Audit Sampling For Tests of Details of Balances

Chapter 17
Audit Sampling for

Tests of Details of
Balances
Copyright © 2014 Pearson Education

Differentiate audit sampling for tests of
details of balances and for tests of controls
and substantive tests of transactions.
Apply statistical sampling to tests of details
of balances.
Apply monetary unit sampling.
17-2
Describe variables sampling.
Use difference estimation in tests of details

of balances.
17-3
1
Differentiate audit sampling for tests of details
of balances and for tests of controls and
substantive tests of transactions.
17-4
Differences among tests
Type of Test What It Measures
Controls Effectiveness of
controls
Transactions Monetary correctness

of transactions
Balances Existence of material

misstatements
17-5
2
Apply nonstatistical sampling to tests of
details of balances.
17-6
14 steps required in audit sampling for
tests of details of balances.
Steps parallel the sampling approach

used to test controls and/or test
transactions.
There are a few differences because

of the different objectives of the tests.
17-7
Audit sampling for tests of
Audit sampling for tests controls and substantive
of details of balances tests of transactions
1. State the objectives 1. State the objectives
of the audit test. of the audit test.
2. Decide whether audit 2. Decide whether audit
sampling applies. sampling applies.
3. Define a misstatement. 3. Define attributes and
exception conditions.
4. Define the population. 4. Define the population.
5. Define the sampling unit. 5. Define the sampling unit.
17-8
6. Specify tolerable 6. Specify the tolerable
misstatement. exception rate.
7. Specify acceptable risk 7. Specify acceptable risk
of incorrect acceptance. of overreliance.
8. Estimate misstatements 8. Estimate the population

in the population. exception rate.
9. Determine the initial 9. Determine the initial
sample size. sample size.
17-9
10. Select the sample. 10. Select the sample.
11. Perform the audit 11. Perform the audit
procedures. procedures.
12. Generalize from the 12. Generalize from the
sample to the population. sample to the population.
13. Analyze the 13. Analyze the exceptions.
misstatements.
14. Decide the acceptability 14. Decide the acceptability
of the population. of the population.
17-10
➢ Take no action until tests of other audit areas
are completed
➢ Perform expanded audit tests in specific areas
➢ Increase the sample size
➢ Adjust the account balance
➢ Request the client to correct the population
➢ Refuse to give an unqualified opinion
17-11
3
Apply monetary unit sampling.
17-12
MUS is an innovation in statistical
sampling methodology that was
developed specifically for use
by auditors.
17-13
• The definition of the sampling unit
is an individual dollar.
• The population size is the recorded

dollar population.
• Preliminary judgment of materiality

is used for each account instead of
tolerable misstatement.
17-14
•Sample size is determined using a
statistical formula.
•A formal decision rule is used for
deciding the acceptability
of the population.
•Sample selection is done using
probability proportional to size
sample selection (PPS).
17-15
The auditor generalizes from the
sample to the population using MUS
techniques.
•Attribute sampling tables are used to

calculate results
•Attribute results must be converted to
dollars
•Make an assumption about the % of
misstatement for each item misstated
•Determine misstatement bounds.
17-16
17-17
17-18
17-19
17-20
17-21
17-22
➢Materiality
➢Assumption of the average percent

of misstatement for population items
that contain a misstatement
➢Acceptable risk of incorrect acceptance
➢Recorded population value
17-23
➢Estimate of the population exception rate
➢Relationship of the audit risk model

to sample size for MUS
PDR = AAR ÷ (IR × CR)
17-24
➢MUS increases the likelihood of selecting
high-dollar items
➢MUS often reduces the cost of audit testing
➢Easy to apply
➢MUS provides a statistical conclusion
17-25
4
Describe variables sampling.
17-26
Frequency of values in percent
Value of x in dollars
17-27
Three things shape the results of the
experiment of taking a large number of samples
from a known population:
1. The mean value of all the sample means

is equal to the population mean ( ).
17-28
2. The shape of the frequency distribution
of the sample means is that of a normal
distribution (curve), as long as the sample
size is sufficiently large, regardless of the
distribution of the population.
3. The percentage of sample means between
any two values of the sampling
distribution is measurable.
17-29
Mean
Frequency of values in percent
Sampling
distribution –
Normal
Population
distribution –
Skewed
Value of in dollars
x
17-30
➢ Difference estimation
➢ Ratio estimation
➢ Mean-per-unit estimation
17-31
➢ All of the elements of the population are
divided into two or more subpopulations
➢ Each subpopulation is independently tested
➢The calculations are then made for each

stratum and then combined into one overall
population estimate
17-32
Actual state of the population
Materially Not materially
Actual audit decision misstated misstated
Conclude that the Correct Incorrect

population is conclusion – conclusion –
materially misstated no risk risk is ARIR
Conclude that the Incorrect Correct

population is not conclusion – conclusion –
materially misstated risk is ARIA no risk
17-33
5
Use difference estimation in tests of details of
balances.
17-34
➢State the objectives of the audit test
➢Decide whether audit sampling applies
➢Define misstatement conditions
➢Define the population
➢Define the sampling unit
➢Specify tolerable misstatement

17-35
ARIA
ARIR
17-36
1. Estimate an expected point estimate
2.Make an advance population standard deviation

estimate – variability of the population.
17-37
2
SD*(ZA + ZR)N
n=
(TM – E *)
where:
n = initial sample size
SD* = advance estimate of the standard deviation
ZA = confidence coefficient for ARIA
ZR = confidence coefficient for ARIR
N = population size
TM = tolerable misstatement for the population
(materially)
E* = estimated point estimate of the population
misstatement
17-38 Copyright © 2014 Pearson Education

The auditor must use one of the
probabilistic sample selection methods
to select the items for confirmation.
The auditor must use care in confirming

and performing alternative procedures.
17-39
Generalize from the sample to the population
1. Compute the point estimate of the
total misstatement
2. Compute an estimate of the population

standard deviation
3. Compute the precision interval
4. Compute the confidence limits

17-40
The auditor must evaluate misstatements to
determine the cause of each misstatement
and decide whether modification of the
audit risk model is needed.
17-41
17-42
Copyright
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Printed in the United States of America.
17-43

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Chapter 17

Audit Sampling for

Copyright © 2014 Pearson Education

Apply monetary unit sampling.

Use difference estimation in tests of details

Transactions Monetary correctness

Balances Existence of material

Steps parallel the sampling approach

There are a few differences because

8. Estimate misstatements 8. Estimate the population

• The population size is the recorded

• Preliminary judgment of materiality

•Attribute sampling tables are used to

➢Assumption of the average percent

➢Acceptable risk of incorrect acceptance

➢Recorded population value

➢Relationship of the audit risk model

PDR = AAR ÷ (IR × CR)

➢MUS often reduces the cost of audit testing

➢MUS provides a statistical conclusion

1. The mean value of all the sample means

➢ Each subpopulation is independently tested

➢The calculations are then made for each

Conclude that the Correct Incorrect

Conclude that the Incorrect Correct

➢Decide whether audit sampling applies

➢Define misstatement conditions

➢Define the population

➢Define the sampling unit

➢Specify tolerable misstatement

2.Make an advance population standard deviation

17-38 Copyright © 2014 Pearson Education

The auditor must use care in confirming

2. Compute an estimate of the population

3. Compute the precision interval

4. Compute the confidence limits

All rights reserved. No part of this publication may be reproduced,

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