Audit sampling

IAS 530
After studying this chapter, you will be able to:
 Define Audit Sampling as per IAS 530.
 Identify the Approaches to Audit Sampling and
Sample Selection Methods.
 Gain the knowledge of sample design, size and
selection of items for testing and Sampling Risk.
 Understand the sampling techniques and
sampling for test of control & substantive test.
According to IAS 530 “Audit sampling”,
„audit sampling‟ refers to the application of
audit procedures to less than 100% of 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.
Population refers to the entire set of data from
which a sample is selected and about which
the auditor wishes to draw conclusions.
Characteristics of Population
 Appropriateness :The auditor will need to
determine that the population from which
the sample is drawn is appropriate for the
specific audit objective .
If the auditor‟s objective were to test for
overstatement of accounts receivable, the population
could be defined as the accounts receivable listing.

On the other hand, when testing for understatement

of accounts payable, the population would not be
the accounts payable listing, but rather subsequent
disbursements, unpaid invoices, suppliers‟ statements,
unmatched receiving reports, or other populations
that would provide audit evidence of understatement
of accounts payable.
Population refers to the entire set of data from which a
sample is selected and about which the auditor wishes to
draw conclusions.
Characteristics of Population
 Completeness : The population also needs to be
complete, which means that if the auditor intends to
use the sample to draw conclusions about whether a
control activity operated effectively during the
financial reporting period, the population needs to
include all relevant items from throughout the entire
period.

 Reliable : When performing the audit sampling, the

auditor performs audit procedures to ensure that the
information upon which the audit sampling is
performed is sufficiently complete and accurate.
The auditor is expected to:
 Provide reasonable assurance.
 Provide opinion with in limited period
of time.
 Very difficult to use all the relevant
audit evidence when voluminous or
cumbersome.
Statistical sampling is the random
selection of the sample items; and the
use of probability theory to evaluate
sample results, including measurement
of sampling risk characteristics. A
sampling approach that does not have
above characteristics is considered non-
statistical sampling.
 The amount of testing (sample size) does not increase in
proportion to the increase in the size of the area (universe)
tested.
 The sample selection is more objective and thereby more
defensible.
 The method provides a means of estimating the minimum
sample size associated with a specified risk and precision.
 It provides a means for deriving a “calculated risk” and
corresponding precision (sampling error) i.e. the probable
difference in result due to the use of a sample in lieu of
examining all the records in the group (universe), using
the same audit procedures.
 It may provide a better description of a large mass of data
than a complete examination of all the data, since non-
sampling errors such as processing and clerical mistakes
are not as large.
Sampling risk is the risk that the auditor‟s conclusions
based on a sample may be different from the
conclusion if the entire population were the subject
of the same audit procedure.

ISA 530 recognizes that sampling risk can lead to

erroneous conclusion:
1. The auditor concludes that controls are operating
effectively, when in fact they are not
2. The auditor may conclude that a material misstatement
does not exist, when in fact it does.
3. The auditor concludes that controls are not operating
effectively, when in fact they are
4. The auditor may conclude that a material misstatement
does exist, when in fact it does not.
Non-sampling risk is the risk that the
auditor forms the wrong conclusion,
which is unrelated to sampling risk.
Eg.
 Human errors
 Inefficacy of the auditors or
 Uses of inappropriate audit
procedures etc
ISA 530 recognizes that there are many
methods of selecting a sample, but it considers
five principal methods of audit sampling as
follows:
✓Random selection
✓Systematic selection
✓Monetary unit sampling
✓Judgmental or Haphazard
selection, and
✓Block or qaota selection.
This method of sampling ensures that
all items within a population stand an
equal chance of selection by the use of
random number tables or random
number generators. The sampling units
could be physical items, such as sales
invoices or monetary units.
Figure 15-1 shows the random selection of sales invoices for the audit of
Hillsburg Hardware Co. using an electronic spreadsheet program.
The method divides the number of sampling
units within a population into the sample size
to generate a sampling interval. The starting
point for the sample can be generated
randomly, but ISA 530 recognizes that it is
more likely to be „truly‟ random if the use of
random number generators or random number
tables are used. Consider the following
example:
You are the auditor of JC Co and are undertaking
substantive testing on the sales for the year ended
31 December 2022. You have established that the
„source‟ documentation that initiates a sales
transaction is the goods dispatch note and you
have obtained details of the first and last goods
dispatched notes raised in the year to 31
December 2022, which are numbered 10,000 to
15,000 respectively.
 The random number generator has suggested a
start of 42 and the sample size is 50. You will
therefore start from goods dispatch note number
(10,000 + 42) 10,042 and then sample every
100th goods dispatch note thereafter until your
sample size reaches 50.
Assume the auditor wants to examine 200 paid
checks from a population of 10,000 checks.

 the interval = 10,000/200 = 50, this implies

the auditor will select every 50th check
 As a starting point the auditor will select one of
the first 50 checks
 Assume from the first 50 checks, check # 37 is
selected randomly, then
 CK# 37; CK# 87 i.e 37 + 50; CK# 137 i.e 87 +
50 are among those that are included in the
sample
The method of sampling is a value-weighted
selection whereby sample size, selection and
evaluation will result in a conclusion in monetary
amounts. The objective of monetary unit
sampling (MUS) is to determine the accuracy of
financial accounts.
The steps involved in monetary unit sampling
are to:
✓ determine a sample size
✓ select the sample
✓ perform the audit procedures
✓ evaluate the results and arriving at conclusion.
Assume the auditor wants to examine 6 customer ledger
accounts from a population of 19 customers ledger with
balance. (accounts with credit and zero balances are not
selected); the customer list has been alphabetized.
Cumulative balance is calculated
 The sampling interval is calculated by taking the total
value on the ledger of $2,103,000 (to the nearest
$000) and dividing by the sample size of 6.
◦ Sampling interval= $2,103,000/6 =$351,000
 The first item is chosen randomly ( a number between
1 & 2,103,000), assume it is 233,000.
 Each item after 233,000 is selected by adding the
sampling interval of $351,000, until 6 items are
selected.
 „000
ID No. Customer Name Balance$ Cumulative Sampling Item

A001 Customer A1 176 176

A002 Customer A2 84 260 Sample #1 (233,000 is found here)

A003 Customer A3 42 302

B001 Customer B1 12 314

B002 Customer B2 45 359

B003 Customer B3 235 594 Sample #2 (584,000 is found here)

B004 Customer B4 211 805

B005 Customer B5 61 866

C001 Customer C1 59 925

C002 Customer C2 21 946 Sample #3 (935,000 is found here)

C003 Customer C3 0

C004 Customer C4 256 1202

C005 Customer C5 419 1621 Sample #4 (1,286,000 is found here)

C006 Customer C6 92 1713 Sample #5 (1,637,000 is found here)

C007 Customer C7 76 1789

D001 Customer D1 0

D002 Customer D2 97 1886

D003 Customer D3 93 1979

D004 Customer D4 89 2068 Sample #6 (1,988,000 is found here)

D005 Customer D5 4 2072

D006 Customer D6 31 2103

When the auditor uses this method of sampling,
he does so without following a structured
technique. ISA 530 also recognizes that this
method of sampling is not appropriate when using
statistical sampling (see further in the article).
Care must be taken by the auditor when adopting
haphazard sampling to avoid any conscious bias
or predictability. The objective of audit sampling
is to ensure that all items that make up a
population stand an equal chance of selection.
This objective cannot be achieved if the auditor
deliberately avoids items that are difficult to locate
or deliberately avoids certain items.
 Is continuous groups of items are chosen from
the population.
 This method of sampling involves selecting a
block (or blocks) of connecting items from
within a population.
 Block selection is rarely used in modern
auditing merely because valid references
cannot be made beyond the period or block
examined. In situations when the auditor uses
block selection as a sampling technique, many
blocks should be selected to help minimize
sampling risk.