
Contains the original methodology for MUS (especially when performed

manually). Also contains the foundations for the audit risk model.
An extensive text on MUS; describes the cell method, which is used in IDEA
and ACL. Provides the rationale for MUS; also provides guidance on risk and
materiality.
Various papers by these authors helped resolve issues related to MUS. Auditors
who use MUS are primarily using either Stringers (1963) method, or LTAs
methods.
Pointed out the dangers of using ratio and difference estimation unless sample
size is not small and enough differences are found; led to much greater use of
MUS for low error rate populations; also led some auditors to establish
minimum stratum size and minimum number of errors to use ratio and
difference estimation (and regression estimation).
Contains formulas and guidance for classical variables sampling. These formulas
are in IDEA and other software. Also discusses classical PPS methods to allow
auditors to use MUS in high error rate situations.
Changed auditors orientation from estimating values to testing hypotheses.
Distinguishes between risk of incorrect acceptance and risk of incorrect
rejection, and stresses the primary need to control risk of incorrect acceptance.
This is the approach used in current guidance.
For control tests, some firms use sequential sampling, either statistically or as a
basis for nonstatistical plans that approximate statistical plans. Audit Sampling
Audit Guide, Appendix B (AICPA 2012a), discusses sequential sampling.
Research on Statistical Sampling
TABLE 2
114

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Felix et. al. (1990)
Area of Practice
Neter et al. (1978)
Research
Proposes the multinomial bound
as closest to the theoretically
correct MUS bound. This
bound removes the excess
conservatism of Stringer
(1963) and cell bounds.
Auditors are not concerned with
excess conservatism if they
find no errors or if they can
still accept the results.
Indicates that Arthur Andersen
had developed and used
software for the moment
bound based on analysis in
Grimlund and Felix (1987).
Also see Dworin and
Grimlund (1984), Tsui et al.
(1985), and Menzefricke and
Smieliauskas (1984) for
related research.
Summary of Findings

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Does todays extensive
computer power make this a
better method for evaluating
MUS samples?
Why are other firms not using

this bound?
Why didnt software vendors
use this method?
Multinomial bound requires

extensive computer resources
to compute.
Lack of interest in statistical

sampling in the 1990s. Firms
did not want to modify their
sampling techniques.
Suggestions for Future

Research
Possible Reasons for Limited

Influence
Panel B: Other Studies that Have Not Significantly Influenced Current Audit Practice
TABLE 2 (continued)

115
Summary of Findings
There was some early
experimentation with
Bayesian methods; there were
also questions about its use.
See the summary in Akresh et
al. (1988, 4451).
There are different ways to plan

sampling for multi-location
audits.
Area of Practice
Bayesian statistics and

other decision systems
Sampling in multilocation audits
Birnberg(1964); Tracy
(1969); Scott (1973);
Felix and Grimlund
(1977); Godfrey and
Neter (1984); McCray
(1984); Shafer and
Srivastava (1990)
Leslie et al. (1979);

Aldersley and Leslie
(1984); Audit Guide
(AICPA 2012a)
Research
Possible Reasons for Limited

Influence
Current state of practice

unclearthis area has not
been significantly researched.
Method is complex; early

software not user friendly;
need to quantify auditor
judgments.
TABLE 2 (continued)
How do these methods compare

with classical methods in
terms of defensibility, sample
sizes, evaluations, and ability
to aggregate evidence? Can
user-friendly software be
developed to make it easier to
understand these methods?
Why didnt the profession
adopt these methods? Should
the profession reconsider
Bayesian or other decision
methods of sample size
determination and evaluation?
What are appropriate ways to
sample in multi-location
audits?
What are good ways to evaluate
results?
Suggestions for Future

Research
116

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for use with populations with low error rates. The study suggested that ratio and difference
estimation should not be used for low error rate populations, as the usual statistical procedures for
calculating confidence intervals for the ratio and difference estimators, whether with unstratified or
stratified samples, involve confidence coefficients far below the nominal coefficient when the
population error rate is low and the sample size is less than 200.5
These findings are particularly germane in a post-SOX environment, as recent research
indicates that the vast majority of samples from accounting populations where sampling is used find
little or no error. In a study of sampling applications performed by a large global network firm,
Durney et al. (2012) report that about 80 percent of the sampling applications find no
misstatements, and 90 percent of sampling applications contain projected misstatement less than 0.5
percent of the unaudited book value of the sampled population. When a population has no error, it
renders ratio and difference estimation useless, as those methods provide reliable confidence
intervals only when sufficient misstatements are found.
MUS is a tool invented by auditors to deal with the low error rate populations often found in
financial systems. Stringer (1963) was the first in the U.S. to write about this method. Several
studies in the 1970s and 1980s by Leslie, Teitlebaum, and Anderson (LTA), together and
individually, addressed the use of MUS. Their book, Dollar-Unit Sampling (Leslie et al. 1979), is
still the best description of how to apply this method.
One perceived disadvantage of MUS using the evaluation method described by Stringer (1963)
is that it is very conservative; that is, when errors are observed, it understates the confidence
achieved or overstates the upper limit of error. Several studies have attempted to improve on MUS
evaluation methods, or find better evaluation formulas to reduce unnecessary conservatism. LTA
introduced the cell method as one way to reduce conservatism. This method is now included in
some audit software, such as ACL and IDEA.
Other examples of attempts to reduce conservatism include studies on the multinomial bound
(see Neter et al. 1978; Leitch et al. 1981, 1982) and studies comparing several newer bounds (see
Grimlund and Felix [1987], which compares four new methods of evaluating MUS samples
Bayesian Normal, Cox and Snell, Modified Moment, Multinomial Dirichlet). Even though these
methods are less conservative, auditors have not widely adopted them, possibly because auditors are
not concerned about conservatism as most populations sampled have little or no error, and/or because
auditors do not use the formal statistical MUS evaluation methods when evaluating samples.
Determine Sample Size
Determination of sample size also varies, depending on whether the test involves tests of controls
or tests of details. For attribute sampling used in test of controls, sample size depends on the desired
confidence level, tolerable deviation rate, and expected population deviation rate. For monetary
sampling used in tests of details of balances, the required sample size depends upon the desired
confidence level, which is a function of risk and assurance from other tests, tolerable misstatement,
expected population misstatement, and population size. The PCAOB identified several issues related
to audit sampling in a report on inspections of 1,662 audits performed by the eight annually inspected
5
When the mean-per-unit estimator is employed with stratified random sampling, the large-sample confidence
limits appear to be reasonably reliable. However, mean-per-unit estimation assumes the variability in the
reported amounts is a good proxy for the variability of errors in the population, which does not hold for
populations with little to no error. As such, in most accounting populations, mean-per-unit sampling is not an
efficient sampling approach.

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firms for the years 20042007 (PCAOB 2008). Issues included (1) sample sizes that were too small to
form a conclusion about the account balance or class of transactions tested, (2) failing to project the
errors identified to the entire population, (3) failing to select the sample in such a way that it could be
expected to be representative of the population, and (4) not appropriately testing all the items in the
sample. The PCAOB finding that sample sizes are too small suggests that audit firms may not be
adequately considering the factors impacting sample size, which is our third discussion question:
DQ3: Do auditors appropriately consider the required factors in the determination of audit
sample sizes? Do they consider other factors?
The PCAOB report noted above is based on data that are more than five years old. Data from
more recent inspections would indicate whether auditors continue to have these problems in
applying audit sampling. Data from inspections from firms other than the eight largest firms and for
private company and governmental audits would also be helpful in identifying whether auditors
appropriately consider factors impacting the determination of sample size in other settings.
Tests of Controls
Regardless of whether statistical or nonstatistical sampling is used, sample size depends upon
the degree of assurance required, the expected rate of deviation, and the tolerable deviation rate.
There appears to be limited research into how these sampling parameters are established in practice.
In addition to the sampling guidelines for controls for large populations that are applied on a
recurring basis, the AICPA (2012a, 39, Table 3.5) Sampling Guide provides minimum suggested
sample size guidelines for controls that operate on a quarterly, monthly, semimonthly, or weekly
basis where the control test may not be the primary source of reliance on the control. Jacoby and
Hitzig (2011) recomputed statistical sample sizes for infrequent controls (e.g., quarterly, monthly,
weekly) and determined that the AICPA minimum sample sizes in the 2008 Sampling Guide were
too small. The authors demonstrate that, for example, a control that operates four times a year
(i.e., quarterly) would require a sample size of four, even if the auditor only wants low assurance
(relatively high control risk), whereas the AICPA guidance indicates a sample size of two.
Despite this criticism, the AICPA task force did not revise the suggested sample sizes in Table
3.5 of the 2012 Sampling Guide. The Guide indicates the extent of testing for infrequent controls is
based on the application of experience and judgment. The Guide also indicates that the extent of
testing in the table reflects the assumption that the test is often not a sole source of evidence
relating to the control objective in an audit of the financial statements and therefore a higher risk of
overreliance is acceptable. In less frequently operating controls, the effect of other sources of
evidence is often greater than for more frequently operating controls (AICPA 2012a, 39). Thus,
high levels of assurance may not be necessary to provide reasonable assurance of the operating
effectiveness of a control when the population is very small, such as four, 12, 24 or 52 items, and
when the auditor has other evidence to address the control objective.6 The Sampling Guide
indicates that when the control test is the sole source of evidence regarding the effectiveness of
controls, and a specific high level of audit evidence is desired, sampling parameters may be used to
determine an appropriate sample size instead of Table 3.5.
Additional research examining how population size and frequency of operation of a control
affect sample size may be useful. Are auditors more likely to use sampling and select larger sample
6
Footnote 14 of paragraph 3.62 in the Sampling Guide (AICPA 2012, 39) indicates that some examples of the
other implicit sources of evidence include inherent risk assessments, assessments of design and
implementation, past experience, walkthroughs, corroborating inquiries, other control testing, knowledge about
other balances, competence of personnel, systems knowledge, and so on.

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sizes for tests of controls on public company audits? Do the large global network firms use the same
sampling approaches and similar sample sizes across political borders? How do sample sizes
compare across public accounting firms? How has recent audit fee competition influenced the use of
sampling and sample sizes? Do auditors generally test controls for audits of private companies?
Test of Balances
The Sampling Guide indicates that sample size for tests of balances depends on the dollar
amount of the population, tolerable misstatement, inherent risk, control risk, expected size and
frequency of misstatements, and the assessment of risks related to other substantive audit
procedures. PCAOB inspections for 20042007 found instances of sample sizes that were too small
to form an appropriate conclusion (PCAOB 2008).
Kachelmeier and Messier (1990) document the tendency of auditors to work backward and
lower assessed risks to achieve a desired sample size. Messier et al. (2001) find that the tendency to
work backward still exists using the 1999 version of the Sampling Guide.7 Using empirical data
from 19931994 and 1999 collected from individual offices of two Big 4 firms and one large
regional firm, Elder and Allen (2003) found that risk assessments and sample sizes declined over
the period, and sample sizes were only weakly related to assessments of inherent risk and control
risk.
These studies predate SOX and the issuance of risk assessment suites of standards by the ASB
and PCAOB. Using post-SOX data, Durney et al. (2012) report higher average sample sizes than
Elder and Allen (2003). Because risk assessments are now initially made during performance of risk
assessment procedures, it is unclear whether auditors are able to lower risk assessments during
testing to achieve lower sample sizes.
Determining sample size is generally thought of in terms of sampling from an individual
account or type of transaction. In these instances, the auditor can determine separate sample sizes
based on individual component parameters, or the auditor can determine an overall sample size
based on the overall entity (assuming sufficient homogeneity in risks, processes, nature of
transactions) and allocate the sample to components based on the proportional size.8 Appendix E of
the Sampling Guide provides some practical guidance on multi-location sampling.
Little evidence exists as to how auditors make these allocation decisions. Menzefricke and
Smieliauskas (1988) extend the model in Scott (1973) to allocate sample size across multiple
accounts to be sampled. The auditors objective is to minimize the combined costs of sampling and
risk of misestimating the accounts due to sampling error. Populations that are more likely to contain
error are sampled more, while those that are costly to test are sampled less.
Paragraph 4.54 in the Sampling Guide (AICPA 2012a, 6465) indicates that when there are
numerous accounts where uncertainty exists or the results are based on numerous tests at various
locations, tolerable misstatement might be set at 50 percent or less of materiality, compared to
ranges of 50 percent to 75 percent often observed. The relationship between tolerable misstatement
7
A number of studies have found a relationship between auditors risk assessments and planned audit hours (e.g.,
Johnstone and Bedard 2001; Hackenbrack and Knechel 1997; OKeefe et al. 1994). In contrast, in empirical
studies based on archival data from one firm, Mock and Wright (1999, 1993) find that auditor risk assessments
are associated with the number of audit hours, but risk assessments are not significantly associated with the
number of audit procedures. Because these studies do not directly address auditor sampling decisions, they are
not discussed further.
Monetary unit sampling and some other sampling methodologies allow the auditor to determine one sample for
all accounts to be sampled using monetary unit sampling. There is little academic evidence on whether this
approach is used in practice.

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and materiality can vary to reflect risk and efficiency characteristics. However, audit risk and
allowance for sampling risk are still to be considered for the aggregate of samples.
Additional research is needed on auditors current sample size decisions, including current
levels of risk assessment, overall materiality, performance materiality, and tolerable misstatement,
and their impact on sample sizes. Does establishment of risks in audit planning affect auditors
ability to adjust risks to reduce sample sizes? How does multi-location testing impact sample sizes?
Is multi-location testing impacted by whether the locations to be tested are domestic or foreign? For
example, are auditors more likely to pool domestic locations as one population to be sampled? Do
auditors treat foreign locations as separate populations for sampling, even when the foreign location
has similar transactions and controls as domestic locations?
Select Sample Items
Our fourth discussion question addresses how auditors select sample items for testing:
DQ4: What methods do auditors use to select sample items for testing?
As discussed earlier, Hall et al. (2002) found in a survey that 85 percent of audit procedures
involved nonstatistical sampling. Of these nonstatistical sampling procedures in tests of controls
and tests of balances, 87 percent used haphazard sampling. This is not surprising since the standards
permit haphazard sampling even though more sophisticated, but easy to apply, methods exist for
selecting samples. However, it is not clear whether their survey instrument allowed responses that
would characterize other forms of sample selection, and auditors may use different selection
techniques today than in 1997 when the survey was administered.
Hall et al. (2000) demonstrate that novice auditors are unable to eliminate bias in haphazard
sample selection. If the bias in novice auditor selection is correlated with the characteristic of audit
interest, errors in the population, then haphazard selection could lead to selections that are not
expected to be representative. Using storage units set up to hold inventory items and vouchers,
auditors tended to select large, brightly colored, and conveniently located sampling units. Using a
similar methodology, Hall et al. (2001) demonstrate that a strategy suggested in the literature of
doubling the haphazard sample does not completely correct the selection bias.
As previously noted, Hall et al. (2002) found that MUS is the most common statistical
sampling method used. MUS samples are selected with probability proportionate to size, so that
larger items are automatically emphasized. There are various MUS methods for selecting the
sample; the most common are the interval and cell methods.9
Stratification of populations is applicable to nonstatistical and statistical variables sampling.
Auditing standards require selection of all items greater than tolerable misstatement. Anecdotal
evidence suggests most firms usually sample from the remaining items as a single stratum (this is
technically not a stratified sample). Given that accounting populations are heteroscedastic (the
dollar amount of misstatement for an item is often related to the recorded value of the item), there
may be efficiency gains to further stratification.10 However, this is not applicable in populations
9
10
The interval length is the population size divided by the sample size. A random start is selected from a number
between one and the length of the interval, and the interval length is added to the item selected to identify the
next sample dollar. The cell method is an interval selection method that selects random dollars in each interval.
These methods insure that items greater than the interval will be selected for testing, but have the potential for
bias associated with systematic selection methods if patterns exist in the sample data. In contrast, using the
random method, each dollar in the population has an equal probability of being selected. Although larger items
will have a greater probability of being selected, their selection is not guaranteed.
For example, Roshwalb et al. (1987) discuss a model-based statistical sampling approach. They applied the
approach to four inventory populations using difference estimation. The model used a large number of strata, but
resulted in a smaller sample size.

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for which no or few misstatements are expected, which may be common for many audits (Durney
et al. 2012).
Auditors may select initial samples randomly or probabilistically, but then supplement the
initial sample with additional items that may be chosen nonstatistically. Wright (1991) documents
that the monetary unit skip interval selection method for augmenting a probability proportionate to
size sample over-represents small book value units. He documents that doubling the sample size to
halve the skip interval and selecting randomly from a preselected PPS pool maintains the
sampling inclusion properties. The more general implication is that an augmented sample may not
maintain the sample characteristics of the original sample. Although sieve sampling is not widely
used in practice, Hoogduin et al. (2010) present a modified sieve selection procedure that maintains
sampling stratum PPS properties in multi-stage samples.
Current research evidence on auditor sample selection techniques would be useful. For
example, to what extent do auditors use haphazard or directed sample selection? Do auditors use
random selection techniques with nonstatistical sampling? To what extent do selection biases
demonstrated in research result in samples that are not representative of the primary population
characteristics of interest (i.e., error rate)? Recent research by Durney et al. (2012) suggests that
structured computerized decision templates result in improved auditor evaluation of samples. Does
such use of technology improve the consistency of application of audit sampling, including sample
planning and the selection decisions? Finally, does the use of computerized decision templates ever
lead to less effective sampling by reducing professional judgment?
Perform Audit Procedures
Perhaps the most critical part of audit sampling is the actual performance of the audit
procedures; however, few research studies directly examine this issue. The fifth discussion question
addresses auditor effectiveness in detecting sample errors:
DQ5: How effective are auditors and audit teams in detecting errors in audit samples?
Waggoner (1990) gave 25 Big 8 auditors a set of 25 disbursement packages seeded with
errors. Auditors failed to detect 45 percent of the errors in the sample. Detection was related to
task experience, suggesting that close attention should be paid to the work of inexperienced staff
members that have not previously performed the task. Participants were not selected at random
and were not familiar with the audit program used. In addition, participants work was not
reviewed, as it would be in a typical auditing setting. Thus, this study may overstate the extent to
which auditors fail to detect sample errors, but the results suggest that evaluations of populations
based on samples may underestimate population error rates due to failure to consider nonsampling risk.
We are unaware of any studies that address auditor effectiveness in detecting misstatements in
sampling monetary balances, although there is an extensive, but dated, literature on the
effectiveness of confirmations in detecting misstatements (see Caster et al. [2008] for a review).
Nonsampling risk arising from auditor failure to detect misstatements in a sample will result in
underestimating the projected misstatement and the upper limit on misstatement.
Nonsampling risk may be partially addressed by quality control procedures, including the
review process, as well as obtaining more evidence from other audit procedures that have lower
nonsampling risk. Further evidence on the causes and extent of nonsampling risk would be helpful
in assessing its impact on audit effectiveness, and whether existing levels of quality control and
review procedures are sufficient to mitigate nonsampling risk.
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Evaluate Errors Found

Existing academic studies on evaluating errors primarily focus on error projection in tests of
details of balances.11 Akresh and Tatum (1988) surveyed CPAs and found that auditors have
difficulty with error projection. In a survey of New York CPA firms, Hitzig (1995) found that
failure to project errors occurs more frequently with nonstatistical sampling. PCAOB inspection
reports (PCAOB 2008) also identified deficiencies in auditors failing to project sample errors. The
sixth discussion question addresses how auditors project errors to the population:
DQ6: To what extent do auditors project sample misstatements to the population? What
factors impact the decision to project sample misstatements?
Burgstahler and Jiambalvo (1986) presented a sample of Big 8 auditors with a set of seven
hypothetical accounts receivable confirmation differences. The auditors projected only 33 percent
of the errors, indicating that auditors fail to project most misstatements, although many of the seven
cases involved unique characteristics. They suggest auditors base the decision to project on the
auditors belief about the representativeness of the error (even though the concept of
representativeness applies to the total sample, not individual items), and argue that it is rarely
appropriate to isolate (not project) an error, since the errors found proxy for unknown errors.
Dusenbury et al. (1994) performed a study involving 105 experienced auditors from one
international accounting firm using cases modeled after those in Burgstahler and Jiambalvo (1986).
They manipulated error representativeness (error versus fraud) and information on containment of
the error to a subpopulation of the unsampled items. Auditors were more likely to project errors that
they believed were more representative of typical misstatements and less likely to project errors
when they believed the error was isolated or containment information was present.12
Elder and Allen (1998) investigate the factors associated with auditors decisions not to project
errors in accounts receivable and inventory, based on 235 accounts receivable and inventory
sampling applications for 53 audits of fiscal year 1993 or 1994, involving individual offices from
three audit firms. Auditors projected 67 percent of the errors. Auditors were more likely not to
project when errors were immaterial in nature, where the population was not well-specified, or in
situations where the error was contained to a subpopulation. There were significant differences in
projection rates across different types of tests, and across firms. Hermanson (1997) found that
auditors from structured audit firms were more likely to project errors than those from lessstructured firms. In a follow-up study of fiscal year 1999 audits, Allen and Elder (2005) found that
projection rates decreased for the two Big 6 firms in their sample. One of the firms increased its
reliance on containment procedures, and another firm increased its use of immateriality as
justification of a decision not to project an error.13
PCAOB (2008) inspection reports and discussions with practitioners suggest sample
misstatements may not always be projected to the population, which is an area prior research
suggests is a potential risk. However, Wheeler et al. (1997) suggest that containment is appropriate
in some circumstances. Elder and Allen (1998) indicate that error containment often involves larger
11
12
13
Error projection is not a concern for attribute samples, since the projected deviation rate is the sample deviation
rate, and most samples have an expectation of no deviations, meaning any deviation should cause unacceptable
results.
An isolated error is one that the auditor identifies as being unique, while a contained error is one the auditor
identifies as occurring only in a segment of the population.
The use of immateriality was based on the size of the error, presumably on the basis that with knowledge of the
size of the misstatement, sample, and population, the auditor could readily estimate whether the projected
misstatement would exceed the minimum threshold for posting amounts to the schedule of possible
misstatements.

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errors; otherwise, the auditor would not expend the effort to document error containment or
isolation if the projected error were immaterial. Durney et al. (2012) examine 160 post-SOX
sampling applications from one audit firm and find that 97 percent of the samples with error
included a projection.
The PCAOB audit standards indicate that errors should be projected to the population.
However, international auditing standards indicate that rare cases of anomalous errors do not need
to be projected when the auditor is able to obtain evidence that a misstatement (or deviation) is not
representative of the population (ISA 530.13). While the related AICPA (2011c) clarified auditing
standard, AU-C 530, Audit Sampling, did not adopt the anomaly language, AU-C 450, Evaluation
of Misstatements Identified during the Audit (AICPA 2011b), indicates that an observed
misstatement may not be an isolated occurrence. In addition, AU-C 450.A4 cautions the auditor
that A misstatement may not be an isolated occurrence. Evidence that other misstatements may
exist include, for example, when the auditor identifies that a misstatement arose from a breakdown
in internal control or from inappropriate assumptions or valuation methods that have been widely
applied by the entity.
Previous research (e.g., Allen and Elder 2008) and PCAOB inspection reports (PCAOB 2008)
have indicated situations where auditors do not project sample errors, potentially compromising
audit effectiveness, although recent research (Durney et al. 2012) suggests significantly improved
auditor performance in projecting sample errors. Perhaps auditor isolation of errors is related to the
formal acknowledgement of anomalies in some recently revised auditing standards. Although
Hitzig (2001) indicates that there really is no such thing as an isolated error, additional guidance on
the use of error containment could be helpful.
Additional research is needed to determine audit firms current practices regarding error
projection. Do projection rates differ for private company and public company audits as a result of
PCAOB oversight? Elder and Allen (1998) and Durney et al. (2012) find that projection decisions
are impacted by use of computer documentation templates. Do techniques such as training and
decision aids improve auditor performance? Given the recent discussion of anomalies in auditing
standards and evidence in Elder and Allen (1998) that containment is used for larger errors, what
reasons, including anomalies, are currently used by auditors to justify not projecting errors? Further,
do auditors ever fail to project errors because of fear of potential disputes with clients?
Conclude on Acceptability of Population Based on Sample Results
Regardless of whether nonstatistical or statistical sampling is used, the auditor should project
sample errors and consider sampling risk in evaluating whether the population is acceptable based
on the sample results. For tests of controls, this involves either comparing the computed upper
deviation rate based on the sample results to the planned tolerable deviation rate established by the
auditor or comparing the sample deviation rate to the planned deviation rate (the latter comparison
assumes the sample size was sufficiently large). For samples used as substantive tests of details, the
acceptability of the sample results is determined similarly by comparing the upper limit on
misstatement to tolerable misstatement or by comparing the projected misstatement to the expected
misstatement (this comparison assumes the sample size was sufficiently large). The final discussion
question addresses auditors evaluation of sample results:
DQ7: What factors impact auditors judgment as to whether the population is acceptable based
on the sample results?
Uecker and Kinney (1977) tested whether auditors evaluation of samples were affected by
representativeness and protectiveness heuristics. Under the representativeness heuristic, auditors
may accept the results of a sample with a low sample deviation rate, even if the actual results are
Supplement 1, 2013
124
unacceptable. Under the protectiveness heuristic, auditors may accept the results of a larger sample
compared to the results from a smaller sample, even if the smaller sample has a lower deviation rate.
They found that auditors employed both heuristics, indicating the potential risk of drawing incorrect
conclusions when auditors evaluate samples nonstatistically. However, this paper predates current
auditing standards.
Blocher and Bylinski (1985) provide subjects with eight trials involving the evaluation of a
sample of 100 accounts receivable selected from a population of 4,033 trade accounts receivable.
They manipulated the variance of audited sample values, mean error amounts, and error variances.
Auditors were asked to construct confidence intervals for the amount of misstatement and account
balance; the auditors constructed intervals were narrower than statistical confidence intervals.
Ham et al. (1985) study error rates and distributions for 20 audits for five years. They find that
error amounts are highly variable and not normally distributed. The magnitude and direction of
errors also differed across accounts. They also found that cutoff errors represented the most likely
source of material error for inventory, accounts receivable, and accounts payable. Butler (1985)
constructed a simple decision aid that caused auditors to consider the base rate of misstatement and
the predictability of the information. Auditors using the decision aid were more likely to make
correct decisions to accept or reject the population compared to a control group.
Peek et al. (1991) examined the effect of the AICPA (1983) Audit Sampling Audit Guide in
evaluating audit populations. They tested two decision rules used by some auditors to account for
sampling risk. One rule rejected the population if projected misstatement exceeded one-third of
tolerable misstatement; the other rejected the population if projected misstatement exceeded twothirds of tolerable misstatement. They tested four accounting populations and varied the extent of
error and tolerable error. Not surprisingly, the two decision rules differed significantly in the extent
to which they resulted in incorrect acceptance and incorrect rejection decisions.14
A more recent paper by Durney et al. (2012) examines 160 sampling applications of a large
network firm that instituted a formalized sampling worksheet to walk auditors through the steps of
sampling, and requires error projection and consideration of sampling risk. They find that sampling
risk was properly considered in the design of all samples, and in the 20 percent of the samples that
contained errors, they found 97 percent of the sampling applications included proper error
projection and consideration of sampling risk.
Elder and Allen (1998) found that auditors generally make direct linear projections of errors,
and did not quantify sampling risk for individual sampling applications. PCAOB AU 350 (}26)
indicates if the total projected misstatement is close to the tolerable misstatement, the auditor may
conclude that there is an unacceptably high risk that the actual misstatements in the population
exceed the tolerable misstatement. Burgstahler et al. (2000) found that auditors are less likely to
require an audit adjustment when the uncertainty associated with sampling risk is not properly
considered by the auditor.
In addition to failing to project errors and adequately consider sampling risk, evaluations of
samples may be affected by the presence of nonsampling error. Anderson and Kraushaar (1986)
14
Ponemon and Wendell (1995) asked 49 inexperienced auditors with an average of less than two years of
experience, and 34 experienced auditors with an average of over four years of experience, to nonstatistically
select 50 sample items and nonstatistically set an upper misstatement bound for the supplies inventory for a
school district. The median of the statistical bounds was closer to the actual overstatement amount than the
median of the auditors nonstatistical bounds for all confidence levels, and had lower dispersion. A validation
experiment indicated that auditors did not judge confidence bounds set statistically as superior to bounds set
nonstatistically. However, an alternative interpretation is that the task was not consistent with how at least some
auditors consider sampling risk given the guidance in the current and previous AICPA Audit Sampling guides,
which involves a direct comparison of projected misstatement to tolerable misstatement to determine if there is
adequate allowance for sampling risk.

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125
find that auditor measurement error can significantly affect statistical results and result in actual
confidence levels well below the desired confidence level. The potential presence of nonsampling
risk can be mitigated by use of adequate review, training, and other quality control procedures and
by use of conservative estimators.
Little current evidence exists on the use of nonstatistical sampling to evaluate audit samples
and the decision rules used to account for sampling risk and nonsampling risk. Further research
would be helpful to assess current statistical and nonstatistical sampling practices and the potential
for judgment errors in the evaluation of sample results, especially when done using nonstatistical
methods. Are there differences across regulatory or country boundaries in the projection of errors
and the consideration of sampling risk? If so, what are the causes (e.g., training in math and
statistics, standards)? For example, international auditing standards indicate errors observed by the
auditor may not need to be projected if they are anomalous; however, similar wording is not
included in U.S. auditing standards. Are errors less likely to be projected for non-U.S. audits?
Future research can examine whether culture is a factor in possible differences in the projection of
errors by auditors in different countries.
SUMMARY AND CONCLUSIONS
We developed a framework of the audit sampling process, and reviewed academic and
practitioner research on the use of audit sampling. Current standards allow the use of statistical and
nonstatistical sampling methods; however, limited current research evidence exists on the methods
used by auditors and their relative effectiveness. Research indicates that auditors often
underestimate risks to minimize sample sizes. Establishing risks in planning may reduce the
extent to which auditors lower risk assessments to minimize sample sizes.
Several studies also document that auditors often failed to project errors, although recent
research suggests that post-SOX projection may be more common. Additional research could
address whether there are circumstances when it is acceptable not to project sample errors, and the
documentation necessary to support this conclusion. Auditors are prone to decision biases when
they evaluate samples nonstatistically that may result in auditors accepting populations that are
considered unacceptable based on specified levels of tolerable deviation rate or tolerable
misstatement.
Many questions raised in our current study have not been addressed by existing research. We
encourage further research in the following areas:
(1) Reporting on internal control, increases in computerized controls, and use of risk
assessment procedures and substantive analytical procedures have changed the way
auditors approach testing. How have these factors affected the types of tests auditors
consider to be sampling applications?
(2) Changes in the regulatory environment may have increased sample sizes and the need for
auditors to justify sampling decisions. To what extent are auditors currently using
statistical versus nonstatistical sampling in tests of controls and monetary tests of details?
Are there situations where firms require the use of statistical sampling? Are there situations
where firms prohibit the use of statistical sampling? Do these requirements vary based on
the regulatory environment?
(3) Given the changes in the need for assurance from sampling and the ability to easily apply
statistical sampling with computer technology, are there situations where statistical
sampling should be required?
(4) Elder and Allen (2003) found a weak relationship between risk and sample sizes. To what
extent are current sample sizes sensitive to risk factors? The AICPA Audit Sampling Audit
Guide indicates that sample sizes determined nonstatistically should be similar to those
Supplement 1, 2013
126
(5)
(6)
(7)
(8)
(9)
determined statistically. Are there differences in practice for sample sizes determined
under the two approaches?
Sampling decisions may be impacted by regulation and the legal environment. Are the use
of sampling, type of sampling, and sample sizes sensitive to the legal and regulatory
environment? If so, what are the causesincentives, competition, culture, inspection, or
litigation risk? Are the difference observed within the large global network firms, or across
firms?
What techniques are currently used by auditors to select sample items for testing? Do
auditors primarily use statistical or nonstatistical selection methods? Where auditors select
a nonstatistical sample, what quality controls are employed to be sure the sample is
expected to be representative of the characteristic(s) of interest?
Companies have grown in size and complexity, but there is little research or guidance on
sampling in such environments. How does the existence of multiple locations, sometimes
with differing controls and accounting systems, influence the way sampling is planned,
performed, and evaluated? Further, is this problem exacerbated by a client with multiple
locations in different countries?
Previous research (e.g., Burgstahler and Jiambalvo 1986; Elder and Allen 1998;
Burgstahler et al. 2000) indicates that auditors often fail to project misstatements,
potentially compromising audit effectiveness; recent research by Durney et al. (2012)
suggests improved auditor performance. How effective are auditors in projecting
misstatements? What impacts auditors decisions not to project sample errors?
Burgstahler et al. (2000) find that auditors fail to consider sampling risk, potentially
resulting in incorrect audit conclusions. What techniques do auditors use to consider
sampling risk when evaluating samples nonstatistically?
Many of the research questions we have identified could be addressed using controlled
experiments or archival data from audit firms. We encourage researchers to pursue these questions
and audit firms to provide data access and subjects to support such research.
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Vol. 32, Supplement 1

American Accounting Association

Audit Sampling Research: A Synthesis and

Submitted: April 2012

Elder, Akresh, Glover, Higgs, and Liljegren

Keywords: audit sampling; audit evidence; post-SOX environment.

Audit Sampling Research

Elder, Akresh, Glover, Higgs, and Liljegren

Auditing: A Journal of Practice & Theory

Audit Sampling Research

Auditing: A Journal of Practice & Theory

Elder, Akresh, Glover, Higgs, and Liljegren

Auditing: A Journal of Practice & Theory

Audit Sampling Research

Elder, Akresh, Glover, Higgs, and Liljegren

Auditing: A Journal of Practice & Theory

Study the precision and

Reexamine Kachelmeier and

Determine Sample Size

Experimental study involving

Collected data from work

Evaluate four accounting

Decide Whether to Use Statistical or Nonstatistical Sampling

Sample sizes were only

MUS is preferable for

Selected Studies Addressing Audit Sampling

(continued on next page)

Has the relationship between risk and

What are current risk assessment levels

To what extent are auditors currently

Audit Sampling Research

Assess whether auditors

Determine if novice auditors

Perform Audit Procedures

Select Sample Items

Experimental study involving

(continued on next page)

How extensive are nonsampling risks

Does the selection bias noted in

What methods are currently used by

Provided 25 auditors with 25

Student subjects were asked to Increasing sample sizes

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Test whether auditors

Behavioral experiment based

Reviewed work papers for 235

Conclude on Acceptability of Population Based on Sample

Investigate auditors actual

Elder and Allen

Evaluate Sample Results

Most samples did not

Auditors were more likely to

Auditors failed to project 33

(continued on next page)

How do auditors consider sampling

What are typical error rates in

Audit Sampling Research

Auditing: A Journal of Practice & Theory

Audit Sampling Research

Elder, Akresh, Glover, Higgs, and Liljegren

Auditing: A Journal of Practice & Theory