• 17 Marks

AA – L2 – Q60 – Audit Sampling

Define sampling risk in the context of audit sampling. List and explain five methods of sample selection used in audit sampling.

Sampling

ISA 530 Audit Sampling defines audit sampling as:
‘The application of audit procedures to less than 100% of the items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.’

Required:

(a) Define sampling risk.
(1 mark)

(b) List five methods of sample selection and explain how they function.
(10 marks)

(c) Which of the above sample selection methods in part (b) would you use if you wanted to maximise the opportunity of having high-value items in your sample? Explain why.
(3 marks)

(d) Define ‘tolerable misstatement’.
(1 mark)

(e) List five situations where sampling may not be appropriate.
(5 marks)

(a)  Sampling risk is the risk that the conclusion auditors draw will be different from that which they would have drawn had they examined the entire population.

(b) Five methods of sample selection include:

  1. Simple random selection
    This is a method of selection in which every item in a population has the same statistical probability of being selected as every other item. The sample will therefore be representative of the population as a whole. This involves selecting from a source of random numbers, either by use of computer programs which generate random numbers or of random number tables.
  2. Value weighted selection
    This involves using the currency unit value rather than the items as the sampling population. Each individual currency unit (say, a dollar) in the population is given an equal chance of selection. For example, one dollar is selected out of the first twenty thousand and thereafter each twenty thousandth dollar is selected. Since an individual currency unit cannot be examined, the item which includes that dollar is selected for examination, usually an invoice, payment or balance.
  3. Systematic selection
    The auditor calculates a uniform sampling interval by dividing the population size by the sample size. Having determined a starting point at random, every item that corresponds to the sampling interval is selected.
  4. Block sampling
    This is not generally an appropriate method of selection because populations might be expected to be structured in such a way that items in a sequence have similar characteristics to each other but different characteristics to items elsewhere in the population.
  5. Haphazard selection (or judgement sampling)
    A selection process in which the auditor attempts to give all items in a population a chance of being selected by choosing items haphazardly. The auditor should avoid conscious bias and predictability in selecting items. For example, a tendency to favour items that appear to be ‘easy’ i.e. items that appear to be simple and without complication.

(c)  Value-weighted selection. High-value items have a greater chance of selection. Since we are sampling every, say, twenty thousandth dollar, it is more likely that this will be part of a material balance and this trend will follow our sample as a whole.

Random and systematic sampling are both genuinely random so there is a greater chance of their sample containing high-value items.

Block sampling may be totally unrepresentative of a sample as it concentrates on a certain attribute.

Haphazard sampling includes human judgment and thus, bias. So this should be excluded.

(d) Tolerable misstatement is the maximum misstatement in the population that the auditor would be willing to accept and still conclude that the result from the sample has achieved the audit objective

(e) Sampling may not always be appropriate:

  1. Where the auditor is ‘on enquiry’ and is performing further audit procedures as a result of earlier testing
  2. Populations are too small to justify a sampling approach
  3. All transactions/balances are material
  4. ‘Sensitive’ items, such as directors’ emoluments which require precise disclosure
  5. Population is non-homogeneous i.e. dissimilar

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