Module E

1. Module E Overview of Sampling “There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli

2. Learning Objectives • Understand the basic principles of sampling, including the differences between statistical and nonstatistical sampling and sampling and nonsampling risk. • Understand the basic steps and procedures used in conducting a sampling plan. • Identify the two situations in which sampling is used in an audit examination. • Understand how the basic steps and procedures used in a sampling plan apply to an audit engagement.

3. When is Sampling Used? • Study and evaluation of internal control • Selecting control procedures to verify compliance • Termed attribute sampling • Substantive procedures • Selecting components or transactions of account balances for verification • Termed variables sampling

4. Sampling Risk • Risk that the decision made based on the sample differs from the decision that would have been made by examining the population • Cause is a nonrepresentative sample • Controlled by: • Determining an appropriate sample size • Ensuring that all items have an equal opportunity of selection • Mathematically evaluating sample results • Sampling versus nonsampling risk

5. Sampling Approaches • Statistical sampling methods use the laws of probability to: • Select sample items • Evaluate sample results • Statistical sampling methods control the auditor’s exposure to sampling risk • Nonstatistical sampling violates one or both of the above criteria • Both statistical sampling and nonstatistical sampling can be used in a GAAS audit

6. Major Steps in Sampling • Determine the objective • Define characteristic of interest • Define the population • Determine sample size • Select the sample • Measure sample items • Evaluate sample results Planning Performing Evaluating

7. Precision and Reliability • Precision (Allowance for sampling risk) • Closeness of sample estimate to true population value • Reliability (Confidence) • Likelihood of achieving a given level of precision

8. Attribute Sampling • Used to estimate the extent to which a characteristic exists within a population • Used in the auditor’s study of internal control • Goal: Estimate the rate at which the client’s internal control is failing to function effectively and compare to an allowable level (tolerable deviation rate)

9. Variables Sampling • Used to estimate the amount (or value) of some characteristic of a population • Used in the auditor’s substantive procedures • Goal: Estimate the amount of error in an account balance or class of transactions and compare to an allowable level (tolerable error)

10. Summary of Sampling Risks • Effectiveness Losses (Major Risk) • Risk of assessing control risk too low (overreliance) - Attribute • Risk of incorrect acceptance - Variables • Efficiency Losses (Minor Risk) • Risk of assessing control risk too high (underreliance) - Attribute • Risk of incorrect rejection - Variables