TOPIC : STATISTICAL SAMPLING

REVIEW QUESTION ANSWERS

1. Define audit sampling. Why do auditors sample instead of
examining every transaction?
Audit sampling involves the auditor selecting a portion of the population of
transactions being audited. The sample is meant to represent the
population as a whole. The auditor will evaluate the sample and the results
will represent the whole population. An audit sample is done when it is not
feasible due to monetary or time constraints to audit an entire population.
To audit every single item within a company would usually take more time
and money than most company have.
2. Distinguish between Type 1 and Type 2 errors. What terms are
used to describe these errors when the auditor is conducting tests
of controls and substantive tests? What costs are potentially
incurred by auditors when such decision errors occur?
Type I error is deciding that the population tested is not acceptable when
in reality it is. Type II error is deciding that the population tested is
acceptable when in reality it is not. When and auditor is evaluating the
level of reliance that can be placed on a control in the context of a
financial statement audit, this risk is also commonly referred to as the risk
of underreliance or the risk of assessing control risk too high. When an
auditor is evaluating the level of reliance that can be placed on a control in
the context of a financial statement audit, this risk is also commonly
referred to as the risk of overreliance or the risk of assessing control risk
too low. The risk of incorrect rejection (Type I) can result in the auditor
conducting more audit work than necessary in order to reach the correct
conclusion. The risk of incorrect acceptance (Type II) can result in the
auditor failing to detect a material misstatement in the financial
statements. This can lead to litigation against the auditor by parties that
rely on the financial statements
3. List audit evidence choices that do not involve sampling.
Audit evidence types that do not involve sampling :

Analytical procedures
Scanning
Inquiry

Observation
Procedures applied to every item in the population
Classes of transactions or account balances not tested

4. Distinguish between non-statistical sampling. What are

advantages and disadvantages of using statistical sampling?

the

In non-statistical sampling, the auditor does not use statistical techniques

to determine the sample size, select the sample, and/or measure sampling
risk when evaluating results. Statistical sampling, on the other hand, uses
the laws of probability to compute sample size and evaluate the sample
results, thereby permitting the auditor to use the most efficient sample
size and to quantify the sampling risk for the purpose of reaching
statistical conclusion about the population.

advantages
Design and efficient sample
Measure the sufficiency
evidence obtained
Quantity sampling risk

5. Define attribute sampling. Why

appropriate for test of controls?

of

is

disadvantages
Training auditor in the proper
use of sampling techniques
Designing and conducting the
sampling application
Lack of consistent application
across audit term due to the
complexity of the underlying
concepts

this

sampling

technique

Attribute sampling is a statistical sampling method used to estimate the

proportion of a characteristic in a population. In applying this technique to
test of control, the auditor normally attempts to determine the operating
effectiveness to a control in term of deviations from a prescribed internal
control.
6. After defining the population, the auditor must make what
additional decisions concerning the population?
Once the population has been defined, the auditor must determine:

that the physical representation of the population is complete

the period to be covered by the test

whether to conduct additional tests in the remaining period

7. List the four factors that enter into the sample size decision. What
is the relationship between sample size and each of these factors?
Factor
The acceptable risk of assessing
control risk too low
The tolerable deviation rate
The expected population deviation
rate
The population size

Relationship to Sample Size

Inverse
Inverse
Direct
Increases sample size only when
population size is small (<5,000
items)

8. In performing certain audit procedures the auditor may encounter

voided
documents,
inapplicable
documents,
or
missing
documents. How should each of these situations be handled
within the attribute sampling application?
Each of these situations should be handled within attribute sampling
application:
I.

II.

III.

Voided document
If the transaction has been properly voided, it does not represent a
deviation. The item should be replaced with a new sample item.
Unused or inapplicable document
Sometimes a selected item is not appropriate for the definition of
the control. In such a case, the item is not a deviation and the
auditor would simply replace the item with another purchases
transaction.
Missing document
If the auditor is unable to examine a document a use an alternative
procedure to test whether the control was adequately performed,
the sample item is a deviation for purpose of evaluating the sample
results.

9. The auditor should perform error analysis when deviations are

found in a sampling application. What are the purposes of
performing error analysis?
The auditor's purposes in evaluating the qualitative aspects of deviations
in performing error analysis involves considering:

The nature of the deviations and their causes

How these deviation may impact the other phases of the audit

10. How should the results of non-statistical sample be evaluated

in terms of considering sampling risk?
The sample population should be restricted to the transaction and
time period under the same system of controls that are relevant to
the assertion being tested. In that case there is likely to be an
unacceptably high risk that the true deviation rate in the population
exceeds the tolerable rate. If the auditor concludes that there is an
unacceptably high risk that the true population deviation rate could
exceed the tolerable rate, it might be practical to expand the test to
sufficient additional items to reduce the risk to an unacceptable
level. Rather than testing additional items, however, it is generally
more efficient to increase the auditor's assessed level of control risk
because the results of the sample would generally support a higher
level of control risk.