Stratification

Dividing it into discrete sub-populations which have an identifying

characteristic
Reduce the variability of items within each stratum and therefore allow
sample size to be reduced without increasing sampling risk
TOD: stratified by monetary value allows greater audit effort to be directed
to the larger value items. Similarly, population may be stratified according to
a particular characteristic that indicates higher risk of misstatement
Results of audit procedure applied to a sample of items within a stratum can
only be projected to the items that make up a stratum
For conclusion on population, consider risk of material misstatement in
relation to whatever other strata make up the entire population
If divided into strata, misstatement is projected for each stratum separately
then combined when considering the possible effect of misstatements on
total class of transactions or account balances

Value-Weighted Selection
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TOD: identify sampling units as individual monetary units that make up the
population

The two major stages in the audit examination during which sampling is used are in
(1) studying and evaluating the clients internal control and (2) conducting
substantive procedures.
Sampling is typically used when the question of interest has the following two
characteristics
1. The need for exact information is not important.
2. The number of items comprising the population is large
sampling risk, which is the likelihood that the decision made based on the
sample differs from the conclusion that would have been made if the entire
population had been examined
Sampling error is caused when the sample drawn from the population does not
appropriately represent that population. Sampling risk is the likelihood of sampling
error.
nonrepresentative sample, which is a sample that differs substantially on one or
more key characteristics of interest from the population from which the sample is
drawn.
Three major steps can control sampling risk in the sampling process: 1.
Determining an appropriate sample size. As a higher percentage of items in the

population is examined, sampling risk decreases.

2. Ensuring that all items have
an equal opportunity to be selected. If all items have an equal opportunity to be
selected, the likelihood of sampling risk decreases.
3. Evaluating sample results
to control sampling risk. The results from a sample are adjusted to consider the
likelihood that the sample being evaluated does not appropriately represent the
population.
Nonsampling risk represents the probability that an incorrect conclusion will be
reached as a result of reasons unrelated to the nature of the sample
Statistical sampling plans apply the laws of probability to selecting sample items
for examination and evaluating sample results. Specifically, statistical sampling
methods enable the audit team to make quantitative statements about the results
and to measure the sufficiency of evidence gathered (i.e., determine a sufficient
sample size) and evaluate the results in such a way to control sampling risk.
Nonstatistical sampling plans do not meet either of these criteria. Thus, these two
types of plans differ in terms of how sample size is determined and how the results
are evaluated.
Unrestricted Random Selection (Random Selection) When using unrestricted
random selection (random selection) , the audit team identifies a series of random
numbers from either a random number table or computer program and selects the
numbered item in the corresponding population
systematic Random Selection (Systematic Selection) W hen using s ystematic
random selection (systematic selection), the audit team randomly selects a
starting point from within the population and includes every nth item thereafter,
where n is determined based on the number of items in the population and the
necessary sample size. In this case, n is referred to as the s ampling interval
and represents the frequency with which items are selected within the population.
The sampling interval is calculated by dividing the number of items in the
population by the necessary sample size.
Haphazard Selection When using haphazard selection,
unstructured manner but without any intentional bias.

items are selected in an

block Selection The use of b lock selection involves selecting a series of

contiguous (or adjacent) items from the population
evaluation
The precision (or allowance for sampling risk ) is the numeric distance from
the estimated population value in which the true (but unknown) population value
may lie with a given probability. In this case, the precision is 1.5 yards.
The
reliability (or confidence level ) is the likelihood of achieving a given level of
precision. In the example, the reliability is 90 percent, which is equal to 100 percent

minus the acceptable sampling risk of 10 percent.

The precision interval is a
range around the sample estimate that has a certain likelihood (equal to reliability)
of including the true population value. In this example, the precision interval is 5.2
to 8.2 yards.
Documenting
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Objective of sampling application, characteristic of interest and definition of

population
Factors affecting sample size
Method of selecting samples and description of items selected
Method of measuring sample items and summary of measurement
Evaluation and conclusion

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.
interested in determining whether the rate at which internal control activities are
not functioning (referred to as the rate of deviation ) exceeds some rate
permissible by the audit team (referred to as the tolerable rate of deviation ).
The use of sampling in this context is referred to as attributes sampling.
Attributes sampling is used when the audit team examines a subset of items
within a population to determine the extent to which a particular attribute exists
within that population.

 Attribute sampling . All possible applications of controls by client personnel.

Variables sampling. All components or transactions comprising the account balance

or class of transaction

Evaluating The final step in either attributes or variables sampling is to evaluate

the sample results that involves the following four-step procedure: 1. Identify
either the rate of deviation (attributes sampling) or difference between audited
values and recorded values (variables sampling) from the sample items. 2 . Adjust
the information in step 1 to control the auditors exposure to sampling risk. This
adjustment is referred to as the allowance for sampling risk. 3 . Compare the
adjusted estimate in step 2 to either the tolerable rate of deviation (attributes
sampling) or the tolerable misstatement (variables sampling). 4 . Based on the
comparison in step 3, make the decision with regard to the effectiveness of the
clients internal control (attributes sampling) or fairness of the account balance
(variables sampling).

variables sampling examines continuous distributions of amounts or values. Thus,

it is used to examine a population when the audit team wants to estimate the true
balance or the misstatement of a particular account or class of transactions

Monetary unit sampling (MUS) provides an estimate of the amount of

misstatement in the account balance or class of transactions. The distinguishing
feature of MUS is that it tends to select higher dollar transactions or components
within an account balance for examination. C lassical variables sampling uses
the laws of probability and the central limit theorem to estimate either (1) the
amount of misstatement in the account balance or class of transactions or (2) the
true balance for an account balance or class of transactions
Classical variables sampling procedures provide a range of estimates with a specific
probability of including the amount of misstatement or the true account balance.
MUS
items in the sample are selected based on their size; that is, each item in the
sample has a probability of being selected that is proportional to its size.
probability proportional to size (PPS) selection . combined attributes-variables
(CAV) sampling, cumulative monetary amount (CMA) sampling, and dollar-unit
sampling (DUS).
The unique feature of MUS is its definition of the population as the
number of dollars (euros, yuan, yen, etc.) in an account balance or class of
transactions.
Thus, if a clients accounts receivable are recorded at $300,000, the population is
defined as 300,000 one-dollar units
When a dollar is selected in this fashion, the entire logical unit is selected for
examination. This feature typically makes MUS samples efficient because a small
number of transactions or components can be selected for examination yet account
for a relatively large dollar amount.
MUS is best used when the audit team expects to find few or no misstatements and
when overstatement (existence assertion) is of greatest concern
In an MUS application, the attribute of interest is the difference between the
recorded value and the audited value, or the amount of misstatement.
Four main factors influence the sample size in an MUS application:
Sampling risk (risk of incorrect acceptance). occurs when the sample selected
by the audit team is not representative of the population from which it is draw

reduce sampling risk, the necessary sample size increases. As the sample size
increases, the likelihood that the sample is representative of the population
increases
Tolerable misstatement.
largest misstatement that they will allow (or tolerate)
before they conclude that the account balance or class of transactions is materially
misstated. amount of tolerable misstatement decreases, the necessary sample size
increases because auditors need to examine more of the population to ensure that
there are not numerous small misstatements that would accumulate to a material
amount.
Expected misstatement.
amount of misstatement the audit team anticipates
in the account balance or class of transactions. expected misstatement increases
(particularly in relation to tolerable misstatement), the audit team increases the
level of assurance. expected misstatement has a direct relationship with sample
size.
Population size.

population size increases, the necessary sample size increases.

audit team normally selects the sample using a systematic random selection
method. When a systematic method is used, the audit team determines a random
starting point within the population, which represents the first item selected. The
audit team then bypasses a fixed number of items in the population and selects the
next item for examination. This process is continued until the number of sampling
units equal to the necessary sample size has been selected. audit team examines
the logical unit that contains the individual sampling unit that is selected for
examination. To select an MUS sample, the audit team calculates a sampling
interval by dividing the recorded account balance by the necessary sample size.
The tainting percentage represents the percentage by which the account is
misstated. It is determined by dividing the difference between the recorded balance
and the audited value by the recorded balance
As with all statistical sampling applications, the audit team must now adjust the
detected misstatements to control for exposure to the risk of incorrect acceptance.

This process requires the audit team to calculate a conservative estimate of the
total misstatement composed of three separate components: projected
misstatement, incremental allowance for sampling risk, and basic allowance for
sampling risk.
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Projected misstatement
n/a because misstatement is higher than
sampling interval
Incremental allowance for sampling risk
Basic allowance for sampling risk

CLASSICAL VARIABLES SAMPLING

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Uses normal distribution theory and the central limit theorem