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AT.3212 SOLIMAN/UY/RICAFRENTE
Determining the Extent of Testing MAY 2022

Reference:
a. PSA 530, Audit Sampling

LECTURE NOTES
Means of Selecting Items for Testing Sampling Risks

When designing tests of controls and tests of details, the Sampling risk is the risk that the auditor’s conclusion based
auditor’s means of selecting items for testing are: on a sample may be different from the conclusion if the
• Selecting all items (100% examination), entire population were subjected to the same audit
• Selecting specific items, and procedure. Sampling risk can lead to two types of
• Audit sampling. erroneous conclusions, such as:

These approaches are described in further details below. Alpha Risk Beta Risk
(Type I (Type II
Selecting All Items Misstatement) Misstatement)
Test of Controls
100% examination is unlikely in the case of tests of Assessing control Assessing control
controls; however, it is more common for tests of details. Sampling risks
risk too high risk too low
100% examination may be appropriate when, for example: less effective
• The population constitutes a small number of large more effective than
Controls are: than they
value items; they actually are
actually are
• There is a significant risk and other means do not Reliance on
provide sufficient appropriate audit evidence; or Under-reliance Overreliance
internal control
• Cost effective by using CAATs. Test of Details
Incorrect
Selecting Specific Items Sampling risks Incorrect Acceptance
Rejection
Specific items selected may include: Material exists when in does not exist when
misstatement: fact it does not in fact it does
• High value or key items.
• All items over a certain amount. Affects audit: Efficiency Effectiveness
• Items to obtain information about matters such as the
nature of the entity or the nature of transactions. The auditor is more concerned with beta risk. The
mathematical complements of these two risks are termed
This does not constitute audit sampling. The results of audit confidence levels.
procedures applied to items selected in this way cannot be
projected to the entire population; accordingly, selective Dealing with sampling risks
examination of specific items does not provide audit
evidence concerning the remainder of the population. The auditor can eliminate sampling risks by examining the
entire population. However, examining the entire population
Audit Sampling is normally not possible for the auditor. Instead, the auditor
usually manages or controls sampling risk by making the
Audit sampling is the application of audit procedures to less sample more representative of the population by:
than 100% of items within a population of audit relevance • Increasing the sample size
such that all sampling units have a chance of selection in • Using appropriate method of selecting sample
order to provide the auditor with a reasonable basis on items
which to draw conclusions about the entire population.
Audit sampling enables the auditor to obtain and evaluate Non-sampling Risks
audit evidence about some characteristic of the items
selected in order to form or assist in forming a conclusion Non-sampling risk is the risk that the auditor reaches an
concerning the population from which the sample is drawn. erroneous conclusion for any reason not related to sampling
This is the case when it is not efficient to review 100% of risk. Non-sampling risk is also an aspect of audit risk not
the records or other circumstances make reviewing all of attributable to sampling such as human error due to:
the records difficult. • Use or application of inappropriate audit
procedures
Representative Sample of the Population • Failure to recognize errors (misstatements or
deviations) in the samples tested
A representative sample is one in which the characteristics • Misinterpretation of evidence obtained
in the sample of audit interest are approximately the same
as those of the population. However, the two things that Dealing with non-sampling risks
cause a sample to be non-representative of the population
are sampling risk and non-sampling risk. These could also Non-sampling risks cannot be totally eliminated in audit.
be the two aspects of audit risk, i.e., [Audit risk = Sampling There is always a chance of human error in audit as the
risk x Non-sampling risk].

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auditor’s judgment may not always be correct. However, type of audit sampling technique utilized and whether the
the auditor can manage non-sampling risks through: test is the performance of test of controls or test of details.
• Proper planning
• Adequate direction and supervision of the audit Step 1: Define the purpose (objective) of the audit
team and timely review of their work test

The Two Sampling Approaches When designing an audit sample, the auditor shall consider
the purpose (objective) of the audit procedure based on the
Audit sampling can be applied using either non-statistical or assessment of ROMM at the assertion level. The auditor’s
statistical sampling approaches. These two approaches consideration includes the specific purpose (test of controls
involve the use of auditor’s professional judgment in or test of details) to be achieved and the combination of
planning and performing the sampling procedure and audit procedures that is likely to best achieve that purpose.
evaluating the results of the sample.
Step 2: Define a deviation or misstatement
The table below presents the comparison between the two
sampling approaches: The auditor considers what conditions constitute a deviation
or misstatement by reference to the objectives of the test.
Statistical Non-statistical
Sampling Sampling Deviations for Tests of Controls
• Random selection
• A sampling For example, suppose that a control requires support for
of the sample
approach that every disbursement to include an invoice, a voucher, a
items
does not have
• Apply the laws or receiving report, and a purchase order; all stamped “Paid.”
characteristics
theory of The auditor believes that the existence of an invoice and a
of statistical
probability to: receiving report, both stamped “Paid,” is necessary to
sampling (i.e.,
§ Design indicate adequate performance of the control. Therefore, in
no random
efficient this case, a deviation may be defined as “a disbursement
selection of
sample not supported by an invoice and a receiving report that has
sample items
Basic § Measure been stamped ‘Paid.’”
and does not
concepts sufficiency of
apply laws of
sample
probability) Misstatement for Tests of Details
§ Evaluate
• Cannot
sample
measure For example, in a test of details relating to the existence of
results
sampling risk accounts receivable, such as confirmation, payments made
§ Measure
quantitatively, by the customer before the confirmation date but received
sampling risk
only based on shortly after that date by the client, are not considered a
quantitativel
the auditor’s misstatement.
y
judgment.
• More defendable Step 3: Identify and understand the relevant
• Easy to apply population
Advantages • Free from bias
• Less costly
• Overvalue the Population means the entire set of data from which a sample
• Relies
evidence it is selected and about which the auditor wishes to draw
exclusively on
provides conclusions. For example, all of the items in an account
professional
• Reduces auditor balance or a class of transactions constitute a population.
judgment to
skepticism The auditor needs to identify the relevant population and
§ Determin
Disadvantage • Increased cost, consider its characteristics from which the sample will be
e sample
s due to: drawn. Considering the characteristics of the population
size
§ training would include:
§ Evaluate
auditors
sample • Preliminary assessment of expected rate of
§ designing
results deviation or misstatement and the auditor’s
samples
tolerable rate of deviation or misstatement.
• Determining whether stratification or value-
Audit Sampling Process weighted selection is appropriate.
• Ascertaining the completion of population.
When designing and performing audit sampling, the auditor
normally observes the following 10 steps: In addition, it is important that the population is appropriate
Step 1: Define the purpose (objective) of the audit test. to satisfy the established objective of the audit procedures
Step 2: Define the deviation or misstatement. by considering the direction of the test.
Step 3: Identify and understand the relevant population.
Step 4: Determine the relevant sampling unit. Assessment of Expected Rate of Deviation or Misstatement
Step 5: Select an appropriate approach of sampling. and Tolerable Rate of Deviation or Misstatement
Step 6: Determine the sample size.
Step 7: Select the sample items. Tolerable deviation rate or misstatement is the rate of
Step 8: Examine and evaluate the evidence for the sample. deviation or monetary amount the auditor is willing to
Step 9: Evaluate the tests results. accept on the population.
Step 10: Document the audit sampling performed.
For test of controls, the auditor makes a preliminary
The steps above are the same regardless of, the sampling assessment of the expected rate of deviation based on the
approach selected whether statistical or non-statistical, the auditor’s understanding of the relevant controls or on the

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examination of a small number of items from the population Populations on which we may perform audit sampling to test
(‘pilot testing’). This assessment is made in order to design for understatement and examples of appropriate reciprocal
an audit sample and to determine sample size. For example, populations may include:
if the expected rate of deviation is unacceptably high than
the auditor’s tolerable rate of deviation, the auditor will Population of audit Example of a potential
normally decide not to perform tests of controls. Similarly, interest reciprocal population
for test of details, the auditor makes an assessment of the Accounts payable Subsequent disbursements
expected misstatement in the population. If the expected
misstatement is high, 100% examination or use of a large Sales Shipping documents
sample size may be appropriate when performing tests of
details. This is normally the case when the auditor’s Step 4: Determine the relevant sampling unit
expected misstatement is approximately or higher than
tolerable misstatement. Sampling unit is the individual items constituting a
population. The sampling units might be physical items (for
Stratification and Value-Weighted Selection example, checks listed on deposit slips, credit entries on
bank statements, sales invoices or debtors’ balances) or
Stratification monetary units. The total population of the sampling units
could be manually prepared documents or lists, documents
Audit efficiency may be improved if the auditor stratifies a generated from computer systems, or an electronic file
population by dividing it into discrete sub-populations which provided by the entity.
have an identifying characteristic. Stratification reduces the
variability of items within each stratum and allow sample Step 5: Select an appropriate approach of sampling
size to be reduced without increasing sampling risk. For
example, 20% of the items in a population may make up The decision whether to use a statistical or non-statistical
90% of the value of an account balance. The results of audit sampling approach is a matter for the auditor’s judgment;
procedures applied to a sample of items within a stratum in making that judgment the auditor consider the following:
can only be projected to the items that make up that • The choice is based on relative costs and benefits
stratum. • Effectiveness
• Need for quantitative estimate of sampling risk
Value-Weighted Selection
However, sample size is not a valid criterion to distinguish
When performing tests of details it may be efficient to between statistical and non-statistical approaches and the
identify the sampling unit as the individual monetary units choice between the two approaches is independent of audit
that make up the population. This is discussed further below procedures to be performed.
under ‘Monetary Unit Sampling’.
Types of Statistical Sampling
Completeness of the population
The two commonly used statistical sampling used in
The population used to make a sample selection needs to auditing are:
contain all sampling units that are to be subjected to
sampling procedures. The totality of the population may be • Attributes sampling–generally used for tests of controls
verified by: § Tests rate of deviation from a prescribed control
• Footing the population items and comparing the total procedure
obtained to that of the population § Estimate frequency of errors in population based on
• Accounting for numerical sequence of prenumbered frequency in sample
documents or records. § Determine whether or not estimated error rate
indicates control is working effectively
Direction of the Test, Appropriate to Test Objective § Attribute – a characteristic of control
§ Deviation – absence of the attribute
For test of controls
• Variables Sampling–generally used for tests of details
If the auditor wishes to test the operating effectiveness of a § Tests whether recorded account balances are fairly
prescribed control designed to ensure that all shipments are stated
billed, the auditor would not detect deviations by sampling § Estimate value of population based on value of
billed items because that population would not be expected items in sample
to contain items that were shipped but not billed. An
appropriate population for detecting such deviations is Attributes Sampling
usually the population of all shipped items.
• Traditional (Classical) attributes sampling
For test of details § Under traditional attribute sampling, sample size is
determined and sample tested to estimate error
When understanding the risks of material misstatement, the rate in population
direction in which the population may be misstated may
need to be considered. When testing for overstatement, • Stop-or-go (Sequential) sampling
items to be examined are selected directly from the § Performed in stages
population of audit interest. While, when testing for § Auditor decides to stop or continue sampling after
understatement, items to be examined are selected from a each stage
reciprocal or independent population. § Appropriate when expected deviation rate is low
§ Sample selected in steps
§ Each step is based on results of previous step

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§ No fixed sample size and may result in lower sample • Items with zero or negative balances are not
if few or no errors detected generally included in the sample
• A high frequency of misstatements results in
• Discovery sampling an increase in sample size
§ Sample size is very small
§ Appropriate when expected deviation rate is NOTE: The discussions below present traditional (classical)
extremely low or zero attributes sampling and traditional (classical) variables
§ Sample large enough to detect at least one error if sampling for test of controls and test of details, respectively.
it exists Though the different types of sampling, as presented above,
§ Any errors in sample results in rejection follow the same steps to be discussed, they generally differ
in considering factors in determining these areas:
Variables Sampling population, sample size and evaluation of the test results.

• Traditional (Classical) variables sampling – There are Step 6: Determine the sample size
three approaches to classical variables sampling for
auditing applications that differ in the way the The auditor shall determine a sample size sufficient to
misstatement is projected to the population are: reduce sampling risk to an acceptably low level. The sample
size can be determined by the application of a statistically-
§ Mean-per-unit approach – The auditor estimates a based formula or through the exercise of professional
total population amount by calculating an average judgment (non-statistical).
audited amount for all items in the sample and
multiplying that average amount by the number of The tables below list the factors affecting sample size for
items constituting the population. test of controls and test of details.

§ Difference approach – The auditor calculates the Test of Controls (Attribute Sampling)
average difference between audited and recorded
amounts of the sample items and projects that Factor Relationship
average difference to the population.
Tolerable deviation rate Inverse
§ Ratio approach – The auditor calculates the ratio Allowable risk of assessing control risk
Inverse
between the sum of the audited amounts and the too low/Sampling risk (beta risk)
sum of the recorded amounts of the sample items Expected population deviation rate Direct
and projects this ratio to the population. The auditor Population size Negligible effect
estimates the total population amount by
multiplying the total recorded amount for the
Test of Details (Variables Sampling)
population by the same ratio.

Using normal distribution theory based on the variability Factor Relationship

of the audited amounts in the sample, the auditor also Assessment of the ROMM/level of
Direct
calculates an allowance for sampling risk. control risk
Other substantive tests Inverse
• Monetary unit sampling (a.k.a., Probability Proportional Tolerable misstatement Inverse
to Size (PPS) or Value-weighted selection)
Allowable risk of incorrect
§ Uses attributes sampling theory to express a Inverse
acceptance/Sampling risk (beta risk)
conclusion in amounts rather than as a rate of
occurrence. Expected amount of misstatement Direct
§ Probability of selecting an item is proportional to its Effect of stratification Inverse
recorded amount. Population size Negligible effect
§ Automatically stratifies an audit population
§ Appropriate for testing for overstatement and few
or no errors are expected Step 7: Select the sample items

Useful for testing assets and revenues The auditor shall select items for the sample in such a way
that each sampling unit in the population has a chance of
§ Advantages over classical variables sampling selection. It is important that the auditor selects a
representative sample, so that bias is avoided.
• Items with larger amounts have a greater
probability of being selected
Sample Selection Methods
• An item that is individually material will
automatically be selected
The principal methods of selecting samples are the use of
• Sample size may be reduced as the same item random selection, systematic selection and haphazard
may be selected more than once selection. Sample selection methods are classified into
• The sample distribution does not have to be probabilistic (statistical) and non-probabilistic (non-
close to the distribution in the population for statistical).
the sample to be valid
• Sampling can be initiated prior to year-end
more easily

§ Disadvantages of PPS
• Understated items have a lower probability of
being selected

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Probabilistic Sample Selections properly voided such that it does not constitute a deviation,
and the chosen replacement is examined.
• Random-number Selection
§ Every sampling unit has the same probability of Missing or Lost Sample
being selected as every other sampling unit in the
population. If the auditor is unable to apply the designed audit
§ Uses computer-generated numbers to select procedures, or suitable alternative procedures, to a selected
sampling units. item, the auditor shall treat that item as a deviation from
§ Match number to prenumbered documents. the prescribed control, in the case of tests of controls, or a
§ Appropriate for both statistical and nonstatistical misstatement, in the case of tests of details.
sampling.
Stopping the Test Before Completion
• Systematic Selection
§ The number of sampling units in the population is Occasionally the auditor might find a large number of
divided by the sample size to give a sampling deviations in auditing the first part of a sample. As a result,
interval, for example 50, and having determined a the auditor might believe that even if no additional errors
starting point within the first 50, each 50th were to be discovered in the remainder of the sample, the
sampling unit thereafter is selected. Starting point results of the sample would not support the planned
may be determined haphazardly or randomly. assessed level of control risk.
§ Determine that sampling units within the
population are not structured in such a way that Step 9: Evaluate the tests results
the sampling interval corresponds with a particular
pattern in the population. The auditor uses judgment in evaluating the results and
§ Useful when identification numbers lacking reaching an overall conclusion. In evaluating the sample
§ Appropriate for both statistical and nonstatistical results, the auditor:
sampling • Considers the nature and causes of deviations and
misstatements,
• Stratified Selection • Calculates and projects the sample deviations and
§ Stratification is the process of dividing a population misstatements, and
into sub-populations, each of which is a group of • Reaches an overall conclusion.
sampling units which have similar characteristics
(often monetary value). Nature and Cause of Deviations and Misstatements
§ Subdivide population into homogeneous strata
§ Select separate sample for each strata by on of The auditor shall investigate the nature and cause of any
prior methods deviations or misstatements identified, and evaluate their
possible effect on the purpose of the audit procedure and
Non-probabilistic Sample Selections on other areas of the audit.

• Block Selection In the extremely rare circumstances the auditor considers a

§ Involves selection of a block(s) of contiguous items misstatement or deviation discovered in a sample to be an
from within the population. anomaly (not representative of population). The auditor
§ Inefficient & not generalizable shall obtain a high degree of certainty that such
§ Should not be used for statistical or nonstatistical misstatement or deviation is not representative of the
sampling without care in controlling sampling risk population. For example is an error that is found to be
caused by use of an incorrect formula in calculating all
• Haphazard Selection inventory values at one particular branch.
§ The auditor selects the sample without following a
structured technique. Projecting Sample Deviations and Misstatements
§ Sampling units selected without special reason or
conscious bias Projecting Deviations for Tests of Controls
§ Inappropriate for statistical sampling
§ Useful for nonstatistical sampling For tests of controls, no explicit projection of deviations is
necessary since the sample deviation rate (SDR) is also the
• Direct sample selection projected deviation rate (PDR) for the population as a
§ Auditor selects items based on judgmental criteria whole. SDR is the rate of deviation in the operation of
such as likelihood of misstatement, characteristics controls detected in the sample by performing tests of
such as different time periods, or large amounts. controls. SDR = # of sample deviations / sample size. PDR,
a.k.a., upper deviation or precision limit, is the rate of
Step 8: Examine and evaluate the evidence for the deviation that the auditor estimates to be in the population.
sample PDR = SDR + allowance for sampling risk (Beta risk). An
allowance for sampling risk can only be calculated where the
The auditor shall perform audit procedures, appropriate to auditor has used statistical sampling.
the purpose, on each item selected, and evaluate the audit
evidence obtained. Projecting Misstatements for Tests of Details

Voided Sample For tests of details, the auditor shall project misstatements
found in the sample to the population. Sample
The auditor shall perform the procedure on a replacement misstatement is the monetary misstatement detected in the
item. If the auditor is satisfied that the sample has been sample by performing tests of details.

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Projected misstatement is the monetary misstatement that Overall Conclusion for Tests of Details
the auditor estimates to be in the population, and is
calculated by adjusting the sample misstatement by an When the projected misstatement plus anomalous
allowance for sampling risk. An allowance for sampling risk misstatement, if any, exceeds tolerable misstatement, the
can only be calculated where the auditor has used statistical sample does not provide a reasonable basis for conclusions
sampling. The methods for calculating an allowance for about the population that has been tested. The closer the
sampling risk and projecting the sample error differ projected misstatement plus anomalous misstatement is to
between classical variables sampling and Monetary Unit tolerable misstatement, the more likely that actual
Sampling (MUS). This is discussed below. misstatement in the population may exceed tolerable
misstatement.
When a misstatement has been established as an anomaly,
it may be excluded when projecting misstatements to the If the auditor concludes that audit sampling has not
population. provided a reasonable basis for conclusions about the
population that has been tested, the auditor may:
Evaluate Sample Results and Reach an Overall Conclusion • Request management to investigate
misstatements identified and the potential for
Overall Conclusion for Tests of Controls further misstatements and to make any necessary
adjustments; or
There are two generally accepted approaches for evaluating • Tailor the nature, timing and extent of those
the sample results for tests of controls: further audit procedures to best achieve the
• Compare PDR to tolerable deviation rate. If the PDR < required assurance.
tolerable deviation rate = the control is operating
effectively. If the PDR = or > tolerable deviation rate Step 10: Document the Audit Sampling Performed
= the control is not operating effectively as designed.
• Compare SDR to expected deviation rate. If the SDR < The auditor should document the sampling application and
expected deviation rate = control is operating related audit procedures.
effectively. If the SDR = or > expected deviation rate
= control is not operating effectively as designed.

DISCUSSION QUESTIONS
Introduction d. Representative sample to conclude for an entire
population.
1. In performing tests of controls and tests of details, the
extent and selection of items to test include Audit Sampling
a. All items.
b. Specific non-representative items. 5. Which of the following causes an inappropriate
c. Audit sampling. conclusion or audit risk?
d. All of the above. a. Sampling risk.
b. Non-sampling risk.
2. Evaluate whether each of the following statements c. Both a and b.
qualifies as sampling: d. Neither a nor b.
1.1 – Test performed on 100% of the items within a
population 6. A sample in which the characteristics of the sample are
1.2 – Selecting items over a certain amount the same as those of the population is a(n):
1.3 – Selecting items for the total population on the a. variables sample.
basis that was expected to be representative b. representative sample.
a. 1.1, 1.2, 1.3 qualify c. attributes sample.
b. 1.1 and 1.2 qualify; 1.3 does not qualify d. random sample.
c. 1.1 and 1.2 do not qualify; 1.3 qualifies
d. 1.1, 1.2, 1.3 do not qualify 7. Which of the following would cause a sampling error (or
sampling risk) in an audit of financial statements?
Testing All Items (100%) a. Selecting a non-representative sample
b. Selecting inappropriate audit procedures
3. Performing 100% testing is least likely possible in which c. Applying audit procedures improperly
of the following? d. Interpreting results inappropriately
a. Large value but small in number accounts.
b. Assertions with assessed significant risks. 8. The risk that the auditor’s conclusion based on a sample
c. Testing customer credit approvals. may be different from the conclusion if the entire
d. Use of CAATs. population were subjected to the same audit procedure
a. Sampling risk
Testing Specific Non-representative Items b. Confidence levels
c. Statistical sampling
4. Testing specific items does not include selecting d. Tolerable rate and the expected rate of deviation
a. High value or key items.
b. Items to obtain certain information. 9. At times a sample may indicate in the case of a test of
c. Items to test the operation of certain control controls, that controls are more effective than they
activities. actually are. This situation illustrates the risk of

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a. Over-reliance. c. Population.
b. Under-reliance. d. Sampling risk.
c. Incorrect precision.
d. Incorrect rejection. Step 2—Define the deviation or misstatement

10. At times a sample may indicate in the case of a test of 18. In performing tests of controls, a deviation refers to
details that a material misstatement does not exist a. A departure from adequate control performance.
when in fact it does. This situation illustrates the risk of b. A difference between the recorded amount and the
a. Incorrect rejection amount the auditor determines to be appropriate.
b. Incorrect acceptance c. A voided sample.
c. Over reliance d. The presence of characteristics of control.
d. Under reliance
Step 3—Identify the relevant population
11. The risk likelihood of assessing control risk too low (risk
of over reliance) and risk of incorrect acceptance relate Step 4—Determine the relevant sampling unit
to the
a. Efficiency of the audit 19. Population is
b. Effectiveness of the audit a. A process that divides population into sub-
c. Preliminary estimates of materiality levels populations which have an identifying characteristic
d. Allowable risk of tolerable misstatements and reduces the variability of items within each
stratum and allows sample size to be reduced
12. Sampling risk may be controlled by: without increasing sampling risk
Increasing the sample Using an appropriate b. A selection that treats each sampling unit as the
size sample selection individual monetary units that make up the
method population.
a. Yes Yes c. The individual items constituting a population.
b. Yes No d. The entire set of data from which a sample is
c. No Yes selected and about which the auditor wishes to draw
d. No No conclusions.

13. To determine if a sample is truly representative, an 20. The sampling units might be
auditor must: a. Physical items (for example, checks listed on
a. conduct multiple samples of the same population. deposit slips, credit entries on bank statements,
b. never use sampling because of the expense sales invoices or debtors’ balances).
involved. b. Monetary units.
c. audit the entire population. c. Either a or b.
d. use systematic sample selection. d. Neither a nor b.

14. The risk that the auditor does not recognize 21. In identifying the relevant population, an auditor should
misstatements or deviations included in the sample for consider
what they are a. Direction of testing.
a. Sampling risk b. Completeness.
b. Confidence levels c. For tests of details, stratification or value-weighted
c. Statistical sampling selection.
d. Nonsampling risk d. All of the above.

15. Which of the following is not an element of nonsampling 22. In performing vouching, an auditor should obtain a
risk? sample from a population of
a. The auditor uses inappropriate procedures in auditing a. Records.
accounts receivable b. Supporting documents.
b. The use of unreasonable small sample size c. Actual items.
c. Misinterpretations of audit evidence d. Any of the above.
d. Auditor fails to recognize the error in the sample
23. To ensure completeness of a population in audit
The 10-Step Audit Sampling Process sampling, an auditor may test boundaries and totality
of population by
16. Which of the following is not one of the basic phases in a. The first and last numbers of prenumbered
audit sampling? documents, or the beginning and ending days of an
a. Planning the sample. audit period.
b. Selecting the sample and performing the tests. b. Accounting for numerical sequence of prenumbered
c. Evaluating the results of the sample. documents.
d. Each of the above is a phase in audit sampling. c. Footing population items and comparing to control
total.
Step 1—Define the objective (purpose) of test d. All of the above.
17. In defining the objective of tests of controls or tests of
details, an auditor should consider which of the 24. In statistical sampling methods used in substantive
following to perform the appropriate audit procedures testing, an auditor most likely would stratify a
and obtain relevant audit evidence? population into meaningful groups which have similar
a. Financial statements assertions. characteristics (often monetary value) if
b. Materiality.

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a. Probability proportional to size (PPS) sampling is Test of Controls

used
b. The population has highly variable recorded 31. Which of the following sampling methods is most useful
amounts to auditors when performing tests of controls?
c. The auditor’s estimated tolerable misstatement is a. Discovery sampling.
extremely small. b. Attribute estimation/sampling.
d. The standard deviation of recorded amount is c. Variable sampling.
relatively small. d. Unrestricted random sampling with replacement.

25. When selecting a stratified sample, the sample size is: 32. It refers to the statistical sampling plan that does not
a. determined for the unstratified population and then use a fixed sample size for tests of controls. It is
apportioned to each stratum. sometimes called “stop-or-go” sampling because the
b. determined for each stratum and selected from that plan allows the audit team to stop after examining a
stratum. relatively small sample and evaluate the results. If the
c. determined for each stratum and selected randomly results are clearly acceptable or clearly unacceptable,
from the entire unstratified population. the audit team can draw its conclusion; if the results are
d. always larger than if unstratified sampling had been inconclusive, the audit team can go forward and
used. examine additional items.
a. Ratio estimation sampling
26. When using monetary-unit sampling, the recorded b. Sequential sampling
amount population is a definition of all the items in the: c. MUS sampling
a. population. d. Variables sampling
b. population which the auditor has included in the
sample. 33. If the auditor is concerned that a population may
c. population which contain errors. contain exceptions, the determination of a sample size
d. sample which contain errors. sufficient to include at least one such exception is a
characteristic of
27. An auditor is applying probability-proportional-to-size a. Discovery sampling.
(PPS) sampling (a.k.a., combined attributes-variables b. Variables sampling.
(CAV) sampling, cumulative monetary amount (CMA) c. Random sampling.
sampling, dollar-unit sampling (DUS), monetary unit d. PPS sampling.
sampling (MUS), and value-weighted selection). If the
population consists of 200 items and is represented by 34. Discovery sampling should be used to estimate whether
P1,000,000 what is the probability the auditor will select a population contains
for testing an account recorded at P100,000? a. Errors of any kind.
a. .005. b. Noncritical errors.
b. .100. c. Critical deviations.
c. .025. d. No errors.
d. Not determinable from the facts given.
Test of Details
Step 5—Select the appropriate sampling approach
35. Which of the following sampling methods would be used
28. The two general approaches to audit sampling are to estimate a numerical measurement of a population,
a. Random and nonrandom such as a peso value?
b. Statistical and nonstatistical a. Attributes sampling
c. Precision and reliability b. Stop-or-go sampling
d. Risk and nonrisk c. Variables sampling
d. Random sampling
29. An advantage of statistical sampling—which applies the
laws of probability to selecting sample items for 36. The following are the classical variables techniques,
examination and evaluating sample results—over except:
nonstatistical sampling is that statistical sampling helps a. Ratio estimation
an auditor to b. Mean-per-Unit (MPU) estimation
a. Minimize the failure to detect errors and c. Value weighted selection
irregularities. d. Difference estimation
b. Eliminate the risk of nonsampling errors.
c. Reduce the level of audit risk and materiality to a 37. The auditor selected samples of 200 with recorded
relatively low amount. amount or P208,000, from population of 1,000
d. Mathematically measures sampling risk. inventory items with total recorded amount of
P1,040,000. After performing the necessary audit
30. A nonstatistical sampling plan can: procedures, the auditor determined that the adjusted
a. Overstate the estimate of sampling risk amount of the samples is P196,000. Which of the
b. Misdirect an auditor to unreliable sampling units following illustrates difference estimation approach to
c. Replicate the results of a statistical sampling projecting sample misstatement to population?
plan a. Average audited amount of 200 samples divided by
d. Understate the degree of audit assurance 200, equals P980. The estimated inventory balance
desired is then calculated as P980,000 (P980 X 1,000).
b. The difference of P12,000 is divided by the number
of sample items (200) to yield an average difference
of P60. The auditor then multiplies the average

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difference by the number of items in the population d. There is an inverse relationship between the sample
to calculate a total difference of P60,000 (P60 X size and the tolerable rate of deviation.
1,000) and the difference is subtracted from the
total recorded amount to obtain an estimated 43. The tolerable rate of deviation is the maximum rate of
inventory balance of P980,000. deviations permissible by the audit team without
c. The ratio of the sum of the sample’s audited modifying the planned assessed level of control risk. In
amounts to the sum of the sample’s recorded determining the tolerable rate of deviation, the audit
amounts would have been 0.94 (P196,000 / team should consider
P208,000). The auditor would multiply the total a. The planned assessed level of control risk.
recorded amount for the population by this ratio b. The degree of assurance desired by the audit
(0.94) to obtain an estimate of the inventory evidence in the sample.
balance of P978,000 (P1,040,000 X 0.94). c. If a control is judged to be more important and
d. None of the above. would result in a more significant reduction in
substantive testing, the tolerable rate of deviation
38. Classical variables sampling uses the laws of probability, should be established at lower levels.
the normal distribution theory, and the central limit d. All of the above.
theorem to estimate range of
a. The amount of misstatement in the account balance 44. In determining the acceptable level of the risk of
or class of transactions. overreliance (i.e., the sampling risk), an auditor should
b. The true balance for an account balance or class of consider
transactions. a. The planned assessed level of control risk.
c. Either a or b. b. The degree of reliance that the audit team wishes
d. Neither a nor b. to place on the client’s internal control.
c. As the planned level of control risk is lower, it
39. The distinguishing feature of Monetary-unit sampling becomes quite important for the audit team to
(MUS) is that it tends to select higher transactions or reduce the exposure to the risk of overreliance.
components within an account balance for examination. d. All of the above.
MUS is not particularly effective at detecting:
a. overstatements. 45. How is the expected population deviation rate
b. understatements. determined?
c. errors in current assets. a. Rate of deviations from prior engagements
d. errors in noncurrent assets. adjusted, if any, for controls improvement or
deterioration during the current year.
40. Which of the following is not a problem with monetary- b. Use a small sample (referred to as a pilot sample)
unit selection? to estimate the rate of deviations in case of initial
a. Population items with a zero recorded balance. audit.
b. Accounts with negative balances. c. Either a or b.
c. Accounts with small recorded balances that are d. Neither a nor b.
significantly understated.
d. Population items that should have a zero balance 46. The tolerable rate of deviations for a test of controls is
but do not. generally
a. Lower than the expected rate of errors in the related
Step 6—Determine the sufficient sample size accounting population.
b. Higher than the expected rate of errors in the
Test of Controls related accounting records.
c. Identical to the expected rate of errors in the related
41. When sampling for attributes, which of the following accounting records.
would decrease sample size? d. Unrelated to the expected rate of errors in the
a b c d related accounting records.
Operating Increase Decrease Increase Decrease
effectiveness 47. Which of the following statements is most likely
of controls incorrect regarding high expected deviation rate and
Tolerable Decrease Increase Increase Increase high expected misstatement relating to sampling used
rate of for tests of controls and tests of details, respectively?
deviation a. If the expected rate of deviation is unacceptably
Expected Increase Decrease Decrease Decrease high, the auditor will normally decide not to perform
control tests of controls.
deviation b. If the expected misstatement is high, the auditor
Risk of over Decrease Increase Increase Decrease will normally decide not to perform tests of details.
reliance c. If the expected misstatement is high, 100%
examination may be appropriate when performing
42. Which of the following statements is correct concerning tests of details.
statistical sampling in tests of controls? d. If the expected misstatement is high, use of a large
a. There is an inverse relationship between the sample sample size may be appropriate when performing
size and the expected control deviation rate. tests of details
b. As the population size doubles, the sample size
should also double.
c. The qualitative aspects of deviations are not
considered by the auditor.

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Test of Details III. All items in the population or within each stratum
have a known chance of selection
48. In substantive testing, which of the following would a. Systematic, random, haphazard.
increase sample size? b. Systematic, haphazard, random.
a b c d c. Haphazard, systematic, random.
Assessment of Increase Increase Increase Decrease d. Random, systematic, haphazard.
control risk
Reliance on Increase Decrease Decrease Increase 55. An underlying feature of random-based selection of
other items is that each
substantive a. Stratum of the accounting population be given equal
procedures representation in the sample.
Tolerable Decrease Increase Decrease Increase
b. Item in the accounting population be randomly
misstatement
ordered.
Expected Increase Decrease Increase Decrease
c. Item in the accounting population should have an
amount of
misstatement opportunity to be selected.
Risk of Decrease Increase Decrease Increase d. Item must be systematically selected using
incorrect replacement.
acceptance
56. If certain forms are not consecutively numbered
49. Determine which of the following would lead to a larger a. Selection of a random sample probably is not
sample size for substantive test of details of an account possible.
balance. Assume all other factors being equal. b. Systematic sampling may be appropriate.
a. Smaller measure of tolerable misstatement c. Stratified sampling should be used.
b. Greater reliance of analytical procedures d. Random number tables cannot be used.
c. Greater reliance on internal controls
d. Smaller expected frequency of errors 57. In systematic sample selection, the population size is
divided by the number of sample items desired in order
50. When planning a test of details using MUS sampling, to determine the:
tolerable misstatement is usually set a. sampling interval.
a. higher than planning materiality. b. tolerable exception rate.
b. lower than planning materiality. c. computed upper exceptions rate.
c. either higher or lower than planning materiality. d. mean.
d. the same as materiality.
58. When using systematic selection procedures with
51. Tolerable misstatement may be _____ amount than monetary-unit sampling of accounts receivable, the
performance materiality? interval is determined by:
a. higher, lower or the same. a. consulting a random number table.
b. high or lower. b. dividing the population size by the desired sample
c. lower or the same. size.
d. the same. c. dividing the sample size by the account with the
largest value.
52. In determining the acceptable level of the risk of d. dividing the population size by the account
incorrect acceptance (i.e., the sampling risk), for receivable with the largest value.
example 10%, an auditor should consider
a. The audit risk. 59. One unique feature of using systematic random
b. The risks of material misstatement (i.e., inherent selection in MUS is that the sampling unit is defined as
risk and control risk). an individual amount within a population. The audit
c. The analytical procedures risk. team examines the logical unit (e.g., a transaction, a
d. All of the above. customer balance, etc.) that contains the individual
sampling unit that is selected for examination. The
Step 7—Select the representative sample items statistical methods used to evaluate monetary-unit
53. The audit team’s basic goal in selecting a sample is to samples:
increase the likelihood that it is representative of the a. neither exclude nor include units twice.
population, thereby reducing sampling risk. For b. permit the inclusion of a unit in the sample more
example, if the audit team is examining a sample of than once.
sales invoices, this sample should include sales invoices c. do not permit a unit to be included in the sample
that more than once.
a. Have been prepared throughout the year. d. ignore the possibility that a unit may be included in
b. Represent both large and small amounts. a sample more than once.
c. Have been prepared by different individuals
involved in the invoice preparation process and 60. Which of the following sample selection techniques is
represent different customers or geographic areas. least desirable for use by an auditor?
d. All of the above. a. Systematic selection
b. Stratified selection
54. Identify the sample selection method used, following c. Block selection
the same order: d. Sequential selection
I. Selecting items using a constant interval between
selections; the first interval having a random start.
II. Selecting items from the entire population with no
intention to include or exclude specific units

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Step 8—Perform the testing and evaluate evidence

65. Which of the following statements regarding projecting
61. An auditor is testing internal control procedures that are the results of audit sampling is incorrect?
evidenced on an entity’s vouchers by matching random a. For tests of details, the auditor shall project
numbers with voucher numbers. If a random number misstatements found in the sample to the
matches the number of a voided voucher, that voucher population.
ordinarily should be replaced by another voucher in the b. When a misstatement has been established as an
random sample if the voucher anomaly, it may be excluded when projecting
a. Constitutes a deviation. misstatements to the population.
b. Has been properly voided. c. Projected misstatement may not be sufficient to
c. Cannot be located. determine an amount to be recorded.
d. Represents an immaterial peso amount. d. For tests of controls, projection of deviations is
necessary.
62. An auditor plans to examine a sample of 20 purchase
orders for proper approvals as prescribed by the client’s
internal control procedures. One of the purchase orders Test of Controls
in the chosen sample of 20 cannot be found, and the
auditor is unable to use alternative procedures to test Use the following information for the next two questions:
whether that purchase order was properly approved.
The auditor should An auditor desired to test credit approval on 10,000 sales
a. Chose another purchase order to replace the invoices processed during the year. The auditor designed a
missing purchase order in the sample. statistical sample that would provide 1% risk of assessing
b. Consider this test of control invalid and proceed with control risk too low (99% confidence) that not more than
substantive tests since internal control cannot be 7% of the sales invoices lacked approval. The auditor
relied upon. estimated from previous experience that about 2 ½% of the
c. Treat the missing purchase order as a deviation for sales invoices lacked approval. A sample of 200 invoices
the purpose of evaluating the sample. was examined and 7 of them were lacking approval. The
d. Select a completely new set of 20 purchase orders. auditor then determined the achieved upper precision limit
to be 8%.
Step 9—Evaluate the test results and reach conclusion
66. The allowance for sampling risk was
63. Anomalous error means a. 5 ½% c. 3 ½%
a. An error (deviation or misstatement) that arises b. 4 ½% d. 1%
from an isolated event that has not recurred other
than on specifically identifiable occasions and is 67. In the evaluation of this sample, the auditor decided to
therefore not representative of errors in the increase the level of preliminary assessment of control
population. risk (CR is high) because the
b. An deviation or misstatement (error) that the a. Tolerable rate (7%) was less than the achieved
auditor expects to be present in the population. upper precision limit (8%).
c. Rate of deviation from prescribed internal control b. Expected deviation rate (7%) was more than the
procedures set by the auditor in respect of which percentage of errors in the sample (3 ½%).
the auditor seeks to obtain an appropriate level of c. Achieved upper precision limit (8%) was more than
assurance that the rate of deviation set by the the percentage of error in the sample 3-1/2%).
auditor is not exceeded by the actual rate of d. Expected deviation rate (2 - ½ %) was less than the
deviation in the population. tolerable rate (7%).
d. Monetary amount set by the auditor in respect of
which the auditor seeks to obtain an appropriate 68. When the upper precision limit exceeds the tolerable
level of assurance that the monetary amount set by rate of deviation, the auditor may
the auditor is not exceeded by the actual a. Reduce reliance on internal control.
misstatement in the population. b. Expand the sample to examine a larger number of
items by at least the number of items in the original
64. Regardless of the results of the attributes sampling sample, as a rule of thumb.
application, the audit team should conduct a qualitative c. Either a or b.
evaluation of deviations to determine their nature and d. Neither a nor b.
cause. A qualitative evaluation of deviations attempts to
answer questions such as: Test of Details
a. Do deviations represent a pervasive error made
consistently on all transactions or an isolated 69. An auditor is evaluating the results of a variables
mistake made on a specific transaction? sampling plan. Which of the following is not relevant to
b. Are deviations intentional or unintentional in the auditor's judgment about the sample?
nature? Do deviations represent a a. Management's explanations for why errors in the
misunderstanding of instructions or careless sample occurred.
attention to duties? b. Projecting the sample error to the population.
c. Do deviations have implications with regard to the c. Considering the effects of sampling risk.
effectiveness of other controls? d. Qualitative information that lends insight into errors
d. All of the above. found.

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misstatements are detected, the recalculated upper

70. Which one of the following is a proper course of action limit on misstatements could fall below the tolerable
for the auditor when the upper misstatement limit misstatement to enable the audit team could
exceeds the tolerable misstatement? conclude that the financial statements were not
a. Analyze the detected misstatements for some materially misstated
common problems. d. All of the above.
b. The auditor can ask the client to correct the known
misstatements or investigate misstatements that Step 10—Complete documentation
have been identified and the potential for further
misstatements and to make any necessary End of AT.3212
adjustments.
c. The auditor can expand the sample. If enough
additional items are examined and no additional

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