Audit Sampling: Notes | Auditing and Ethics for CA Intermediate PDF Download

 Page 1


 
 
LEARNING OUTCOMES 
 
 
  
AUDIT SAMPLING 
 
After studying this chapter, you will be able to: 
? Define Audit Sampling as per Standards on Auditing 530 and its importance. 
? 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 how/when to apply them to audit 
procedures. 
CHAPTER 
7 
 
Page 2


 
 
LEARNING OUTCOMES 
 
 
  
AUDIT SAMPLING 
 
After studying this chapter, you will be able to: 
? Define Audit Sampling as per Standards on Auditing 530 and its importance. 
? 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 how/when to apply them to audit 
procedures. 
CHAPTER 
7 
 
 
 
7.2 
 
AUDITING AND ASSURANCE 
1. SAMPLING: AN AUDIT PROCEDURE 
No conscious e?ort in human society is divested of economic considerations and 
auditing is no exception. There is a growing realisation that the traditional approach 
to audit is economically wasteful because all the e?orts are directed to check all 
transactions without any exception. This invariably leads to more emphasis on 
routine checking, which often is not necessary in view of the time and the cost 
involved. With the shift in favour of formal internal controls in the management of 
a?airs of organisations, the possibilities of routine errors and frauds have greatly 
diminished i.e the internal controls as designed by the management are for the 
very purpose of Prevention, Detection and Correction of Frauds and Erros. Thus the 
auditors often ?nd extensive routine checking as nothing more than a ritual 
because it seldom reveals anything material Now the approach to audit and the 
extent of checking are undergoing a progressive change in favour of more attention 
towards the questions of principles and controls with a curtailment of non-
consequential routine checking. By routine checking we traditionally think of 
extensive checking and vouching of all the entries, disregarding the concept of 
materiality. 
The extent of the checking to be undertaken is primarily a matter of judgment of 
the auditor, there is nothing statutorily stated anywhere which speci?es what work is 
to be done, how it is to be done and to what extent it has to be done. It is also not 
obligatory that the auditor must adopt the sampling technique. What he is to do as 
an auditor is to express his opinion on the financial statements and become bound 
by that. 
To ensure good and reasonable standard of work, he should adopt standards and 
techniques that can lead him to an informed professional opinion. On  consideration of 
this fact, it can be said that it is in the interest of the auditor that if he decides to form his 
opinion on the basis of a part checking ( i.e sampling), he should adopt standards and 
techniques which are widely followed and which have a recognised basis.  
Since statistical theory of sampling is based on a scienti?c law, it can be relied upon to a 
greater extent than any arbitrary technique which lacks in basis and acceptability. 
This enables the auditor to make conclusions and express fair opinion without 
having to check all of the items within the financial statements. 
Page 3


 
 
LEARNING OUTCOMES 
 
 
  
AUDIT SAMPLING 
 
After studying this chapter, you will be able to: 
? Define Audit Sampling as per Standards on Auditing 530 and its importance. 
? 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 how/when to apply them to audit 
procedures. 
CHAPTER 
7 
 
 
 
7.2 
 
AUDITING AND ASSURANCE 
1. SAMPLING: AN AUDIT PROCEDURE 
No conscious e?ort in human society is divested of economic considerations and 
auditing is no exception. There is a growing realisation that the traditional approach 
to audit is economically wasteful because all the e?orts are directed to check all 
transactions without any exception. This invariably leads to more emphasis on 
routine checking, which often is not necessary in view of the time and the cost 
involved. With the shift in favour of formal internal controls in the management of 
a?airs of organisations, the possibilities of routine errors and frauds have greatly 
diminished i.e the internal controls as designed by the management are for the 
very purpose of Prevention, Detection and Correction of Frauds and Erros. Thus the 
auditors often ?nd extensive routine checking as nothing more than a ritual 
because it seldom reveals anything material Now the approach to audit and the 
extent of checking are undergoing a progressive change in favour of more attention 
towards the questions of principles and controls with a curtailment of non-
consequential routine checking. By routine checking we traditionally think of 
extensive checking and vouching of all the entries, disregarding the concept of 
materiality. 
The extent of the checking to be undertaken is primarily a matter of judgment of 
the auditor, there is nothing statutorily stated anywhere which speci?es what work is 
to be done, how it is to be done and to what extent it has to be done. It is also not 
obligatory that the auditor must adopt the sampling technique. What he is to do as 
an auditor is to express his opinion on the financial statements and become bound 
by that. 
To ensure good and reasonable standard of work, he should adopt standards and 
techniques that can lead him to an informed professional opinion. On  consideration of 
this fact, it can be said that it is in the interest of the auditor that if he decides to form his 
opinion on the basis of a part checking ( i.e sampling), he should adopt standards and 
techniques which are widely followed and which have a recognised basis.  
Since statistical theory of sampling is based on a scienti?c law, it can be relied upon to a 
greater extent than any arbitrary technique which lacks in basis and acceptability. 
This enables the auditor to make conclusions and express fair opinion without 
having to check all of the items within the financial statements. 
7.3 
 
 AUDIT SAMPLING 
2. MEANING OF AUDIT SAMPLING 
According to SA 530 “Audit sampling”, ‘audit sampling’ 
refers to the application of audit procedures to less 
than 100% of items within a population  relevant under 
the audit, such that all sampling units (i.e all the items 
in the population) have a equal chance of selection. 
This is to ensure that the items selected represent the 
entire population which enables the auditor to draw 
conclusions and express his opinion based on a pre-determined objective..  
The objective of the auditor when using audit sampling is to provide a reasonable 
basis for the auditor to draw conclusions about the population from which the 
sample is selected. 
Scope of SA-530 
SA 530 becomes applicable when the auditor has decided to use audit sampling in 
performing audit procedures. This standard deals  with the auditor’s use of - 
? Statistical and  
? Non-statistical sampling  
when designing and selecting the- 
(i)  audit sample,  
(ii)  performing tests of controls and tests of details, and  
(iii)  evaluating the results from the sample. 
SA 500 “Audit Evidence”,  deals with the auditor’s responsibility to design and 
perform audit procedures to obtain sufficient appropriate audit evidence to be able 
to draw reasonable conclusions on which to base the audit opinion.  
SA 500 lays down the means available to the auditor for selecting the items for 
testing. One of those is Audit Sampling. Hence SA 530 complement SA 500. 
2.1 Population 
Population refers to the entire set of data from which a sample is selected and 
about which the auditor wishes to draw conclusions. 
The auditor should select sample items in such a way that the sample can be 
expected to be representative of the population. This requires that all items in the 
population have an opportunity of being selected. 
Page 4


 
 
LEARNING OUTCOMES 
 
 
  
AUDIT SAMPLING 
 
After studying this chapter, you will be able to: 
? Define Audit Sampling as per Standards on Auditing 530 and its importance. 
? 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 how/when to apply them to audit 
procedures. 
CHAPTER 
7 
 
 
 
7.2 
 
AUDITING AND ASSURANCE 
1. SAMPLING: AN AUDIT PROCEDURE 
No conscious e?ort in human society is divested of economic considerations and 
auditing is no exception. There is a growing realisation that the traditional approach 
to audit is economically wasteful because all the e?orts are directed to check all 
transactions without any exception. This invariably leads to more emphasis on 
routine checking, which often is not necessary in view of the time and the cost 
involved. With the shift in favour of formal internal controls in the management of 
a?airs of organisations, the possibilities of routine errors and frauds have greatly 
diminished i.e the internal controls as designed by the management are for the 
very purpose of Prevention, Detection and Correction of Frauds and Erros. Thus the 
auditors often ?nd extensive routine checking as nothing more than a ritual 
because it seldom reveals anything material Now the approach to audit and the 
extent of checking are undergoing a progressive change in favour of more attention 
towards the questions of principles and controls with a curtailment of non-
consequential routine checking. By routine checking we traditionally think of 
extensive checking and vouching of all the entries, disregarding the concept of 
materiality. 
The extent of the checking to be undertaken is primarily a matter of judgment of 
the auditor, there is nothing statutorily stated anywhere which speci?es what work is 
to be done, how it is to be done and to what extent it has to be done. It is also not 
obligatory that the auditor must adopt the sampling technique. What he is to do as 
an auditor is to express his opinion on the financial statements and become bound 
by that. 
To ensure good and reasonable standard of work, he should adopt standards and 
techniques that can lead him to an informed professional opinion. On  consideration of 
this fact, it can be said that it is in the interest of the auditor that if he decides to form his 
opinion on the basis of a part checking ( i.e sampling), he should adopt standards and 
techniques which are widely followed and which have a recognised basis.  
Since statistical theory of sampling is based on a scienti?c law, it can be relied upon to a 
greater extent than any arbitrary technique which lacks in basis and acceptability. 
This enables the auditor to make conclusions and express fair opinion without 
having to check all of the items within the financial statements. 
7.3 
 
 AUDIT SAMPLING 
2. MEANING OF AUDIT SAMPLING 
According to SA 530 “Audit sampling”, ‘audit sampling’ 
refers to the application of audit procedures to less 
than 100% of items within a population  relevant under 
the audit, such that all sampling units (i.e all the items 
in the population) have a equal chance of selection. 
This is to ensure that the items selected represent the 
entire population which enables the auditor to draw 
conclusions and express his opinion based on a pre-determined objective..  
The objective of the auditor when using audit sampling is to provide a reasonable 
basis for the auditor to draw conclusions about the population from which the 
sample is selected. 
Scope of SA-530 
SA 530 becomes applicable when the auditor has decided to use audit sampling in 
performing audit procedures. This standard deals  with the auditor’s use of - 
? Statistical and  
? Non-statistical sampling  
when designing and selecting the- 
(i)  audit sample,  
(ii)  performing tests of controls and tests of details, and  
(iii)  evaluating the results from the sample. 
SA 500 “Audit Evidence”,  deals with the auditor’s responsibility to design and 
perform audit procedures to obtain sufficient appropriate audit evidence to be able 
to draw reasonable conclusions on which to base the audit opinion.  
SA 500 lays down the means available to the auditor for selecting the items for 
testing. One of those is Audit Sampling. Hence SA 530 complement SA 500. 
2.1 Population 
Population refers to the entire set of data from which a sample is selected and 
about which the auditor wishes to draw conclusions. 
The auditor should select sample items in such a way that the sample can be 
expected to be representative of the population. This requires that all items in the 
population have an opportunity of being selected. 
 
 
7.4 
 
AUDITING AND ASSURANCE 
2.1.1 Characteristics of Population 
1. Appropriateness: The auditor will need to determine that the population 
from which the sample is drawn is appropriate for the specific audit objective. 
Appropriate means population from which the samples are drawn shall be relevant 
for the specific objective under audit this is because when the samples are drawn, 
the audit procedures are applied on the sample and the conclusions are projected 
on the population.  
It is important for the auditor to ensure that the population is appropriate to the 
objective of the audit procedure, which will include consideration of the direction 
of testing 
Example 
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. 
2. 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 is operated effectively during the financial reporting period, the 
population needs to include all relevant items i.e all the activities that form part of 
that relevant internal control,  throughout the entire period. If population is 
complete in all respects, the conclusions drawn on the population will be 
considered to be reasonable. 
3. 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. Auditor should obtain evidence about the 
reliability of population. If population is not reliable with respect to accuracy and 
source, the sample drawn will definitely not be relevant for the specific audit objective. 
Sampling Unit 
The individual items that make up the population are known as sampling units. The 
population can be divided into sampling units in a variety of ways. It is a selection 
from the population that is used as an extrapolation of the population. Audit 
procedures are applied on these units and the conclusions drawn from them are 
projected on the population. 
Page 5


 
 
LEARNING OUTCOMES 
 
 
  
AUDIT SAMPLING 
 
After studying this chapter, you will be able to: 
? Define Audit Sampling as per Standards on Auditing 530 and its importance. 
? 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 how/when to apply them to audit 
procedures. 
CHAPTER 
7 
 
 
 
7.2 
 
AUDITING AND ASSURANCE 
1. SAMPLING: AN AUDIT PROCEDURE 
No conscious e?ort in human society is divested of economic considerations and 
auditing is no exception. There is a growing realisation that the traditional approach 
to audit is economically wasteful because all the e?orts are directed to check all 
transactions without any exception. This invariably leads to more emphasis on 
routine checking, which often is not necessary in view of the time and the cost 
involved. With the shift in favour of formal internal controls in the management of 
a?airs of organisations, the possibilities of routine errors and frauds have greatly 
diminished i.e the internal controls as designed by the management are for the 
very purpose of Prevention, Detection and Correction of Frauds and Erros. Thus the 
auditors often ?nd extensive routine checking as nothing more than a ritual 
because it seldom reveals anything material Now the approach to audit and the 
extent of checking are undergoing a progressive change in favour of more attention 
towards the questions of principles and controls with a curtailment of non-
consequential routine checking. By routine checking we traditionally think of 
extensive checking and vouching of all the entries, disregarding the concept of 
materiality. 
The extent of the checking to be undertaken is primarily a matter of judgment of 
the auditor, there is nothing statutorily stated anywhere which speci?es what work is 
to be done, how it is to be done and to what extent it has to be done. It is also not 
obligatory that the auditor must adopt the sampling technique. What he is to do as 
an auditor is to express his opinion on the financial statements and become bound 
by that. 
To ensure good and reasonable standard of work, he should adopt standards and 
techniques that can lead him to an informed professional opinion. On  consideration of 
this fact, it can be said that it is in the interest of the auditor that if he decides to form his 
opinion on the basis of a part checking ( i.e sampling), he should adopt standards and 
techniques which are widely followed and which have a recognised basis.  
Since statistical theory of sampling is based on a scienti?c law, it can be relied upon to a 
greater extent than any arbitrary technique which lacks in basis and acceptability. 
This enables the auditor to make conclusions and express fair opinion without 
having to check all of the items within the financial statements. 
7.3 
 
 AUDIT SAMPLING 
2. MEANING OF AUDIT SAMPLING 
According to SA 530 “Audit sampling”, ‘audit sampling’ 
refers to the application of audit procedures to less 
than 100% of items within a population  relevant under 
the audit, such that all sampling units (i.e all the items 
in the population) have a equal chance of selection. 
This is to ensure that the items selected represent the 
entire population which enables the auditor to draw 
conclusions and express his opinion based on a pre-determined objective..  
The objective of the auditor when using audit sampling is to provide a reasonable 
basis for the auditor to draw conclusions about the population from which the 
sample is selected. 
Scope of SA-530 
SA 530 becomes applicable when the auditor has decided to use audit sampling in 
performing audit procedures. This standard deals  with the auditor’s use of - 
? Statistical and  
? Non-statistical sampling  
when designing and selecting the- 
(i)  audit sample,  
(ii)  performing tests of controls and tests of details, and  
(iii)  evaluating the results from the sample. 
SA 500 “Audit Evidence”,  deals with the auditor’s responsibility to design and 
perform audit procedures to obtain sufficient appropriate audit evidence to be able 
to draw reasonable conclusions on which to base the audit opinion.  
SA 500 lays down the means available to the auditor for selecting the items for 
testing. One of those is Audit Sampling. Hence SA 530 complement SA 500. 
2.1 Population 
Population refers to the entire set of data from which a sample is selected and 
about which the auditor wishes to draw conclusions. 
The auditor should select sample items in such a way that the sample can be 
expected to be representative of the population. This requires that all items in the 
population have an opportunity of being selected. 
 
 
7.4 
 
AUDITING AND ASSURANCE 
2.1.1 Characteristics of Population 
1. Appropriateness: The auditor will need to determine that the population 
from which the sample is drawn is appropriate for the specific audit objective. 
Appropriate means population from which the samples are drawn shall be relevant 
for the specific objective under audit this is because when the samples are drawn, 
the audit procedures are applied on the sample and the conclusions are projected 
on the population.  
It is important for the auditor to ensure that the population is appropriate to the 
objective of the audit procedure, which will include consideration of the direction 
of testing 
Example 
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. 
2. 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 is operated effectively during the financial reporting period, the 
population needs to include all relevant items i.e all the activities that form part of 
that relevant internal control,  throughout the entire period. If population is 
complete in all respects, the conclusions drawn on the population will be 
considered to be reasonable. 
3. 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. Auditor should obtain evidence about the 
reliability of population. If population is not reliable with respect to accuracy and 
source, the sample drawn will definitely not be relevant for the specific audit objective. 
Sampling Unit 
The individual items that make up the population are known as sampling units. The 
population can be divided into sampling units in a variety of ways. It is a selection 
from the population that is used as an extrapolation of the population. Audit 
procedures are applied on these units and the conclusions drawn from them are 
projected on the population. 
7.5 
 
 AUDIT SAMPLING 
In simple words, conclusions drawn on the sample becomes the conclusion of the 
population from where it is drawn. 
Example: If the auditor’s objective were to test the validity of accounts receivables, 
the sampling unit could be defined as customer balances or individual custome r 
invoices. The auditor defines the sampling unit in order to obtain an efficient and 
effective sample to achieve the particular audit objectives. The conclusion on the 
population is based on the audit procedures applied on the sampling unit. 
Sample must be representative 
Whatever may be the approach non-statistical or statistical sampling, the 
sample must be representative. This means that it must be closely similar to the 
whole population although not necessarily exactly the same. The sample must be 
large enough to provide statistically meaningful results. 
 
 
 
 
 
 
 
 
 3. APPROACHES TO SAMPLING 
Audit sampling enables the auditor to obtain and 
evaluate audit evidence about some characteristic 
of  the  items  selected in order to form or assist in 
forming a conclusion about the population ,from 
which the sample is drawn. Audit sampling can be 
applied using either 
? non-statistical or 
? statistical sampling approaches. 
Statistical sampling is an approach to sampling that has the random selection of 
the sample units; and the use of probability theory to evaluate sample results, 
including measurement of sampling risk characteristics.  
SAMPLING PROCESS 
is performed on 
Test of controls 
to identify deviations from 
expected internal controls 
Test of details  
to identify misstatements of 
account balances and class of 
transactions