Chapter 15

Audit Sampling for Tests of Controls and

Substantive Tests of Transactions

Review Questions

15-1 A representative sample is one in which the characteristics of interest for

the sample are approximately the same as for the population (that is, the sample
accurately represents the total population). If the population contains significant
misstatements, but the sample is practically free of misstatements, the sample is
nonrepresentative, which is likely to result in an improper audit decision. The
auditor can never know for sure whether he or she has a representative sample
because the entire population is ordinarily not tested, but certain things, such as
the use of random selection, can increase the likelihood of a representative
sample.

15-2 Statistical sampling is the use of mathematical measurement techniques

to calculate formal statistical results. The auditor therefore quantifies sampling
risk when statistical sampling is used. In nonstatistical sampling, the auditor does
not quantify sampling risk. Instead, conclusions are reached about populations
on a more judgmental basis.
For both statistical and nonstatistical methods, the three main parts are:

1. Plan the sample

2. Select the sample and perform the tests
3. Evaluate the results

15-3 In replacement sampling, an element in the population can be included

in the sample more than once if the random number corresponding to that
element is selected more than once. In nonreplacement sampling, an element
can be included only once. If the random number corresponding to an element is
selected more than once, it is simply treated as a discard the second time.
Although both selection approaches are consistent with sound statistical theory,
auditors rarely use replacement sampling; it seems more intuitively satisfying to
auditors to include an item only once.

15-4 A simple random sample is one in which every possible combination of

elements in the population has an equal chance of selection. Two methods of
simple random selection are use of a random number table, and use of the
computer to generate random numbers. Auditors most often use the computer to
generate random numbers because it saves time, reduces the likelihood of error,
and provides automatic documentation of the sample selected.

15-1
15-5 In systematic sampling, the auditor calculates an interval and then
methodically selects the items for the sample based on the size of the interval.
The interval is set by dividing the population size by the number of sample items
desired.
To select 40 numbers from a population of 2,800, the auditor divides 40
into 2,800 and gets an interval of 70. He or she then selects a random number
between 0 and 69. Assume the auditor chooses 17. The first item is the number
17. The next is 87, then 157, 227, and so on.
The advantage of systematic sampling is its ease of use. In most populations
a systematic sample can be drawn quickly, the approach automatically puts the
numbers in sequential order and documentation is easy.
A major problem with the use of systematic sampling is the possibility
of bias. Because of the way systematic samples are selected, once the first item
in the sample is selected, other items are chosen automatically. This causes
no problems if the characteristics of interest, such as control deviations, are
distributed randomly throughout the population; however, in many cases they are
not. If all items of a certain type are processed at certain times of the month or
with the use of certain document numbers, a systematically drawn sample has a
higher likelihood of failing to obtain a representative sample. This shortcoming
is sufficiently serious that some CPA firms prohibit the use of systematic
sampling.

15-6 The purpose of using nonstatistical sampling for tests of controls and
substantive tests of transactions is to estimate the proportion of items in a
population containing a characteristic or attribute of interest. The auditor is
ordinarily interested in determining internal control deviations or monetary
misstatements for tests of controls and substantive tests of transactions.

15-7 A block sample is the selection of several items in sequence. Once the first
item in the block is selected, the remainder of the block is chosen automatically.
Thus, to select 5 blocks of 20 sales invoices, one would select one invoice and
the block would be that invoice plus the next 19 entries. This procedure would
be repeated 4 other times.

15-2
15-8 The terms below are defined as follows:

TERM DEFINITION
a. Acceptable risk of The risk the auditor is willing to take of accepting a control
assessing control risk as effective or a rate of monetary misstatements as
too low (ARACR) tolerable, when the true population exception rate is
greater than the tolerable exception rate.
b. Computed upper The highest estimated exception rate in the population at
exception rate (CUER) a given ARACR.
c. Estimated population The exception rate the auditor expects to find in the
exception rate (EPER) population before testing begins. It is necessary to plan
the appropriate sample size.
d. Sample exception rate The actual rate of exception discovered in the sample. It
(SER) is calculated by dividing the actual number of exceptions
in the sample by the sample size.
e. Tolerable exception rate The exception rate the auditor will permit in the population
(TER) and still be willing to use the assessed control risk and/or
the amount of monetary misstatements in the transactions
established during planning.

15-9 The sampling unit is the population item from which the auditor selects
sample items. The major consideration in defining the sampling unit is making it
consistent with the objectives of the audit tests. Thus, the definition of the population
and the planned audit procedures usually dictate the appropriate sampling unit.
The sampling unit for verifying the occurrence of recorded sales would
be the entries in the sales journal since this is the document the auditor wishes to
validate. The sampling unit for testing the possibility of omitted sales is the shipping
document from which sales are recorded because the failure to bill a shipment is
the exception condition of interest to the auditor.

15-10 The tolerable exception rate (TER) represents the exception rate that the
auditor will permit in the population and still be willing to use the assessed control
risk and/or the amount of monetary misstatements in the transactions established
during planning. TER is determined by choice of the auditor on the basis of his or
her professional judgment.
The computed upper exception rate (CUER) is the highest estimated
exception rate in the population, at a given ARACR. For nonstatistical sampling,
CUER is determined by adding an estimate of sampling error to the SER (sample
exception rate). For statistical sampling, CUER is determined by using a statistical
sampling table after the auditor has completed the audit testing and therefore
knows the number of exceptions in the sample.

15-3
15-11 Sampling error is an inherent part of sampling that results from testing
less than the entire population. Sampling error simply means that the sample is
not perfectly representative of the entire population.
Nonsampling error occurs when audit tests do not uncover errors that
exist in the sample. Nonsampling error can result from:

1. The auditor's failure to recognize exceptions, or

2. Inappropriate or ineffective audit procedures.

There are two ways to reduce sampling risk:

1. Increase sample size.

2. Use an appropriate method of selecting sample items from the
population.

Careful design of audit procedures and proper supervision and review

are ways to reduce nonsampling risk.

15-12 An attribute is the definition of the characteristic being tested and the
exception conditions whenever audit sampling is used. The attributes of interest
are determined directly from the audit program. In a test of control, that attribute
is evidence of the operation of the control consistent with the design. In a
substantive test, the attribute is the absence of monetary misstatement.

15-13 An attribute is the characteristic being tested for in a population. An

exception occurs when the attribute being tested for is absent. The exception for
the audit procedure, the duplicate sales invoice has been initialed indicating the
performance of internal verification, is the lack of initials on duplicate sales invoices.

15-14 Tolerable exception rate (TER) is the result of an auditor's judgment. The
suitable TER is a question of materiality and is therefore affected by both the
definition and the importance of the attribute in the audit plan. It represents the
exception rate that the auditor will permit in the population and still be willing to
conclude that the control is operating effectively and/or the amount of monetary
misstatements in the transactions established during planning is acceptable.
The sample size for a TER of 7% would be smaller than that for a TER
of 4%, all other factors being equal.

15-15 The appropriate ARACR is a decision the auditor must make using
professional judgment. The degree to which the auditor wishes to reduce assessed
control risk below the maximum is the major factor determining the auditor's
ARACR.
The auditor will choose a smaller sample size for an ARACR of 10%
than would be used if the risk were 5%, all other factors being equal.

15-4
15-16 The relationship between sample size and the four factors determining
sample size are as follows:

a. As the ARACR increases, the required sample size decreases.

b. As the population size increases, the required sample size is normally
unchanged, or may increase slightly.
c. As the TER increases, the sample size decreases.
d. As the EPER increases, the required sample size increases.

15-17 In this situation, the sample exception rate (SER) is 4%, the sample size
is 100 and the ARACR is 10%. From the 10% ARACR table (Table 15-9) then,
the CUER is 7.9%. This means that the auditor can state with a 10% risk of being
wrong that the true population exception rate does not exceed 7.9%.

15-18 Analysis of exceptions is the investigation of individual exceptions to

determine the cause of the breakdown in internal control. Such analysis is important
because by discovering the nature and causes of individual exceptions, the
auditor can more effectively evaluate the effectiveness of internal control. The
analysis attempts to tell the "why" and "how" of the exceptions after the auditor
already knows how many and what types of exceptions have occurred.

15-19 When the CUER exceeds the TER, the auditor may do one or more of
the following:

1. Revise the TER or the ARACR. This alternative should be followed

only when the auditor has concluded that the original specifications
were too conservative, and when he or she is willing to accept the
risk associated with the higher specifications.
2. Expand the sample size. This alternative should be followed when
the auditor expects the additional benefits to exceed the additional
costs. That is, the auditor believes that the sample tested was not
representative of the population and that exceptions are not expected
in the expanded sample.
3. Revise assessed control risk upward. This is likely to increase
substantive procedures. Revising assessed control risk may be
done if 1 or 2 is not practical and additional substantive procedures
are possible.
4. Write a letter to management. This action should be done in
conjunction with each of the three alternatives above. Management
should always be informed when its internal controls are not
operating effectively. If a deficiency in internal control is considered
to be a significant deficiency in the design or operation of internal
control, professional standards require the auditor to communicate
the significant deficiency to the audit committee or its equivalent in
writing. If the client is a publicly traded company, the auditor must
evaluate the deficiency to determine the impact on the auditors

15-5
15-19 (continued)

report on internal control over financial reporting. If the deficiency is

deemed to be a material weakness, the auditors report on internal
control would contain an adverse opinion.

15-20 Random (probabilistic) selection is a part of statistical sampling, but it is

not, by itself, statistical measurement. To have statistical measurement, it is
necessary to mathematically generalize from the sample to the population.
Probabilistic selection must be used if the sample is to be evaluated
statistically, although it is also acceptable to use probabilistic selection with a
nonstatistical evaluation. If nonprobabilistic selection is used, nonstatistical
evaluation must be used.

15-21 The decisions the auditor must make in using attributes sampling are:
What are the objectives of the audit test?
Does audit sampling apply?
What attributes are to be tested and what exception conditions are
identified?
What is the population?
What is the sampling unit?
What should the TER be?
What should the ARACR be?
What is the EPER?
What generalizations can be made from the sample to the population?
What are the causes of the individual exceptions?
Is the population acceptable?

In making the above decisions, the following should be considered:

The individual situation.

Time and budget constraints.
The availability of additional substantive procedures.
The professional judgment of the auditor.

Multiple Choice Questions From CPA Examinations

15-22 a. (3) b. (1) c. (1) d. (1)

15-23 a. (1) b. (3) c. (4) d. (4)

15-24 a. (4) b. (3) c. (2)

15-6
 Discussion Questions and Problems

15-25 a.

NUMBERING SYSTEM EXCEL SELECTION

SAMPLING UNIT FOR THE POPULATION FORMULA

1. Sales invoice All invoices =RANDBETWEEN(1,8274)

numbered 0001 to
8274
2. Bill of lading All bills of lading =RANDBETWEEN(18221, 29427)
numbered 18221
through 29427 (if a
random number table
is used, the left-most
digit 2 can be
dropped)
3. Customer A pair of random =RANDBETWEEN(1,20)
numbers, where the
first random number
is the page number and
(1-20), and the
second random
=RANDBETWEEN(1,50)
number is the line
number on the page
(1-50)
4. Line numbers A pair of random =RANDBETWEEN(1,215)
on the sales numbers, where the
journal that first random number
have a sales is the page number and
invoice (1-215), and the
recorded on second random
=RANDBETWEEN(1,100)
them number is the invoice
as counted down
from the top of the
page (1-100)

15-7
15-25 (continued)

The command for selecting the random number can be entered directly onto the
spreadsheet, or can be selected from the function menu (math & trig) functions. It
may be necessary to add the analysis tool pack to access the RANDBETWEEN
function. Once the formula is entered, it can be copied down to select additional
random numbers. When a pair of random numbers is required, the formula for
the first random number can be entered in the first column, and the formula for
the second random number can be entered in the second column.

b. First five numbers using systematic selection:

RANDOM FIRST 5
SAMPLING STARTING SAMPLE
UNIT INTERVAL POINT ITEMS
1. Sales invoice 110 39 39
(8274/75) 149
259
369
479
2. Bill of lading 149 18259 18259
[(29427-18221) = 18408
11206/75] 18557
18706
18855
3. Customer 13 Page 1, line #11 Page Line
(979 lines/75) 1 11
1 24
1 37
1 50
2 13

Using systematic selection, the definition of the sampling unit for determining the
selection interval for population 3 is the total number of lines in the population.
The length of the interval is rounded down to ensure that all line numbers
selected are within the defined population.

15-26 a. To test whether shipments have been billed, a sample of

warehouse removal slips should be selected and examined to see if
they have the proper sales invoice attached. The sampling unit will
therefore be the warehouse removal slip.
b. Attributes sampling method: Assuming the auditor is willing to
accept a TER of 3% at a 10% ARACR, expecting no exceptions in
the sample, the appropriate sample size would be 76, determined
from Table 15-8.
15-26 (continued)

15-8
 Nonstatistical sampling method: There is no one right answer to this
question because the sample size is determined using professional
judgment. Due to the relatively small TER (3%), the sample size
should not be small. It will most likely be similar in size to the
sample chosen by the statistical method.
c. Systematic sample selection:

25734 = Population size of warehouse removal slips

(50321-24587).
76 = Sample size using statistical sampling (students
answers will vary if non-statistical sampling was
used in part b.
339 = Interval (25734/76) if statistical sampling is used
(students answers will vary if non-statistical
sampling was used in part b).
26821 = Random starting point.

Select warehouse removal slip 26821 and every 339th warehouse

removal slip after (27160, 27499, etc.)

Computer generation of random numbers using Excel:

=RANDBETWEEN(24587,50321)

The command for selecting the random number can be entered

directly onto the spreadsheet, or can be selected from the function
menu (math & trig) functions. It may be necessary to add the
analysis tool pack to access the RANDBETWEEN function. Once
the formula is entered, it can be copied down to select additional
random numbers.

d. Other audit procedures that could be performed are:

1. Test extensions on attached sales invoices for clerical

accuracy. (Accuracy)
2. Test time delay between warehouse removal slip date and
billing date for timeliness of billing. (Timing)
3. Trace entries into perpetual inventory records to determine
that inventory is properly relieved for shipments. (Posting
and summarization)

e. The test performed in part c cannot be used to test for occurrence of

sales because the auditor already knows that inventory was
shipped for these sales. To test for occurrence of sales, the sales
invoice entry in the sales journal is the sampling unit. Since the

15-26 (continued)

15-9
 sales invoice numbers are not identical to the warehouse removal
slips it would be improper to use the same sample.

15-27 a. It would be appropriate to use attributes sampling for all audit

procedures except audit procedures 1 and 3. Procedure 1 involves
recalculation of just one months sales journals mathematical
accuracy. The auditor would judgmentally select the month to test.
Procedure 3 involves the performance of an analytical procedure for
which the auditor is doing a 100% review of the entire sales journal.

b. The appropriate sampling unit for audit procedures 2, and 4-6 is a

sales invoice number, date, or line item in the sales journal. The
primary emphasis in the test is the occurrence and accuracy objectives.

c. The attributes for testing are as follows:

AUDIT
PROCEDURE ATTRIBUTE
2 Entries in the sales journal have been shipped as
evidence by the existence of a related shipping document.
4 Prices used to calculate the sales amount on the
invoice match those on the approved price list.
5 The date that credit approval is documented on the sales
order precedes the date on the shipping document.
6 The calculation of the sales amount on the sales
invoice is mathematically accurate.

d. The sample sizes for each attribute are as follows:

TEST OF SAMPLE SIZE

CONTROL OR
SUBSTANTIVE
AUDIT TEST OF ARACR TER EPER SAMPLE
PROCEDURE TRANSACTIONS SIZE
2 S T of T 5% 5% 0.5% 93
4 T of C 5% 7% 1.5% 66
5 T of C 5% 7% 1.5% 66
6 ST of T 5% 5% 0.5% 93

15-28 a. and b. The sample sizes and CUERs are shown in the following table:

15-10
 INITIAL CUER
ACTUAL SAMPLE SIZE FROM
SAMPLE FROM TABLE TABLE
SIZE 15-8 SER 15-9 TER

1 100 127 2.0% 6.2% 6.0%

2 100 93 4.0 9.0 5.0
3 20 18 5.0 18.1 20.0
4 100 99 0.0 3.0 3.0
5 60 65 1.7 6.4 8.0
6 60 60 13.3 >20.0 15.0

a. The auditor selected a sample size smaller than that determined

from the tables in populations 1 and 5. The effect of selecting a
smaller sample size than the initial sample size required from the
table is the increased likelihood of having the CUER exceed the
TER. If a larger sample size is selected, the result may be a sample
size larger than needed to satisfy TER. That results in excess
audit cost. Ultimately, however, the comparison of CUER to TER
determines whether the sample size was too large or too small.

b. The SER and CUER are shown in columns 4 and 5 in the preceding
table.

c. The population results are unacceptable for populations 1, 2, and 6.

In each of those cases, the CUER exceeds TER.
The auditor's options are to change TER or ARACR, increase
the sample size, or perform other substantive tests to determine
whether there are actually material misstatements in the population.
An increase in sample size may be worthwhile in population 1
because the CUER exceeds TER by only a small amount. Increasing
sample size would not likely result in improved results for either
population 2 or 6 because the CUER exceeds TER by a large
amount.

d. Analysis of exceptions is necessary even when the population is

acceptable because the auditor wants to determine the nature and
cause of all exceptions. If, for example, the auditor determines that
a misstatement was intentional, additional action would be required
even if the CUER were less than TER.

15-11
15-28 (continued)
e.

TERM NATURE OF TERM

1. Estimated population exception Nonstatistical estimate made

rate by auditor.

2. Tolerable exception rate Audit decision.

3. Acceptable risk of assessing Audit decision.

control risk too low

4. Actual sample size Audit decision (determined

by other audit decisions).

5. Actual number of exceptions in Sample result.

the sample

6. Sample exception rate Sample result.

7. Computed upper exception rate Statistical conclusion about

the population.

15-29 a. The actual allowance for sampling risk is shown in the following table:

ACTUAL ALLOWANCE
FOR SAMPLING RISK
SER CUER (CUER-SER)

1 4.0% 10.3% 6.3%

2 4.0 7.9 4.9
3 4.0 12.1 8.1
4 3.0 7.6 4.6

b. The CUER is higher for attribute 1 than attribute 2 because the

sample size is smaller for attribute 1, resulting in a larger allowance
for sampling risk.
c. The CUER is higher for attribute 3 than attribute 1 because the auditor
selected a lower ARACR. This resulted in a larger allowance for
sampling risk to achieve the lower ARACR.
d. If the auditor increases the sample size for attribute 4 by 50 items
and finds no additional exceptions, the CUER is 5.1% (sample size of
150 and three exceptions). If the auditor finds one exception in

15-12
15-29 (continued)

the additional items, the CUER is 6.0% (sample size of 150, four
exceptions). With a TER of 6%, the sample results will be acceptable
if one or no exceptions are found in the additional 50 items. This
would require a lower SER in the additional sample than the SER
in the original sample of 3.0 percent. Whether a lower rate of
exception is likely in the additional sample depends on the rate of
exception the auditor expected in designing the sample, and whether
the auditor believe the original sample to be representative.

15-30 a. Because the sample sizes under nonstatistical sampling are

determined using auditor judgment, students answers to this question will vary.
They will most likely be similar to the sample sizes chosen using attributes
sampling in part b. The important point to remember is that the sample sizes
chosen should reflect the changes in the four factors (ARACR, TER, EPER, and
population size). The sample sizes should have fairly predictable relationships,
given the changes in the four factors. The following reflects some of the
relationships that should exist in students sample size decisions:

SAMPLE SIZE EXPLANATION

1. 90 Given
2. > Column 1 Decrease in ARACR
3. > Column 2 Decrease in TER
4. > Column 1 Decrease in ARACR (column 4 is
the same as column 2, with a
smaller population size)
5. < Column 1 Increase in TER-EPER
6. < Column 5 Decrease in EPER
7. > Columns 3 & 4 Decrease in TER-EPER

b. Using the attributes sampling table in Table 15-8, the sample sizes
for columns 1-7 are:
1. 88
2. 127
3. 181
4. 127
5. 25
6. 18
7. 149

15-13
15-30 (continued)

c.

CHANGE IN EFFECT ON ILLUSTRATION IN

FACTORS SAMPLE SIZE PART a or b
1. Increase in ARACR. Decrease Compare columns 4 and 1

2. Increase in TER. Decrease Compare columns 3 and 2

(population sizes are not
consistent, but this has little
effect on sample size)

3. Increase in EPER. Increase Compare columns 6 and 5

4. Increase in population No effect or Compare columns 4 and 2

size. slight increase

d. The difference in the sample size for columns 3 and 6 result from
the larger ARACR and larger TER in column 6. The extremely large
TER is the major factor causing the difference.

e. The greatest effect on the sample size is the difference between

TER and EPER. For columns 3 and 7, the differences between the
TER and EPER were 3% and 2% respectively. Those two also had
the highest sample size. Where the difference between TER and
EPER was great, such as columns 5 and 6, the required sample
size was extremely small.
Population size had a relatively small effect on sample size.
The difference in population size in columns 2 and 4 was 99,000
items, but the increase in sample size for the larger population was
marginal (actually the sample sizes were the same using the
attributes sampling table).

f. The sample size is referred to as the initial sample size because it

is based on an estimate of the SER. The actual sample must be
evaluated before it is possible to know whether the sample is
sufficiently large to achieve the objectives of the test.

15-14
15-31 a.

ALLOWANCE FOR SAMPLING

SER TER-SER ERROR SUFFICIENT?

1. 2% 3% Probably*

2. 2% 3% No (due to smaller sample size)*

3. 2% 3% Yes

4. 2% 3% Probably*

5. 2% 3% No (due to small sampling size)

6. 10% NA No (SER exceeds TER)

7. 0% 5% Yes

8. 0% 5% No due to small sample size

* Students answers as to whether the allowance for sampling error risk

is sufficient will vary, depending on their judgment. However, they should
recognize the effect that lower sample sizes have on the allowance for
sampling risk in situations 1, 5 and 8.

b. Using the attributes sampling table in Table 15-9, the CUERs for
columns 1-8 are:

1. 4.6%
2. 6.2%
3. 4.0%
4. 4.6%
5. 9.2%
6. 16.4%
7. 3.0%
8. 11.3%

15-15
15-31 (continued)

c.

CHANGE IN EFFECT ON ILLUSTRATIONS IN PART a

FACTORS CUER or b

1 Decrease in Increase Compare columns 3 and 4

ARACR
2 Decrease in No effect Compare columns 1 and 4
population size or minor
decrease
3 Decrease in Increase Compare columns 4 and 5
sample size (both sample exception
rates are 2%)
4 Decrease in Decrease Compare columns 6 and 7
the number of
exceptions in
the sample

d. The factor that appears to have the greatest effect is the number of
exceptions found in the sample compared to sample size. For
example, in columns 2 and 6, the increase from 2% to 10% SER
dramatically increased the CUER. Population size appears to have
the least effect. For example, in columns 1 and 4, the CUER was
the same using the attributes sampling table even though the
population in column 1 was 10 times larger.

e. The CUER represents the results of the actual sample whereas the
TER represents what the auditor will allow. They must be compared
to determine whether or not the population is acceptable.

15-32 a.

Attribute Missing element

1 CUER is 9.2%
2 Initial sample size is 77
3 Tolerable exception rate is 7%
4 The actual number of exceptions in the sample was 1
5 ARACR is 5%
6 Sample size is 70

b. The sample results are unacceptable for Attributes 1 and 6 because

CUER exceeds TER for those attributes.

15-16
15-32 (continued)

c. The sample size for attribute 1 is smaller than the sample size for
attribute 3 because the estimated population exception rate is 0%
for attribute 1 but 1% for attribute 3. Because there is no expectation
of errors in the population, the sample size is smaller for attribute 1.

d. The CUER is smaller for attribute 2 relative to attribute 5 for two

primary reasons. First, ARACR is higher in attribute 2 relative to
attribute 5, which means the auditor has a greater willingness to
accept the risk that the assessment of control risk is too low for
attribute 2. Second, the difference between TER and EPER is
slightly higher for attribute 2 relative to attribute 5.

15-33 a. The following shows which are exceptions and why:

INVOICE
NUMBER EXCEPTION? TYPE OF EXCEPTION

5028 No Error was detected and corrected by

client.
6791 No Sales invoice was voided.
6810 Yes Proof of shipment not presented.
7364 No Credit collection problem; should be
noted for review of allowance for
doubtful accounts.

7625 Yes Duplicate sales invoice not properly

filed.

8431 Yes Invoices not recorded by proper date;

represents potential cutoff problem.

8528 Yes Customer orders not included in

invoice package to verify
compliance with the order.

Yes Error in pricing. No internal verification.

8566
Yes Duplicate sales invoice not properly
8780
filed.
Credit not authorized.
9169 Yes
Internal verification of price extensions
9974 Yes
and postings of sales invoices was
not included.

b. It is inappropriate to set a single acceptable tolerable exception rate

and estimated population exception rate for the combined exceptions

15-17
15-33 (continued)

because each attribute has a different significance to the auditor

and should be considered separately in analyzing the results of the
test.

c. The CUER assuming a 5% ARACR for each attribute and a sample

size of 150 is as follows:

INVOICE NUMBER OF
NUMBER DESCRIPTION OF ATTRIBUTE EXCEPTIONS SER

6810 Shipping document not located 1 .67%

7625 Duplicate sales invoice/customer 3 2.00%
8780 order not located
8528
8431 Invoice date improper 1 .67%
8566 Price extensions postings 1 .67%
incorrect
8566 Price extensions and postings 2 1.33%
9974 not internally verified
9169 Credit not authorized 1 .67%

d.

INVOICE SAMPLING ERROR

NUMBER TER-SER SUFFICIENT?

6810 5.33% Yes

7625
8780 4.0% Probably*
8528
8431 5.33% Yes
8566 5.33% Yes
8566
4.67% Probably*
9974
9169 5.33% Yes

* Students answers will most likely vary for this attribute.

15-18
15-33 (continued)

e. For each exception, the auditor should check with the controller to
determine an explanation for the cause. In addition, the appropriate
analysis for each type of exception is as follows:

INVOICE
NUMBER EXCEPTION ANALYSIS
6810 Confirm the account balances to the customers; examine the
reduction in the perpetual inventory records.
7625 Trace the amount to the sales journal and accounts receivable
master file; examine the shipping document and recompute the
sale amount.
8431 Determine who recorded the invoice and check several others
prepared by him or her to determine if the problem consistently
occurs.
8528 Examine the accounts receivable master file for subsequent cash
receipt; examine sales invoices for other invoices to the same
customer to determine if customer orders were attached.
8566 Check the price on other invoices to the same customer. Check
the price on other invoices that have the same product.
8780 See 7625
9169 Check credit history of customer and evaluate collectibility of the
customer's account.
9974 Recheck actual price, extensions and postings; determine who
the clerk was and check several other invoices for proper
indication of performance.

Case

15-34 a. Audit sampling could be conveniently used for procedures 3 and 4

since each is to be performed on a sample of the population.

b. The most appropriate sampling unit for conducting most of the audit
sampling tests is the shipping document because most of the tests
are related to procedure 4. Following the instructions of the audit
program, however, the auditor would use sales journal entries as
the sampling unit for step 3 and shipping document numbers for
step 4. Using shipping document numbers, rather than the documents
themselves, allows the auditor to test the numerical control over
shipping documents, as well as to test for unrecorded sales. The
selection of numbers will lead to a sample of actual shipping
documents upon which tests will be performed.

15-19
15-34 (continued)

c. Note: The sampling data sheet that follows assumes an attributes

sampling approach. The only difference between the sampling data
sheet for attributes sampling and for nonstatistical sampling is the
actual determination of sample size. For nonstatistical sampling,
students answers will vary, but will most likely be comparable to the
sample sizes determined under attributes sampling.

DESCRIPTION INITIAL
OF ATTRIBUTES EPER TER ARACR SAMPLE SIZE*
A duplicate sales invoice exists for 1.0 5.0 10 77
the shipping document selected.
Shipping document agrees with 0.0 4.0 10 57
related duplicate sales invoice.
The duplicate sales invoice has 1.0 5.0 10 77
attached a copy of the shipping
document, shipping order, and
customer order.
The shipping order has proper 1.0 5.0 10 77
credit approval.
The duplicate sales invoice has 1.0 5.0 10 77
internal verification of computations.
The duplicate sales invoice has the 0.0 4.0 10 57
same price and quantity as approved
price list and shipping document.
Customer name, amount and date 0.0 4.0 10 57
agrees between duplicate sales
invoice and sales journal and
subsidiary ledger.

* assumes the shipping document is the sampling unit.

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 Integrated Case Application

15-35 a. and d.

PINNACLE MANUFACTURINGPART VI

Client: Pinnacle Manufacturing

Audit Area: Tests of Controls and Substantive Test of TransactionsAcquisitions.

Define the Objective(s): Examine vendors' invoices, receiving reports, purchase

orders, and other related documents to determine whether the system has
functioned as intended and as described in the audit program.

Define the population precisely (including stratification, if any): Vouchers from

1/1/2011 to 10/31/2011. First voucher number 6734. Last voucher number 33722.

Define the sampling unit, organization of population items, and random

selection procedures: Voucher number, recorded sequentially in the acquisitions
journal; random number function in electronic spreadsheet.

Planned Audit Actual Results

Calculated
Initial Number Sampling
Sample Sample of Error
Description of Attributes EPER TER ARACR Size Size Exceptions SER (TER-SER)

1. Evidence of internal verification of

voucher package including -.7% (note
propriety of purchase, dates, unit SER
costs, prices, extensions, 0 6% 10% 30 30 2 6.7%
exceeds
footings, account classification, TER)
recording in journal, and posting
and summarization. (6a, b)

2. Prices on vendors' invoices

conform to approved price limits 0 5% 10% 40 40 0 0 5%
established by management. (6c)

3. Price times quantity and other

calculations on the vendor's 1% 5% 10% 50 50 0 0 5%
invoice are correct. (6d)

4. Evidence of proper account

classification on vendors' 2% 5% 10% 70 70 0 0 5%
invoices. (6e)

5. Dates on entries in purchases

journal agree with dates on 1% 5% 10% 50 50 2 4% 1%
receiving reports. (6f)

6. Evidence of internal verification of 0 6% 10% 30 30 0 0% 6%

each purchase voucher. (6g)

Results: Based on the results of the tests, all controls appear effective except for evidence of internal verification.
Since there were also two errors on timing and an error in comparing the vendor's invoice amount to the
acquisitions journal that is not included as an attribute, a larger than normal sample in year-end testing of
accounts payable is appropriate.

15-35 (continued)

15-21
Notes: 1. The planned audit variables are judgmental. The results of the prior year from part III were used to
decide EPER. Initial sample size and CUER are judgments.
2. There was an error discovered where there was no attribute. This happens in practice too. The auditor
should not ignore the exception even though it is an unplanned discovery.

b.

Client: Pinnacle Manufacturing

Audit Area: Tests of Controls and Substantive Test of TransactionsCash

Disbursements

Define the Objective(s): Examine cancelled checks and other related documents
to determine whether the system has functioned as intended and as described in
the audit program.

Define the population precisely (including stratification, if any): Cancelled

checks from 1/1/2011 to 10/31/2011. First check number 12376. Last check
number 37318.

Define the sampling unit, organization of population items, and random

selection procedures: Check number, recorded sequentially in the cash
disbursements journal; random number function in electronic spreadsheet.

Planned Audit Actual Results

Calculated
Initial Number Sampling
Sample Sample of Error
Description of Attributes EPER TER ARACR Size Size Exceptions SER (TER-SER)

1. Payee, name, amount, and date

on cancelled check agrees with
0 5% 10% 40
related purchases journal and
cash disbursements entry. (9a)

2. Evidence of signature, proper

endorsement and cancellation of 0 5% 10% 40
each check. (9b)

3. Date on cancelled check agrees

2 5% 10% 70
with bank cancellation date. (9c)

4. Cash discounts are correct. (9d) 0 5% 10% 40

c. Population = voucher numbers 6734 to 33722

Sample size = 50

Random Selection:

15-35 (continued)

15-22
 If random selection is performed using Excel, the command to
select numbers randomly from the population is:

=RANDBETWEEN(6734, 33722)

The command for selecting the random number can be entered

directly onto the spreadsheet, or can be selected from the function
menu (math & trig) functions under the insert menu. It may
be necessary to add the analysis tool pack to access the
RANDBETWEEN function. Once the formula is entered, it can be
copied down to select additional random numbers. The random
numbers will vary for each student, so they are not listed in this
solution.

Internet Problem Solution: Applying Statistical Sampling

Internet Problem 15-1

a. The primary difference between nonstatistical and statistical sampling

is that statistical sampling allows the auditor to quantitatively measure
sampling risk using the laws of probability. In non-statistical sampling,
the auditor is only able to qualitatively assess sampling risk using
auditor judgment.

b. Auditors frequently justify the use of nonstatistical sampling by noting

the additional costs associated with the use of statistical sampling.
They argue that statistical sampling is more costly due to the cost of
training auditors on the use of statistical sampling, costs of selecting
the sample using random selection, and the cost of sampling evaluation
that requires the quantification of sampling risks using formulas
based on probability theory. The article highlights, however, that the
ready availability of computers and off-the-shelf software with
statistical sampling applications built in have virtually mitigated
most of these concerns.

c. The primary advantage of statistical sampling is the ability to

quantitatively measure sampling risk within a specific confidence
interval. The ability to quantitatively measure sampling risk
distinguishes statistical sampling from nonstatistical sampling, where
the auditor is left to judgment as to the extent of sampling risk present.

d. In probability sampling, every item in the population under audit has

a known chance of selection. The decision as to which items in the
population to select is left to the laws of chance, not to auditor judgment.

Internet Problem 15-1 (continued)

15-23
 e. The upper confidence limit is the projected misstatement plus the
allowance for sampling risk. The auditor uses the upper confidence
limit to evaluate whether the sample result is acceptable or not.
If the upper confidence limit exceeds the maximum tolerable
misstatement amount, the auditor decides that the misstatement in the
population may exceed the tolerable amount. If the upper confidence
limit is less than the maximum tolerable misstatement, the auditor
decides that the potential misstatement in the population is
acceptable (tolerable).

(Note: Internet problems address current issues using Internet sources. Because
Internet sites are subject to change, Internet problems and solutions may change. Current
information on Internet problems is available at www.pearsonglobaleditions.com/arens.)

15-24