this presentation discusses about audit sampling.

1. Audit Sampling
Adli Rafdi Annas
344168
Gerald Prayogo
342858
M Heickal Pradinanta
350168

2. Nature of Audit Sampling
 The process of using auditing procedures to
test less than 100 percent of various items in a
company's account balance such that each unit
may have an equal opportunity of being
selected.

3. Define Audit Sampling
 Refer to Definition on ISA 530 for Audit Sampling
 Process of selecting a subset of a population of
items for the purpose of making inferences to
whole population.
 The process of using auditing procedures to less
than 100 per cent of various items in a company's
account balance such that each unit may have an
equal opportunity of being selected.

4. Purpose of Audit sampling
 Audit sampling help auditors on doing their audit work at
a given period of time. It is possible for auditor to make
details examination on all the items being examined.
 To gather or get the evidences from the audit procedures
being performed. Sampling is only the method (efficient)
or sources of the evidence.
 To detect error and any materially misstatements.

5. Select the audit samples
 1) Simple random sampling – cases are selected
in a completely random way which ensures
that each case has an equal chance of being
 2) Stratified random sampling – The
population is divided into groups depending
on characteristics they share in common e.g.
diagnosis, age. A random sample is then
selected from each group.

6. Select the audit samples
 3) Interval random sampling – The population is
arranged in order and the first case is then selected at
random. The rest of the cases are then selected at pre-
defined intervals,
 4) Rapid-cycle sampling – This method can be used
where you know there may be a problem and you want
to obtain results as quickly as possible. Here you carry
out the audit with a relatively small sample, implement
changes and then re-audit using another small sample
to determine whether improvements have been made.
This method uses lots of small data sets to monitor care
and can make the change cycle quicker to complete.

7. factors affecting the sample size.
Population Size
 This is only relevant in very small populations.
Level of confidence
 Even a 100% sample will not give complete assurance .Auditors work
to level of confidence which can be expressed precisely .
Precision
 Clearly the level of confidence and the precision interval are related
,in that for a given sample size higher confidence can be expressed in
a wider precision interval and vice versa.

8. Risk
Risk is a highly important concept in modern auditing and in high risk
areas a large sample will be desirable.
Materiality
Materiality is fundamental to modern auditing and with all
populations being sample, materiality should be considered in fixing the
sample size.

Subjective factors
This is most important and yet difficult area of consideration .The
auditor expects to gain audit evidence about a population from a sample.
Expected error/deviation rate
The theory requires that the samples size required is a function of the
error .This is only known after the results have been evaluated .However
an estimate based on previous experience and knowledge of other
factors may give a good indication

9. Audit samples selection method
CHARACTERISTICS OF SAMPLE:
Random
 A random sample is one where each item of the
population has an equal or specified chance of being
selected
Representatives
 The sample should be representative of the differing
items in the whole population .

10. Protective
Protective that is of the auditor. More intensive auditing should occur
on high value items known to be high risk.
Unpredictable
Client should not be able to know or guess which items will be
examined.
Haphazard
Simply choosing items subjectively but avoiding bias.
Simple random
All items in population have a number .
Stratified
Dividing the population into sub population and is useful when parts
of the population have higher than normal risk.

11. Cluster sampling
This is useful when data is maintained in clusters as wage records are
kept in weeks or sales invoice in months.
Random systematics
Involves making a random start and then taking every “n”th item
thereafter.
Multi stage sampling
This method is appropriate when data is stored in two or more levels.
For example stock in a retail chain of shops. The first stage is to
randomly select a sample of shops and the second stage is to randomly
select stock items from the chosen shops.

12. Examine the evaluation of
sample size by using….

13.  Test of control
 Determine the system’s internal controls comply with the
stated policies, plans, laws and regulations.
 Evaluate the design of controls and determine if the
controls are in operation.
 To detect material error and whether the internal controls
were operating effectively through out the period being
audited.
 Provide information as to the rate of error in terms of
control failure rather than to enable direct extrapolation
in term of monetary errors in the financial statements.

14.  Substantive test
 Provide audit evidence to the completeness, accuracy
and validity of the information contained in the financial
statements.
 Determine their accuracy and to draw conclusions about
the materiality of the error amounts in the accounts.
 To obtain reliable confidence limits, such as confidence
limits with actual confidence levels
 Example the total error amount should not be very much
greater than the true error amount with sample sizes that
are not too large for practical audit applications.

15. Distinguish the advantages and
disadvantages of selecting
samples…

16. Statistical vs. Non-statistical
Statistical
 Through the application
of mathematical rules.
 It allows the
quantification
(measurement) of
sampling risk in planning
the sample and evaluate
the results.
Non-statistical
 Auditor does not quantify
sampling risk.
 Instead, those sample
items that auditor
believes will provide the
most useful information
in the circumstances are
selected.

17. Advantages
 Very accurate.
 Economical in nature.
 Very reliable.
 High suitability ratio
towards the different
surveys.
 Takes less time.
 In cases, when the
universe is very large,
then the sampling method
is the only practical
method for collecting the
data.
Disadvantages
 Inadequacy of the
samples.
 Chances for bias.
 Problems of accuracy.
 Difficulty of getting the
representative sample.
 Untrained manpower.
 Absence of the
informants.
 Chances of committing
the errors in sampling.

18. Probability Sampling
Advantages
 Less prone to bias
 Allows estimation of
magnitude of sampling error,
from which you can
determine the statistical
significance of
changes/differences in
indicators
Disadvantages
 Requires that you have a list of
all sample elements
 More time-consuming
 More costly
 No advantage when small
numbers
of elements are to be
chosen
Non-Probability Sampling
Advantages
 More flexible
 Less costly
 Less time-consuming
 Judgmentally representative
samples may be preferred
when small numbers of
elements are to be chosen
Disadvantages
 Greater risk of bias
 May not be possible to
generalize to program target
population
 Subjectivity can make it
difficult to
measure changes in
indicators over time
 No way to assess precision or
reliability of data

19. ERROR IN THE POPULATION

20. Type I and Type II errors
 Type I and Type II errors are the two types of decision
errors an auditor can make when deciding that sample
evidence supports or does not support a test of controls or
a substantive procedures based on a sampling application.
 In reference to a test of controls Type I and Type II
errors are:
 Risk of incorrect rejection (Type I):
 Level of Control Risk > Operating Effectiveness
 Risk of assessing control risk too high or the risk of under-
reliance.

21.  Risk of incorrect acceptance (Type II):
 Level of CR < Operating Effectiveness
 Risk of assessing control risk too low or the risk of over-
reliance.
 In reference to substantive tests Type I and Type II
errors as follows:
 Risk of incorrect rejection (Type I):
 Overestimating Misstatement in samples that support the
conclusion

22.  Risk of incorrect acceptance (Type II):
 The risk of Underestimating the misstatement in samples
that support the conclusion
 Such errors can result in the auditor's conducting
more audit work than necessary in order to reach the
correct conclusion. The risk of incorrect acceptance can
result in the auditor failing to detect a material
misstatement in the financial statements. This can
lead to litigation against the auditor by the parties who
relied on the financial statements.

23. EXPECTED ERROR IN THE
POPULATION
a) Tolerable error
 Tolerable error is the maximum error in the population that auditors
would be willing to accept and still conclude that the result from the
sample has achieved the audit objective.
 Is considered during the planning stage and, for substantive procedures, is
related to the auditors' judgement about materiality.
 The smaller the tolerable error, the greater the sample size needs to be.
 In tests of control, the tolerable error is the maximum rate of deviation
from a prescribed control procedure that auditors would be willing to
accept and still conclude that the preliminary assessment of control risk
is valid.
 In substantive procedures, the tolerable error is the maximum monetary
error in an account balance or a class of transactions that auditors would
be willing to accept so that when the results of all audit procedures are
considered, auditors are able to conclude, with reasonable assurance,
that the financial statements are not materially misstated.

24. b) Expected error
 More expected errors = larger sample required
 Smaller sample sizes are justified when the population is
expected to be error free.
 In determining the expected error in a population, auditors
would consider such matters as error levels identified in
previous audits, changes in the entity's procedures and
evidence available from other procedures, including tests of
control.

25. NATURE OF ERROR
 Common features: type of transaction, location, product
line or period of time.
 In such circumstances, auditors may decide to identify all
items in the population which possess the common
feature, thereby producing a subpopulation, and extend
audit procedures in this area.
 Auditors would then perform a separate analysis based on
the items examined for each sub-population.

26. What if the auditor finds there is
an error?
 Material error is usually the result of one or more of the
following :
a) A large number of small error – should be detected by
representative sampling.
b) Few large error – should be detected by selecting
sampling.
c) A combination of (a) and (b) – both sample types will be
needed

27. a) Representative sample
Drawn at random from a population. A sample should be large
enough to allow auditors to draw valid inferences about the
whole population. Auditors test of control will always make use of
representative sampling may also be used for substantive
testing.
b) Selecting samples
Focus on particular items in the population. These are usually
the large and unusual items, transactions or balances that are
large enough to give a materials error if incorrect, or which are
worthy of investigation.

28. ACTION TAKEN WHEN ERROR IS
FOUND
 Auditors project the error results of the sample to the population
from which the sample was selected in order to form a conclusion
about the possible level of error in the population as a whole.
 The projection of the error results of the sample to the population as
a whole involves estimating the probable error in the population by
extrapolating the errors found in the sample.
 When projecting error results, auditors would ensure that the
method of projection is consistent with the method used to select the
sampling unit.
 This is in addition to considering the qualitative aspects of the errors
found. When the population has been divided into sub-populations,
the projection of errors is done separately for each sub-population
and the results are combined.

29.  Auditors would consider whether errors in the population might
exceed the tolerable error. To accomplish this, auditors compare the
projected population error to the tolerable error taking into account
the results of other audit procedures relevant to the specific control
or financial statement assertion.
 The projected population error used for this comparison in the case
of substantive procedures is net of adjustments made by the entity.
When the projected error exceeds tolerable error, auditors re-assess
the sampling risk and if that risk is unacceptable, consider extending
the audit procedure or performing alternative audit procedures,
either of which may result in them proposing an adjustment to the
financial statements.

30. THANK YOU!