May 1, 2008 Audit Sampling Guide

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Audit Sampling

(New Edition as of May 1, 2008)

AICPA Audit Guide: Audit Sampling

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Notice to Readers

This AICPA Audit Guide was prepared by the AICPA Audit Sampling Guide Task Force to assist auditors indesigning and perorming sampling in a inancial statement audit conducted in accordance with generallyaccepted auditing standards! Auditing guidance included in an AICPA Audit Guide is an interpreti"e publicationpursuant to A# section 1$%& Generally Accepted Auditing Standards'AICPA&Professional Standards& "ol! 1(!

Interpreti"e publications are recommendations on the application o Statements on Auditing Standards 'SASs(in speciic circumstances& including engagements or entities in speciali)ed industries! An interpreti"epublication is issued under the authority o the Auditing Standards *oard 'AS*( ater all AS* members ha"ebeen pro"ided an opportunity to consider and comment on whether the proposed interpreti"e publication isconsistent with the SASs! The members o the AS* ha"e ound this guide to be consistent with e+isting SASs!

An auditor should be aware o and consider interpreti"e publications applicable to his or her audit! I an auditordoes not apply the auditing guidance included in an applicable interpreti"e publication& the auditor should beprepared to e+plain how he or she complied with the SAS pro"isions addressed by such auditing guidance!

This AICPA Audit Guide& which also contains attestation guidance& is an interpreti"e publication pursuant to ATsection $%& SSAE Hierarchy'AICPA&Professional Standards& "ol! 1(! Interpreti"e publications includerecommendations on the application o Statements on Standards or Attestation ,ngagements 'SSA,s( inspeciic circumstances& including engagements or entities in speciali)ed industries! Interpreti"e publications areissued under the authority o the AS*! The members o the AS* ha"e ound this guide to be consistent with thee+isting SSA,s!

A practitioner should be aware o and consider interpreti"e publications applicable to his or her attestationengagement! I the practitioner does not apply the guidance included in an applicable AICPA Audit andAccounting Guide& the practitioner should be prepared to e+plain how he or she complied with the SSA,pro"isions addressed by such guidance!

Defining Professional Requireents

A# section 1-%&Defining Professional Requirements in Statements on Auditing Standards& and AT section -%&Defining Professional Requirements in Statements on Standards for Attestation Engagements'AICPA&Professional Standards& "ol! 1(& which were issued in .ecember -%%$& set orth the meaning o certain termsused in SASs and SSA,s& respecti"ely& issued by the AS* in describing the proessional re/uirements imposedon auditors and practitioners! The speciic terms used to deine proessional re/uirements in these sections arenot intended to apply to interpreti"e publications issued under the authority o the AS* because interpreti"epublications are not auditing or attestation standards! It is the AS*0s intention to make conorming changes tothe interpreti"e publications o"er the ne+t se"eral years to remo"e any language that would imply a proessionalre/uirement where none e+ists!

In .ecember -%%& the Accounting and 2e"iew Ser"ices Committee 'A2SC( issued A2 section -%&DefiningProfessional Requirements in Statements on Standards for Accounting and Review Services'AICPA&Professional Standards& "ol! -(& which sets orth the meaning o certain terms used in Statements on Standardsor Accounting and 2e"iew Ser"ices 'SSA2S( issued by the A2SC in describing the proessional re/uirementsimposed on accountants perorming a compilation or re"iew o a nonissuer! The speciic terms used to deineproessional re/uirements in this section are not intended to apply to interpreti"e publications issued under theauthority o the A2SC because interpreti"e publications are not SSA2Ss! It is the A2SC0s intention to makeconorming changes to the interpreti"e publications to remo"e any language that would imply a proessionalre/uirement where none e+ists!

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A# section 1-%& AT section -%& and A2 section -%& which were eecti"e upon issuance& deine the terminologythat the AS* and A2SC will use going orward to describe the degree o responsibility that the re/uirementsimpose on the auditor& practitioner& or accountant in engagements perormed or nonissuers! SASs& SSA,s& andSSA2Ss will use the words mustor is requiredto indicate an unconditional requirement& with which the auditorpractitioner& or accountant is re/uired to comply! SASs& SSA,s& and SSA2Ss will use the word shouldtoindicate apresumptively mandatory requirement! The auditor& practitioner& or accountant is re/uired to complywith a presumpti"ely mandatory re/uirement in all cases in which the circumstances e+ist to which thepresumpti"ely mandatory re/uirement applies3 howe"er& in rare circumstances& the auditor& practitioner& or

accountant may depart rom a presumpti"ely mandatory re/uirement pro"ided he or she documents the4ustiication or the departure and how the alternati"e procedures perormed in the circumstances were suicientto achie"e the ob4ecti"es o the presumpti"ely mandatory re/uirement! I a SAS& SSA,& or SSA2S pro"ides thata procedure or action is one that the auditor& practitioner& and accountantshould consider& the consideration othe procedure or action is presumpti"ely re/uired& whereas carrying out the procedure or action is not!

This guide has been updated as applicable or A# section 1-%& AT section -%& and A2 section -%! 2eer to theSchedule o Changes in appendi+ Ior additional inormation!

Recognition

5arold 6! 7onk& 8r!& ChairAuditing Standards oard

This -%%9 re"ision o the guide was chaired by 6ynord ,! Graham!

2008 !udit "a#ling $uide %as& 'orce

Abraham .! Akresh 7ark .! 7ayberry

8ohn P! *rolly .ouglas F! Prawitt

7ichael F! Campana Tre"or 2! Stewart

7ark S! Chapin 8ohn 2! Troyer

illiam 6! Feli+& 8r! Phil .! edemeyer

;enneth C! Garrett 5arold I!


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This guide has been modiied by the AICPA sta to include certain changes necessary due to the issuance oauthoritati"e pronouncements since the guide was originally issued! 2ele"ant guidance contained in oicialpronouncements issued through 7arch 1& -%%9 has been considered in the de"elopment o this edition o theguide! This includes rele"ant guidance issued up to and including the ollowing:

AICPA SAS @o! 11& !he Auditor%s Communication &ith !hose Charged &ith Governance

'AICPA&Professional Standards& "ol! 1& A# sec! ?9%(

AICPA Auditing Interpretation @o! 1& BCommunicating .eiciencies in Internal Control "erCompliance in an ice o 7anagement and *udget '7*( Circular AD1?? AuditE o A#section ?-$& Communicating 'nternal Control Related "atters 'dentified in an Audit'AICPA&Professional Standards& "ol! 1& A# sec! >?-$par! !%1!%(

AICPA SSA, @o! 1& SSAE Hierarchy'AICPA&Professional Standards& "ol! 1& AT sec! $%(

AICPA Auditing Interpretation @o! & B2eporting on Attestation ,ngagements Perormed in

Accordance ith Go"ernment Auditing StandardsE o AT section 1%1&Attest Engagements'AICPA&Professional Standards& "ol! 1& AT sec! >1%1par! !$!$9(

#sers o this guide should consider pronouncements issued subse/uent to those in the preceding list todetermine their eect on entities co"ered by this guide! In determining the applicability o a pronouncement& itseecti"e date should also be considered!

!uditing $uidance ncluded in %*is $uide

Ris& !ssessent "tandards

In 7arch -%%& the AS* issued SAS @os! 1%111'the Hrisk assessment standardsH(! Collecti"ely& the riskassessment standards establish standards and pro"ide guidance concerning the auditor0s assessment o the riskso material misstatement 'whether caused by raud or error( in a nonissuer inancial statement audit3 design andperormance o tailored audit procedures to address assessed risks3 audit risk and materiality3 planning and

super"ision3 and audit e"idence! The most signiicant changes to e+isting practice that the auditor will bere/uired to perorm are as ollows:

btain a more inDdepth understanding o the audited entity and its en"ironment& including its

internal control

Perorm a more rigorous assessment o the risks o where and how the inancial statements could

be materially misstated 'deaulting to a ma+imum control risk is not acceptable(

Pro"ide a linkage between the auditor0s assessed risks and the nature& timing& and e+tent o audit

procedures perormed in response to those risks

The statements are eecti"e or audits o inancial statements or periods beginning on or ater .ecember 1$&-%%!See appendi+ 5in this guide or a more detailed comparison between the risk assessment standardsand the e+isting standards! This guide has been conormed to the new risk assessment standards!

For additional guidance on the risk assessment standards& please reer to the AICPA Audit GuideAssessing andResponding to Audit Ris( in a )inancial Statement Audit'product no! %1-$kk( and the AICPA Audit 2iskAlert *nderstanding the +ew Auditing Standards Related to Ris( Assessment 'product no! %--$-kk(!

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Defining Professional Requireents

As pre"iously stated& this guide has been conormed& as applicable& to the standards ound in A# section 1-%&AT section -%& and A2 section -%& which were eecti"e upon issuance '.ecember -%%$& e+cept or A2 section-%& which was issued in .ecember -%%(! These new standards deine the terminology that the AS* and A2SCwill use going orward to describe the degree o responsibility that the re/uirements impose on the auditor&practitioner& or accountant in engagements perormed or nonissuers! 2eer to the Schedule o Changes inappendi+ Ior additional inormation!

Preface

Pur#ose and !##lica+ility

This guide&Audit Sampling& presents recommendations on the application o generally accepted auditingstandards 'GAAS( to audits in"ol"ing the use o audit sampling methods! It is a re"ision o the 1>9? and -%%1AICPA Audit Guide by the same name! The guide relects Statements on Auditing Standards 'SASs( issuedsince the guide was originally issued in 1>9?! It also includes increased guidance on the use o nonstatisticalaudit sampling! This guidance is more integrated and e+plains throughout the guide the common actors thatneed to be considered when ollowing either a statistical or nonstatistical approach! Although the purpose o this

guide is to pro"ide guidance to help auditors apply audit sampling in accordance with A# section ?$%&AuditSampling'AICPA&Professional Standards& "ol! 1(& the concepts and procedures described herein may be useulwhen perorming attestation engagements that in"ol"e sampling!

Pu+lic !ccounting 'irs Registered it* t*e Pu+lic o#any !ccounting -.ersig*t /oard

Sub4ect to the Securities and ,+change Commission 'S,C( o"ersight& Section 1%? o the SarbanesD+ley Act'act( authori)es the Public Company Accounting "ersight *oard 'PCA*( to establish auditing and relatedattestation& /uality control& ethics& and independence standards to be used by registered public accounting irmsin the preparation and issuance o audit reports as re/uired by the act or the rules o the S,C! Accordingly&public accounting irms registered with the PCA* are re/uired to adhere to all PCA* standards in the audits

o issuers& as deined by the act& and other entities when prescribed by the rules o the S,C!

References to Professional "tandards

In citing the proessional standards& reerences are made to the AICPAProfessional Standardspublication! Inthose sections o the guide where speciic PCA* auditing standards are reerred to& reerences are made to theAICPA0sPCA, Standards and Related Rulespublication! Please reer to appendi+ Go this guide or asummary o ma4or e+isting dierences between AICPA standards and PCA* standards! Additionally& whenreerencing proessional standards& this guide cites section numbers and not the original statement number& asappropriate! For e+ample& SAS @o! $ is reerred to as A# section ?1!

!##lica+ility of Requireents of t*e "ar+anes-ley !ct of 2002

Publicly held companies and other issuers'see the ollowing deinition( are sub4ect to the pro"isions o the actand related S,C regulations implementing the act! Their outside auditors are also sub4ect to the pro"isions othe act and to the rules and standards issued by the PCA*!

Presented in the ollowing paragraphs is a summary o certain key areas addressed by the act& the S,C& and thePCA* that are particularly rele"ant to the preparation and issuance o an issuers inancial statements and thepreparation and issuance o an audit report on those inancial statements! 5owe"er& the pro"isions o the act& the

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regulations o the S,C& and the rules and standards o the PCA* are numerous and are not all addressed inthis section or in this guide!

Definition of an 'ssuer

The act states that the term issuermeans an issuer 'as deined in section ? o the Securities ,+change Act o1>? '1$ #!S!C! 9c((& the securities o which are registered under Section 1- o that act '1$ #!S!C! 9l(& or thatis re/uired to ile reports under Section 1$'d( '1$ #!S!C! 9o'd((& or that iles or has iled a registration

statement that has not yet become eecti"e under the Securities Act o 1>?? '1$ #!S!C! a et se/!(& and that ithas not withdrawn!

Issuers& as deined by the act& and other entities when prescribed by the rules o the S,C 'collecti"ely reerred toin this guide as issuersor issuer( and their public accounting irms 'who must be registered with the PCA*(are sub4ect to the pro"isions o the act& implementing S,C regulations& and the rules and standards o thePCA*& as appropriate!

@onissuers are those entities not sub4ect to the act or the rules o the S,C!

$uidance for ssuers

Manageent !ssessent of nternal ontrol

As directed by Section % o the act& the S,C adopted inal rules re/uiring companies sub4ect to the reportingre/uirements o the Securities ,+change Act o 1>?& other than registered in"estment companies and certainother entities 'or e+ample& 11D; ilers(& to include in their annual reports a report o management on thecompanys internal control o"er inancial reporting!

Companies that are large accelerated filersor accelerated filers& as deined in ,+change Act 2ule 1-bD-& arere/uired to comply with these rules or iscal years ending on or ater @o"ember 1$& -%%! Foreign pri"ateissuers that are large accelerated ilers or accelerated ilers and that ile their annual reports on Form -%DF or %DF must begin to comply with the rules or the irst iscal year ending on or ater 8uly 1$& -%%!+onaccelerated

filersincluding oreign pri"ate issuers that are not accelerated ilers are re/uired to comply with the rules or theirst iscal year ending on or ater .ecember 1$& -%%! See the S,C eb site at www!sec!go"or urtherinormation!

The S,C rules clariy that managements assessment and report is limited to internal control over financialreporting! The S,Cs deinition o internal control encompasses the Committee o Sponsoring rgani)ations othe Treadway Commission 'CS( deinition but the S,C does not mandate that the entity use CS as itscriteria or 4udging eecti"eness!

The auditor0s attestation on the eecti"eness o the internal control o"er inancial reporting is currently re/uiredor large accelerated ilers and accelerated ilers! For nonaccelerated ilers& the auditor0s attestation is re/uired

or annual reports or iscal years ending on or ater .ecember 1$& -%%9!n J

fn * On February 1, 2008, the Securities and Exchange Commission (SEC issued !ro"osed #u$e %%&888'that, if ado"ted, ou$d amend SEC #e$ease )o %%&8+0 by deferring for one year the auditor attestationre-uirement for nonacce$erated .$ers re-uired by Section /0/(b of the Sarbanes&Ox$ey ct of 2002 nderthe "ro"osed amendments, a nonacce$erated .$er ou$d be re-uired to "roide the auditor3s attestationre"ort on interna$ contro$ oer .nancia$ re"orting in an annua$ re"ort .$ed for .sca$ years ending on or after4ecember 15, 200' nti$ then, a$$ nonacce$erated .$ers ou$d be re-uired to com"$ete on$ymanagement3s assessment of interna$ contro$ oer .nancia$ re"orting #efer to the SEC 6eb site atsecgofor further dee$o"ments on this issue

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"elect "E De.elo#ents

The S,C posted an interpreti"e release& Commission Guidance Regarding "anagement%s Report on 'nternalControl ,ver )inancial Reporting *nder Section -./a0 or -1/d0 of the Securities E2change Act of -3.4& on 8une-%& -%%& to pro"ide guidance or management regarding its e"aluation and assessment o internal control o"erinancial reporting! This guidance is organi)ed around two broad principles! The irst principle is thatmanagement should e"aluate whether it has implemented controls that ade/uately address the risk that amaterial misstatement o the inancial statements would not be pre"ented or detected in a timely manner! This

guidance describes a topDdown& riskDbased approach to this principle! The second principle is that management0se"aluation o e"idence about the operation o its controls should be based on its assessment o risk! Thisguidance pro"ides an approach or making riskDbased 4udgments about the e"idence needed or the e"aluation!

The S,C also posted a inal rule&Amendments to Rules Regarding "anagement%s Report on 'nternal Control,ver )inancial Reporting5on 8une -%& -%% that pro"ides& among other signiicant pro"isions& that a companyperorming an e"aluation in accordance with the aorementioned interpreti"e guidance also satisies the annuale"aluation re/uired by ,+change Act 2ules 1?aD1$ and 1$dD1$! Among other rule changes& the S,C deined theterm material wea(nessand re"ised the re/uirements regarding the auditor0s attestation report on theeecti"eness o internal control o"er inancial reporting to re/uire the auditor to e+press an opinion directly onthe eecti"eness o internal control o"er inancial reporting and not on management0s e"aluation process!

In a subse/uent inal rule&Definition of the !erm Significant Deficiency5posted August ?& -%%& the S,C deinedthe termsignificant deficiencyor the purpose o implementing Section ?%- and Section % o the act! *yincluding a deinition o signiicant deiciency in S,C rules& in addition to the deinition o material wea(ness&the S,C has enabled management to reer to its rules and guidance or inormation on the meaning o theseterms rather than reerring to the auditing standards! 2eaders should reer to the S,C eb site at www!sec!go"or more inormation!

$uidance for !uditors

The act mandates a number o re/uirements concerning auditors o issuers& including mandatory registrationwith the PCA*& the setting o auditing standards& inspections& in"estigations& disciplinary proceedings&prohibited acti"ities& partner rotation& and reports to audit committees& among others! The PCA* continues toestablish rules and standards implementing pro"isions o the act concerning the auditors o issuers!

!##lica+ility of $!!" and P!-/ "tandards

The act authori)es the PCA* to establish auditing and related attestation& /uality control& ethics& andindependence standards to be used by registered public accounting irms in the preparation and issuance o auditreports or entities sub4ect to the act or the rules o the S,C! Accordingly& public accounting irms registeredwith the PCA* are re/uired to adhere to all PCA* standards in the audits o issuers& as deined by the act&and other entities when prescribed by the rules o the S,C!

For those entities not sub4ect to the act or the rules o the S,C& the preparation and issuance o audit reportsremain go"erned by GAAS as issued by the Auditing Standards *oard!

"elect P!-/ De.elo#ents

n 7ay -& -%%& the PCA* adopted Auditing Standard @o! $&An Audit of 'nternal Control ,ver )inancialReporting !hat 's 'ntegrated with An Audit of )inancial Statements'AICPA&PCA, Standards and Related

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Rules& 2ules o the *oard& HStandardsH(& and an independence rule relating to the auditor0s pro"ision o internalcontrolDrelated nonaudit ser"ices! Auditing Standard @o! $supersedes PCA* Auditing Standard @o! -&AnAudit of 'nternal Control ,ver )inancial Reporting Performed in Con6unction &ith an Audit of )inancial

Statements! The S,C appro"ed the standard on 8uly -$& -%% and it is eecti"e or audits o internal controlo"er inancial reporting re/uired by the act or iscal years ending on or ater @o"ember 1$& -%%! ,arlieradoption is permitted at any point ater S,C appro"al!

Auditing Standard @o! $is principles based and is designed to increase the likelihood that material weaknesses

in internal control will be ound beore they result in material misstatement o a company0s inancial statementsand& at the same time& eliminate procedures that are unnecessary! It ocuses the auditor on the proceduresnecessary to perorm a high /uality audit and makes the audit scalable so it can change to it the si)e andcomple+ity o any company! 2eaders should reer to the PCA* eb site atwww!pcaob!orgor moreinormation!

Maor Eisting Differences /etween $!!" and P!-/ "tandards

The ma4or dierences between GAAS and PCA* standards are described in both part I o "olume I o theAICPAProfessional Standardsand in part I o the AICPA publication titledPCA, Standards and RelatedRules! Please reer to appendi+ Go this guide or a summary o ma4or e+isting dierences between AICPA

standards and PCA* standards!

Introduction

%*e De.elo#ent of !udit "a#ling

31 At the beginning o the twentieth century& the rapid increase in the si)e o American companies created aneed or audits based on selected tests o items constituting account balances or classes o transactions!Pre"iously& a number o audits had included an e+amination o e"ery transaction in the period co"eredby the inancial statements! At that time& proessional literature paid little attention to the sub4ect osampling!

32 A program o audit procedures printed in 1>1 in the)ederal Reserve ulletinincluded some earlyreerences to sampling& such as selecting Ha ew book itemsH o in"entory! The program was prepared bya special committee o the AICPA0s earliest predecessor& the American Association o PublicAccountants!

34 For the irst ew decades o the twentieth century& auditors oten applied sampling& but the e+tent osampling was not related to the eecti"eness o an entity0s internal control! Some auditing articles andte+tbooks in the 1>1%s and 1>-%s reerred to reducing the e+tent o tests o details based on reliance onthe entity0s internal check& as internal control was irst called3 howe"er& there was little acceptance othis relationship in practice until the 1>?%s!

35 In 1>$$& the American Institute o Accountants 'later to become the AICPA( publishedA Case Study of theE2tent of Audit Samples& which summari)ed audit programs prepared by se"eral CPAs to indicate thee+tent o audit sampling each considered necessary or a case study audit! The study was importantbecause it was one o the irst proessional publications on audit sampling! It also acknowledged somerelationship between the e+tent o tests o details and reliance on internal control! The 1>$$ studyconcluded& HAlthough there was some degree o similarity among the "iews e+pressed as to the e+tent osampling necessary or most items in the inancial statements& no clearDcut pattern resulted!H

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36 .uring the 1>$%s& some interest de"eloped in applying statistical principles to sampling in auditing! Someauditors succeeded in de"eloping methods or applying statistical sampling3 howe"er& other auditors/uestioned whether those techni/ues should be applied in auditing!

37 The irst pronouncement on the sub4ect o statistical sampling in auditing was the special report StatisticalSampling and the 'ndependent Auditorissued by the AICPA0s Committee on Statistical Sampling in1>-! The report concluded that statistical sampling was permitted under generally accepted auditingstandards 'GAAS(! A second report&Relationship of Statistical Sampling to Generally Accepted Auditing

Standards& issued by the committee in 1>& illustrated the relationship between precision andconidence 'reliability( in sampling and GAAS! The 1> report was later included as appendi+ A oStatement on Auditing Procedure 'SAP( @o! $& !he Auditor%s Study and Evaluation of 'nternal Control!The statement elaborated on the guidance pro"ided by the earlier report! The Auditing ProceduresCommittee reportPrecision and Relia$ility for Statistical Sampling in Auditingwas issued in 1>- asappendi+ * o SAP @o! $!

3 Two other SAPs included reerences to sampling applications in auditing! SAP @o! ??&Auditing Standardsand Procedures /a codification0& issued in 1>?& indicated that a practitioner might consider usingstatistical sampling in appropriate circumstances! SAP @o! ?&Revision of 7E2tensions of AuditingProcedure7 Relating to 'nventories& issued in 1>& pro"ided guidance on the auditor0s responsibility

when a client uses a sampling procedure& rather than a complete physical count& to determine in"entorybalances!

38 From 1> to 1>& the AICPA published a series o "olumes on statistical sampling&An Auditor%s Approachto Statistical Sampling& or use in continuing proessional education! In 1>9& the AICPA publishedStatistical Auditing& by .onald 7! 2oberts& e+plaining the theory underlying statistical sampling inauditing!

39 In 1>91& the AICPA0s Auditing Standards *oard 'AS*( issued Statement on Auditing Standards 'SAS( @o!?>&Audit Sampling 'AICPA&Professional Standards5"ol! 1& A# sec! ?$%(& which pro"ides generalguidance on both nonstatistical and statistical sampling in auditing and superseded appendi+es A and *o SAS @o! 1& Codification of Auditing Standards and Procedures'AICPA&Professional Standards& "ol!1(! In 1>9?& the AICPA published the irst edition o this Audit GuideAudit Sampling! In -%%1& theAICPA published an updated "ersion o the guide!

310 In -%%& the AS* issued a suite o eight risk assessment standards 'SAS @os! 1%111( to be used in theplanning and perormance o a inancial statement audit! Se"eral o these pronouncements also pro"ideguidance on the use o audit sampling! SAS @o! 1%&Audit Ris( and "ateriality in Conducting an Audit'AICPA&Professional Standards& "ol! 1& A# sec! ?1-(& pro"ides guidance on the auditor0s considerationo audit risk and materiality when planning and perorming an audit o inancial statements inaccordance with GAAS! Audit risk and materiality are important in determining the nature& timing& ande+tent o auditing procedures 'including those that in"ol"e audit sampling( and e"aluating the results othose procedures! SAS @o! 1%>& *nderstanding the Entity and 'ts Environment and Assessing the Ris(s

of "aterial "isstatement'AICPA&Professional Standards& "ol! 1& A# sec! ?1(& and SAS @o! 11%&Performing Audit Procedures in Response to Assessed Ris(s and Evaluating the Audit Evidence,$tained'AICPA&Professional Standards& "ol! 1& A# sec! ?19(& clariy the circumstances under whichcontrols can be relied on and the importance o IT general controls and tests o controls as a basis orreliance! The AICPA also issued the Audit GuideAssessing and Responding to Audit Ris( in a )inancialStatement Auditto pro"ide guidance on obtaining an understanding o the entity and its en"ironment&including its internal control& assessing the risks o material misstatement& designing urther auditprocedures that respond to the assessed risks& and e"aluating audit indings and e"idence! In discussing

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the auditor0s assessment o control risk& the preceding guidance describes the manner in which theauditor designs& perorms& and e"aluates tests o controls& including those that in"ol"e audit sampling!

311 Included in the suite o risk assessment standards is an amendment to A# section ?$%: SAS @o! 111&Amendment to Statement on Auditing Standards +o8 .35Audit Sampling 'AICPA&ProfessionalStandards& "ol! 1(! SAS @o! 111 mo"ed the discussion o the audit risk model rom A# section ?$%toA# section ?1-! In addition& the SAS indicated that nonstatistical sample si)es ordinarily would becomparable to statistically determined sample si)es or similar parameters!

%*e "ignificance of !udit "a#ling

312 A# section ?$%recogni)es that auditors are oten aware o items in account balances or classes otransactions that likely contain misstatements! Auditors consider this knowledge in planning procedures&including audit sampling! They usually will ha"e no special knowledge about other items in accountbalances or classes o transactions that& in their 4udgment& will need to be tested to ulill the auditob4ecti"es! Auditors might apply audit sampling to those account balances or classes o transactions! A#section ?$%pro"ides guidance or planning& perorming& and e"aluating audit samples using twoapproaches: nonstatistical and statistical!

%*e Pur#ose of %*is $uide

314 This guide pro"ides guidance to help auditors apply audit sampling in accordance with A# section ?$%!It pro"ides practical guidance on the use o nonstatistical and statistical sampling in auditing! In manycases& auditors may apply procedures not in"ol"ing audit sampling to account balances or classes otransactions! @either this document nor A# section ?$%pro"ides guidance on planning& perorming& ore"aluating audit procedures not in"ol"ing audit sampling!

315 This guide discusses se"eral approaches to the application o sampling in auditing! It does not discussthe use o sampling i the ob4ecti"e o the application is to de"elop an original estimate o /uantities oramounts! To a"oid a comple+& highly technical presentation& this guide does not include guidance one"ery possible "alid method o selecting and e"aluating audit samples! It also does not discuss themathematical ormulas underlying statistical sampling because knowledge o statistical samplingormulas& which was once re/uired to apply statistical sampling in auditing& is no longer as importantbecause the ormulas are oten imbedded in sotware that assists the auditor in si)ing& selecting& ande"aluating the sample! This guide assumes that the auditor uses appropriate and reliable computerprograms or tables to perorm the calculations and selections necessary or statistical sampling!

316 This guide may be used both as a reerence source or those who are knowledgeable about auditsampling and as initial background or those who are new to this area! Auditors unamiliar withtechnical sampling considerations might beneit by combining use o this guide with a continuingeducation course in audit sampling and by consulting with persons knowledgeable in audit sampling!Training is a"ailable rom se"eral sources& including the AICPA& state CPA societies& colleges and

uni"ersities& pri"ate "endors& and some CPA irms!

317 The guide is organi)ed as ollows:

Chapter 1deines audit sampling and illustrates the dierence between procedures that in"ol"e

audit sampling and those that do not in"ol"e audit sampling!

Chapter -pro"ides o"er"iews o the audit sampling process and the "arious approaches to audit

sampling!

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Chapter ?pro"ides guidance on the use o nonstatistical and statistical audit sampling or tests o

controls!

Chapter pro"ides general guidance on the use o nonstatistical and statistical audit sampling or

substanti"e tests!

Chapter $pro"ides a case study or nonstatistical sampling applications or substanti"e tests!

Chapter discusses monetary unit sampling! Chapter discusses classical "ariables sampling techni/ues using computer programs!

Chapters each include a case study illustrating the application o the guidance!

This guide includes se"eral appendi+es! Appendi+es A&*&C&and.are useul primarily in

applying certain statistical sampling approaches! Appendi+ ,describes an approach tocontrolling the risk o incorrect acceptance when planning an audit sampling application!Appendi+ Fcontains a discussion relating to designing samples or multilocation sampling! Alsoincluded is appendi+ G& a glossary!

31 An auditor using nonstatistical sampling is not re/uired to compute the sample si)e or the nonstatisticalsampling application using statistical theory3 howe"er&paragraph !-?o A# section ?$% clariies thatsample si)es o statistical and nonstatistical samples ordinarily would be comparable when the samesampling parameters are used:

An auditor who applies statistical sampling uses tables or ormulas to compute sample si)e basedon these 4udgments! An auditor who applies nonstatistical sampling uses proessional 4udgmentto relate these actors in determining the appropriate sample si)e! rdinarily& this would result ina sample si)e comparable to the sample si)e resulting rom an eicient and eecti"ely designedstatistical sample& considering the same sampling parameters!6

6This guidance does not suggest that the auditor using nonstatistical sampling compute acorresponding sample si)e using statistical theory!

318 This guide pro"ides se"eral /uantitati"e illustrations o sample si)es based on statistical theory that maybe helpul to an auditor applying proessional 4udgment and e+perience in considering the eect o"arious planning considerations on sample si)e when using nonstatistical sampling!n 1

319 hen using audit sampling& the auditor chooses between a statistical and a nonstatistical approach toaudit sampling! *oth methods comply with auditing standards! Statistical methods are drawn rom theield o applied statistics and re/uire training and e+perience in their use! @onstatistical methods drawon the auditor0s e+perience and proessional 4udgment in selecting items or e"idence rom populations

fn 1 Een though sam"$e si7es beteen statistica$ and nonstatistica$ sam"$es may be simi$ar, othercharacteristics of the sam"$ing "$an such as sam"$e se$ection methods may not be simi$ar Furtheradustments to the nonstatistica$ sam"$e "$an, for exam"$e an increase in the sam"$e si7e or changes inthe se$ection method, may be needed to "roide e-uia$ent assurance from statistica$ and nonstatistica$sam"$ing "$ans

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and e"aluating the results! In using statistical sampling& the auditor uses e+perience and 4udgment whendetermining the appropriate selection and e"aluation methods pro"ided rom the ield o appliedstatistics! It is important to note that nonstatistical sampling methods may use tools rom statisticalsampling such as random selection o sample items or determining sample si)e by using statisticalsampling tables! A distinguishing element is the e"aluation method where statistical methods state aspeciic numerical sampling risk in inerring the condition o the population rom the sample! Thedierences between these two methods include the dierent le"els o ormality in structuring the designand e+ecution o the procedures and the numerical control o and e"aluation o sampling risk pro"ided

by statistical methods! *oth approaches are best carried out by auditors who ha"e training in their useand e"aluation! Training in nonstatistical sampling generally pro"ides an o"er"iew o statisticalprinciples& because those principles are useul in helping the auditor to understand nonstatisticalsampling!

320 Although the purpose o this guide is to pro"ide guidance to help auditors apply audit sampling inaccordance with A# section ?$%& the concepts and procedures are useul when perorming attestationengagements that in"ol"e audit sampling!

References to !P!Professional Standards

321 hen reerring to the proessional standards& this guide cites the applicable sections o the codiicationand not the numbered statements& as appropriate! For e+ample& SAS @o! ?> is reerred to as A# section?$%!

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*a#ter 1

Characteristics of Audit Sampling

1301 This chapter deines audit sampling and illustrates the dierence between procedures that in"ol"e auditsampling and those that do not in"ol"e audit sampling!

1302 An auditor oten does not rely solely on the results o a single procedure to reach a conclusion on anassertion relating to an account balance or a class o transactions& or the operating eecti"eness ocontrols! 2ather& audit conclusions are usually based on e"idence obtained rom se"eral sources as aresult o applying a number o procedures! The combined e"idence obtained rom the "arious proceduresis considered in reaching an opinion about whether the inancial statements are ree o materialmisstatement!

1304 The assertions described in A# section ?-&Audit Evidence'AICPA&Professional Standards& "ol! 1(&should be considered when planning audit sampling 'or e+ample& what could go wrong or the correctpopulation or sampling( as well as other audit procedures 'or e+ample& in the risk assessment

standards& Statement on Auditing Standards KSASL@os! 1%111(! In this guide& the guidance relating tobalances and classes o transactions implies the consideration o rele"ant assertions or the particularaccount or class o transactions!

!udit "a#ling Defined

1305 According to A# section ?$%&Audit Sampling 'AICPA&Professional Standards& "ol! 1(& audit samplingis Hthe application o an audit procedure to less than 1%% percent o the items within an account balanceor class o transactions or the purpose o e"aluating some characteristic o the balance or class!H Inother words& audit sampling pro"ides the auditor an appropriate basis on which to conclude on acharacteristic o a population based on e+amining e"idence regarding that characteristic rom a sampleo the population! Procedures not in"ol"ing audit sampling are not the sub4ect o A# section ?$%or thisguide!

Procedures %*at May Not n.ol.e !udit "a#ling

1306 Some auditing procedures by their nature may not in"ol"e audit sampling 'unless the procedures arespeciically designed as audit samples(! In general& procedures that may not in"ol"e audit sampling maybe grouped into the categories as discussed in the ollowing paragraphs!

nquiry and -+ser.ation

1307 Auditors ask many /uestions during the course o their audits! Auditors also obser"e the operations o

their clients0 businesses and their controls! *oth in/uiry and obser"ation pro"ide auditors with audite"idence! In/uiry and obser"ation commonly are used in the ollowing procedures:

Inter"iewing management and employees

btaining an understanding o the internal controls

bser"ing the beha"ior o personnel and the unctioning o business operations

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bser"ing cashDhandling acti"ities

bser"ing the operation o controls

Perorming walkthrough proceduresn 1

bser"ing the e+istence o land and buildings

btaining written representations rom management

In some cases these procedures could be designed as sampling procedures& such as designing multipleobser"ations o physical security controls!

!nalytical Procedures

130 According to A# section ?->&Analytical Procedures'AICPA&Professional Standards& "ol! 1(& suchprocedures Hconsist o e"aluations o inancial inormation made by a study o plausible relationshipsamong both inancial and noninancial data!H In perorming analytical procedures& the auditor comparesrecorded amounts or ratios de"eloped rom recorded amounts with e+pectations de"eloped by theauditor!

1308 These procedures are not considered audit sampling because they do not result in pro4ecting the result othe e+amination o a portion o the population to the total population! For similar reasons& scanningaccounting records or unusual items is not audit sampling!

Procedures !##lied to E.ery te in a Po#ulation

1309 In some circumstances& an auditor might decide to e+amine e"ery item constituting an account balanceor a class o transactions! *ecause the auditor is e+amining the entire population& rather than only aportion& to reach a conclusion about the balance or class taken as a whole& 1%% percent e+amination isnot a procedure that in"ol"es audit sampling! In some cases& the use o computer assisted audit

techni/ues may allow the application o a test to all items in the population 'or e+ample& tests o clericalaccuracy and comparison o in"oices and shipments( and& thus& audit sampling does not apply!

1310 A population or audit sampling purposes does not necessarily need to be an entire account balance orclass o transactions! In some circumstances& an auditor might e+amine all the items that constitute anaccount balance or class o transactions that e+ceed a gi"en amount 'or e+ample& more than M-$&%%%( orthat ha"e an unusual characteristic 'or e+ample& re/uire dual signature appro"al or payment(! Theauditor might either '1( apply other auditing procedures 'or e+ample& targeted analytical proceduresperormed at a detailed le"el such as at the lineDitem or location le"el( to items that do not e+ceed thatgi"en amount or possess the unusual characteristic or '-( apply no detailed auditing procedures to thembecause there is an acceptably low risk o material misstatement e+isting in the remaining items! Again&

the auditor is not using audit sampling when applying procedures in this manner! 2ather& the auditor hassegregated the account or class o transactions into two groups! ne group is tested 1%% percent3 theother group is tested by analytical or other auditing procedures or remains untested based on the lowle"el o risk o material misstatement in the portion not sub4ected to 1%% percent testing!

fn 1 6a$9throughs may a$so inc$ude an examination of eidence and re"erformance, de"ending on theirdesign and "erformance

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1311 For the same reason& cuto tests oten do not in"ol"e audit sampling applications! In perorming cutotests& auditors oten e+amine all signiicant transactions or a suicient period surrounding the cutodate and& as a result& such tests oten do not in"ol"e the application o audit sampling! 5owe"er& onecould design cuto tests by using audit sampling when the "olume o transactions during the period ointerest is high!

"oe %ests of ontrols May Not n.ol.e !udit "a#ling

1312 Auditors choose rom a "ariety o methods& including in/uiry& obser"ation& inspection o documentarye"idence& and reperormance& in e"aluating the implementation o controls! hile many procedureswhere documentary e"idence is e+amined or where the auditor reperorms a control in"ol"e auditsampling& many o the other methods may not in"ol"e sampling! Paragraph !?-o A# section ?$%speciies certain types o tests o controls that& because o the nature o the procedures used& do notnormally in"ol"e audit sampling! It states the ollowing:

Sampling concepts also do not apply or some tests o controls! Tests o automated applicationcontrols are generally tested only once or a ew times when eecti"e 'IT( general controls arepresent& and thus do not rely on the concepts o risk and tolerable de"iation as applied in othersampling procedures! Sampling generally is not applicable to analyses o controls or

determining the appropriate segregation o duties or other analyses that do not e+aminedocumentary e"idence o perormance! In addition& sampling may not apply to tests o certaindocumented controls or to analyses o the eecti"eness o security and access controls! Samplingalso may not apply to some tests directed toward obtaining audit e"idence about the operation othe control en"ironment or the accounting system& or e+ample& in/uiry or obser"ation oe+planation o "ariances rom budgets when the auditor does not desire to estimate the rate ode"iation rom the prescribed control& or when e+amining the actions o those charged withgo"ernance or assessing their eecti"eness!

1314 In addition& when the perormance o a control is not documented or e"idenced& such as the perormanceo an automated control where no record o the control perormance is retained& the concept o samplingsuch a control in the con"entional sense may not be meaningul! For e+ample& such a test may beperormed contemporaneously with its occurrence or tested with a test dec(o data with knownproperties that are designed to test the automated controls& and the e+tent o testing and the periodsincluded in the test are determined based on the /uality o the related IT general controls! Such testsoten do not in"ol"e audit sampling!

%ests of ontrols *en Etra#olation is Not ntended

1315 bser"ation o a client0s physical in"entory count acti"ities is a test usually perormed primarily throughthe auditor0s obser"ation o the operation o controls o"er in"entory mo"ement& counting procedures&and other acti"ities used by the client to control the count o the in"entory! The auditor0s test counts oclient counts may not be or e+trapolating results& but may be or determining the ade/uacy and

accuracy o the count procedures! @e"ertheless& the auditor considers the de"iations and misstatementsound! As such& when discrepancies in the count are identiied& an assessment is made o the reasons orthe discrepancy& and a recount may be indicated or some or all o the in"entory items by a count teamor in a location until the auditor is satisied that the count is accurate! #sing this procedure during thecount may not in"ol"e the application o audit sampling! ,"en when e+trapolation is not intended& theauditor still considers issues such as the e+tent o procedures perormed and the possibility o bias in theselection o sample items!

Procedures %*at Do Not E.aluate *aracteristics

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1316 Procedures rom which the auditor does not intend to e+tend the resulting conclusion to the remainingitems in the account balance or class o transactions do not re/uire audit sampling! The auditor does notuse audit sampling when he or she applies an auditing procedure to less than 1%% percent o the items inan account balance or class o transactions as something other than e"aluating a trait o the entirebalance or class! For e+ample& an auditor might trace se"eral transactions through an entity0s accountingsystem to obtain an understanding o the design o the entity0s internal control! In such cases& theauditor0s intent is to gain a general understanding o the accounting system or other rele"ant parts o theinternal control& rather than to e"aluate a characteristic o all transactions processed! As a result& the

auditor may not be using audit sampling!

1317 ccasionally& auditors perorm such procedures as checking arithmetical calculations or tracing 4ournalentries into ledger accounts on less than a 1%% percent 'test( basis! hen such procedures are applied toless than 1%% percent o the arithmetical calculations or ledger postings that aect the inancialstatements& audit sampling may not be in"ol"ed i the procedure is not a test to e"aluate a characteristico an account balance or class o transactions& but is intended to pro"ide only limited e"idence thatsupplements the auditor0s other audit e"idence regarding a inancial statement assertion or is designed topro"ide e"idence only about the items tested!

:ntested /alances

131 The auditor might decide that he or she need not apply any detailed audit procedures to an accountbalance or class o transactions i the auditor belie"es that there is an acceptably low risk o materialmisstatement e+isting in the account or class! Audit sampling is not rele"ant to untested balances!

%ests of !utoated % ontrols

1318 IT systems process transactions and other inormation consistently unless the systems or programs 'orrelated tables& parameters& or similar items that aect how the programs process the data( are changed!Thereore& when testing the operations o automated controls& the auditor may adopt the strategy otesting one or a ew o each type o transaction at a point in time and test general controls 'or e+ample&controls o"er implementation and changes to systems and programs& access and security& and computer

operations( to pro"ide e"idence that the automated controls ha"e been operating eecti"ely o"er theaudit period! hen IT general controls are tested and determined to be eecti"e& a single test o anautomated control may be suicient to place reliance on the automated control during the period o theaudit e+amination!

1319 *ecause distinguishing between audit procedures in"ol"ing audit sampling and procedures not in"ol"ingaudit sampling might be diicult& the ne+t section o this chapter discusses the distinction betweenprocedures that do and do not in"ol"e audit sampling!

"a#ling and Nonsa#ling !udit Procedures Distinguis*ed

1320 An account balance or class o transactions may be e+amined by a combination o se"eral auditprocedures! These procedures might in"ol"e audit sampling! An illustration can help clariy thedistinction between procedures that do or do not in"ol"e audit sampling! An auditor might be e+aminingi+ed asset additions o M- million! These might include $ additions totaling M1! million related to aplant e+pansion program and %% smaller additions constituting the remaining M%%&%%% recordedamount! The auditor might decide that the $ large additions are indi"idually signiicant and need to bee+amined 1%% percent and might then consider whether to apply audit sampling to the remaining %%items! This decision is based on the auditor0s determination o tolerable misstatement and the assessmento the risks o material misstatement in the M%%&%%%& not on the percentage o the M- million

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indi"idually e+amined 'in this case& 9% percent(! Se"eral possible approaches are discussed in theollowing ? situations!

1321 "ituation 13The auditor has perormed other procedures related to i+edDasset additions& including theollowing:

2isk assessment procedures

The consideration o related controls& which supported a low le"el o assessed control risk A re"iew o the entries in the i+ed asset ledger& which re"ealed no unusual items

An analytical procedure& which suggested the M%%&%%% recorded amount& does not contain a

material misstatement

1322 In this situation& the auditor might decide that suicient audit e"idence regarding i+edDasset additionshas been obtained without applying audit sampling to the remaining indi"idually insigniicant items!Thereore& the concept o audit sampling would not apply unless a sample is selected!

1324 "ituation 23The auditor has not perormed any procedures related to the accuracy o the remaining %%

items& but& nonetheless& decides that any misstatement in those items would be immaterial! The physicale+istence o the assets was "eriied by other procedures! The only remaining e+posure is assessed to bethe risks o material misstatement in the accuracy o the recorded amounts& which& based on the simplecash based purchases and controls o"er disbursements& the auditor has assessed to be low! Thereore& theconcept o audit sampling would not apply unless a sample is selected!

1325 "ituation 43The auditor has perormed some or all o the same procedures as in situation 1& butconcludes that some additional audit e"idence about the %% indi"idually insigniicant additions will beobtained through audit sampling! In this case& the inormation in A# section ?$%and this guide assiststhe auditor in planning& perorming& and e"aluating the audit sampling application!

%erinology :sed in %*is $uide

1326 The terms used in this guide are consistent with those in A# section ?$%! Some auditors may be amiliarwith other terms& includingprecision& confidence level& relia$ility& alpha ris(& and $eta ris(& which areoten used in discussions o statistical sampling! A# section ?$%does not use those terms because A#section ?$%applies to both statistical and nonstatistical sampling and& thereore& nontechnical terms aremore appropriate! Also& certain statistical terms& such as relia$ilityandprecision& ha"e been used withdierent meanings! Auditors may use "arious terms in their practice& as long as they understand therelationship o those terms to the concepts in A# section ?$%and this guide! Terms used in this guideare deined in the glossary ound in appendi+ F! Some o those relationships ollow!

Relia+ility or onfidence ;e.el

1327 A# section ?$%and A# section ?1-&Audit Ris( and "ateriality in Conducting an Audit 'AICPA&Professional Standards5"ol! 1(& use the concept o ris(instead o reliability 'or conidence le"el(!5owe"er& statistical sampling literature oten uses the terms relia$ilityand confidence level! In addition&other auditing standards use the term assurance& a concept related to conidence or reliability!Additionally& some auditors e+press the sampling guidance in their audit approaches in terms oassuranceand not ris(! 2isk is the complement o reliability or conidence le"el! For e+ample& i anauditor accepts a 1% percent sampling risk& the reliability or conidence le"el is speciied as >% percent!

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The term ris(is more consistent with the auditing ramework described in the SASs and the audit riskmodel illustration in the appendi+to A# section ?$%! Audit proessionals are ad"ised to be amiliar withthe "arious terms that are rele"ant to audit sampling!

!l#*a and /eta Ris&s

132 A# section ?$%uses the terms ris( of assessing control ris( too low'when sampling or tests ocontrols( and ris( of incorrect acceptance'or substanti"e testing( instead o $eta ris(! A# section ?$%

also uses the terms ris( of assessing control ris( too highand ris( of incorrect re6ectioninstead o alpharis(! *oth alpha ris(and $eta ris('sometimes reerred to as risks o type I and type II errors( arestatistical terms that ha"e not been consistently applied in the auditing literature!

Precision

1328 Precision might be used both as a planning concept and an e"aluation concept or audit sampling! 2atherthan the termprecision& A# section ?$%uses the concept oplanned allowance for sampling ris(inplanning and the concept o allowance for sampling ris(in the e"aluation stage!

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*a#ter 2

The Audit Sampling Process

2301 Audit sampling may be applied using statistical or nonstatistical approaches! This chapter pro"ideso"er"iews o the audit sampling process and the "arious approaches to audit sampling!

Pur#ose and Nature of !udit "a#ling

2302 Audit sampling is the application o an audit procedure to less than 1%% percent o the items within anaccount balance or class o transactions or the purpose o e"aluating some characteristic o the balanceor class! Auditors re/uently use audit sampling procedures to obtain audit e"idence! Auditors may useeither nonstatistical or statistical sampling! The items selected or e+amination rom the account balanceor class o transactions is reerred to as thesample! All the items constituting the account balance orclass o transactions o interest are thepopulation!


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230 A# section ?$%&Audit Sampling'AICPA&Professional Standards& "ol! 1(& establishes standards or auditsampling that apply to both statistical and nonstatistical sampling! These standards include theollowing:

here the item selected or the supporting documentation is not a"ailable to the auditor& the

auditor should generally treat the item as a de"iation or misstatement! This presumption may beo"ercome by appropriate e"idence!

The auditor should pro4ect the results o the sample to the population rom which the sample wasselected& and not conclude solely on the speciic sample de"iations or known misstatements'e"en i corrected by the client(!

The auditor should compare the pro4ected de"iation rate or misstatement to the tolerable rate or

tolerable misstatement or the account balance or class o transactions and should appropriatelyconsider sampling risk!

The auditor should consider the /ualitati"e aspects o the de"iations or misstatements in

assessing whether the e"idence may suggest other issues that might alter the implied se"erity othe assessment or need to be addressed in the audit! For e+ample& a de"iation might pro"ide

e"idence o a raud or a serious control issue!

%y#es of !udit %ests

2308 A# section ?$%describes three types o audit tests: tests o controls& substanti"e tests& and dualDpurposetests! The type o test to be perormed is important to an understanding o audit sampling!

%ests of ontrols

2309 Tests o controls pro"ide e"idence about the eecti"eness o the design& implementation& or operation oa control in pre"enting or detecting material misstatements in a inancial statement assertion! In tests ocontrols& the auditor is generally concerned about the rates o any de"iation rom a prescribed control

procedure! Tests o controls are necessary when the audit strategy is to rely on the eecti"eness o thecontrol! As discussed in the section HSome Tests o Controls 7ay @ot In"ol"e Audit SamplingH inchapter 1& some controls cannot be tested using audit sampling!

2310 Controls generally are e+pected to be applied in the same way to all transactions sub4ect to that policy orprocedure& regardless o the magnitude o the transaction! Thereore& i the auditor is using auditsampling& it is generally not appropriate to select only high dollar amounts in tests o controls& unless thecontrol is applied only to high dollar transactions! Sample items should be selected in such a way thatthe sample can be e+pected to be representati"e o the population& so that the auditor will be able to drawappropriate conclusions about the population!

"u+stanti.e %ests

2311 Substanti"e tests are audit procedures designed to obtain e"idence about the "alidity and propriety o theaccounting treatment o transactions and balances or to detect misstatements! n 1 Substanti"e tests dier

fn 1 Substantie tests may a$so reea$ de.ciencies in contro$s

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rom tests o controls in that the auditor is interested primarily in a conclusion about dollars! Substanti"etests include '1( tests o details o transactions and balances and '-( analytical procedures!

DualPur#ose %ests

2312 In some circumstances& an auditor might design a test that has a dual purpose: testing the eecti"enesso a control and testing whether a recorded balance or class o transactions is materially misstated! Inusing dualDpurpose testing& an auditor may ha"e begun substanti"e procedures beore determining

whether the test o controls supports the auditor0s assessed le"el o control risk! Thereore& an auditorplanning to use a dualDpurpose sample will ha"e made a preliminary 4udgment that there is an acceptablylow risk that the rate o de"iations rom the prescribed control in the population e+ceeds the ma+imumrate o de"iations the auditor is willing to accept without altering the planned assessed le"el o controlrisk! For e+ample& an auditor designing a test o the controls or entries in the "oucher register mightplan a related substanti"e test at a risk le"el that anticipates a particular assessed le"el o control risk!The assessed le"el o control risk would be dependent on the results o the test o the controls!

2314 Assuming the same sample selection method is appropriate or both purposes& the si)e o a sampledesigned or a dualDpurpose test will generally be the larger o the samples that would otherwise ha"ebeen designed or the two separate purposes! Generally& separate procedures 'or e+ample& tests o

controls and substanti"e procedures( are applied to the common sample o transactions to draw both thecontrol and substanti"e conclusions! The act that a transaction was correctly processed substanti"elydoes not pro"ide e"idence that controls designed to achie"e those ob4ecti"es were in place and operatingeecti"ely! 5owe"er& in some circumstances the perormance o a single test may pro"ide bothsubstanti"e and controls e"idence such as when reperorming a manual control that is designed to ensureclerical accuracy! The auditor ordinarily should e"aluate de"iations rom pertinent controls andmonetary misstatements separately& using the risk le"el applicable or the respecti"e purposes whene"aluating dualDpurpose samples! The guidance pro"ided in chapters ?or e"aluating the results otests o controls and substanti"e tests is also applicable to the e"aluation o dualDpurpose samples!

2315 hen control and substanti"e sample si)es are "ery dierent due to the sampling parameters chosen& theauditor may consider whether the sample si)es can be made more similar by changing the audit strategyand balancing the reliance on controls "ersus the reliance on substanti"e procedures used in thissituation! hen the auditor belie"es that the use o the parameters resulting in "ery dierent samplesi)es results in the best audit strategy& a dualDpurpose test 'common items identiied or the two samples(can be accomplished by either testing both purposes with the larger sample or by irst selecting thelarger sample and then selecting an unbiased& representati"e selection o items rom the larger sample touse or the smaller sample! For e+ample& the smaller sample could be selected by taking a random&hapha)ard& or systematic 'e"ery nth item( sample rom the larger sample! The subsample is generally notselected in such a way that the resultant sample can be e+pected to only represent a part o a year or becomprised o only "ery large items! This could happen& or e+ample& i only the irst items in asystematically selected larger sample or only the largest items are selected or the smaller subsample!

Ris&

2316 The 4ustiication or reasonable assurance 'in other words& a high& but not absolute le"el o assurance(rather than certainty regarding the reliability o inancial inormation is based on the third standard oieldwork: HThe auditor must obtain suicient appropriate audit e"idence !!! to aord a reasonable basisor an opinion !!!H According to A# section ?$%& the 4ustiication or accepting some uncertainty arisesrom the relationship between the cost and time re/uired to e+amine all the data and the ad"erseconse/uences o possible erroneous decisions based on the conclusions resulting rom e+amining only a

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sample o such data! The uncertainty inherent in perorming auditing procedures is audit risk! At theaccount balance& class o transactions& rele"ant assertion& or disclosure le"el& audit risk consists o 'a( therisks o material misstatement 'consisting o inherent risk and control risk( and '$( detection risk!Paragraph !-?o A# section ?1-&Audit Ris( and "ateriality in Conducting an Audit'AICPA&Professional Standards& "ol! 1(& states that auditors should assess the risk o material misstatement at therele"ant assertion le"el as a basis or urther audit procedures 'tests o controls or substanti"eprocedures(! It is not acceptable to simply deem risk to be Bat the ma+imum!E This assessment may be in/ualitati"e terms such as high& medium& and low& or in /uantitati"e terms such as percentages! Audit risk

includes uncertainties due to both sampling and other actors! These are sampling risk and nonsamplingrisk& respecti"ely!

"a#ling Ris&

2317 Sampling risk is the risk that the auditor0s conclusion based on a sample might be dierent rom theconclusion he or she would reach i the test were applied in the same way to the entire population!Sampling risk arises rom the possibility that a particular sample might contain proportionately more orless monetary misstatement or de"iation rom prescribed controls than e+ist in the account balance orclass o transactions as a whole! Sampling risk includes the risk o assessing control risk too low and therisk o assessing control risk too high 'see discussions inchapters 1and ?( as well as the risk o incorrect

acceptance and the risk o incorrect re4ection 'see discussions inchapters 1and (!

Nonsa#ling Ris&

231 @onsampling risk includes all the aspects o audit risk that are not due to sampling! An auditor mightapply a procedure to all transactions or balances and still ail to detect a material misstatement or theineecti"eness o a control! @onsampling risk includes the possibility o using audit procedures that arenot appropriate to achie"e the speciic ob4ecti"e! For e+ample& the auditor cannot rely on conirmation orecorded recei"ables to re"eal whether there are unrecorded recei"ables! @onsampling risk also arisesbecause the auditor might ail to recogni)e de"iations or misstatements included in documents that he orshe e+amines! In that situation& the audit procedure would be ineecti"e e"en i all items in thepopulation were e+amined!

2318 There is no common method that allows the auditor to measure nonsampling risk! This risk can&howe"er& be reduced to a negligible le"el by ade/uate planning and super"ision o audit work 'see A#section ?11&Planning and SupervisionKAICPA&Professional Standards& "ol! 1L( and by implementingan eecti"e /uality control system 'see Statement o Nuality Control Standards @o! & A )irm%s Systemof 9uality ControlsKAICPA&Professional Standards& "ol! -& NC sec! 1%L& and A# section 11& !heRelationship of Generally Accepted Auditing Standards to 9uality Control StandardsKAICPA&Professional Standards& "ol! 1L(! Also& the auditor ordinarily considers nonsampling risk when designinghis or her audit procedures! I there is a choiceo audit procedures& both o which pro"ide the same le"elo assurance at appro+imately the same cost& the auditor ordinarily uses the procedure with the lowernonsampling risk! The sub4ect o controlling nonsampling risk is beyond the scope o this guide3

howe"er& the HGeneral Implementation ConsiderationsH section o this chapter might be helpul to theauditor in controlling some aspects o nonsampling risk!

Nonstatistical and "tatistical "a#ling

2319 According to Paragraph !%1o A# section ?$%& HAudit sampling is the application o an audit procedureto less than 1%% percent o the items within an account balance or class o transactions or the purpose oe"aluating some characteristic o the balance or class!H All audit sampling in"ol"es 4udgment in planningand perorming the sampling procedure and e"aluating the results o the sample! The audit procedures

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perormed in e+amining the selected items in a sample generally do not depend on the samplingapproach used!

2320 nce a decision has been made to use audit sampling& the auditor may choose to use either statistical ornonstatistical sampling! This choice is oten a costDbeneit consideration! Statistical sampling helps theauditor '1( design an eicient sample& '-( measure the suiciency o the audit e"idence obtained& and'?( /uantitati"ely e"aluate the sample results! I audit sampling is used& some sampling risk is alwayspresent! Statistical sampling uses the laws o probability to measure sampling risk! Any sampling

procedure that does not permit the numerical measurement o the sampling risk is a nonstatisticalsampling procedure! ,"en though the auditor rigorously selects a random sample& the samplingprocedure is a nonstatistical application i the auditor does not make a statistical e"aluation o thesample results!

2321 A properly designed nonstatistical sampling application that considers the same actors that would beconsidered in a properly designed statistical sample can pro"ide results that are as eecti"e as thoserom a properly designed statistical sampling application3 howe"er& there is one important dierence:statistical sampling e+plicitly measures the sampling risk associated with the sampling procedure bypro"iding an e+plicit le"el o sampling risk 'also sometimes e+pressed as its complementOconidenceor reliability( and allowance or sampling risk 'that is& precision( about the sample result!

2322 Statistical sampling might in"ol"e dierent training because it re/uires more speciali)ed e+pertise! Theuse o audit sampling sotware can reduce the costs o applying statistical sampling! Such sotware iscommonly used to select random& systematic& or stratiied samples whether or not the sample isstatistically e"aluated!

2324 5owe"er& it may not be eicient to use sampling sotware when the population is not already inelectronic ormat! For e+ample& i the indi"idual balances constituting an account balance to be testedare manual records and not maintained in an organi)ed pattern& it might not be eicient or an auditor toselect items in a way that would satisy the re/uirements o a properly designed statistical sample! Insuch a circumstance& that auditor will still need to obtain e"idence that the population is complete andthat determination may pro"ide a suggested approach or sample selection!

2325 Another e+ample o when it may be diicult to apply statistical sampling is when the auditor plans touse audit sampling to test a physical in"entory count and the client does not maintain perpetualin"entory records! Although the auditor can select a sample so that the sample can be e+pected to berepresentati"e o the population 'selected without bias(& it might be diicult to satisy certainre/uirements or a statistical sample i priced in"entory listings or detailed prenumbered /uantity listingscannot be used in the selection process! 'See the section H.etermining the 7ethod o Selecting theSampleH in chapter ?!( *ecause either nonstatistical or statistical sampling can pro"ide suicient audite"idence& the auditor chooses between them ater considering their relati"e eiciency and eecti"enessin the circumstances!

2326 Statistical sampling pro"ides the auditor with a tool that assists in applying e+perience and proessional4udgment to e+plicitly control sampling risk! *ecause this risk is present in both nonstatistical andstatistical sampling plans& there is no conceptual reason to e+pect a nonstatistical sample to pro"idedierent assurance rom a wellDdesigned statistical sample o comparable si)e or the same samplingprocedure!n - A# section ?$%states the sample si)e o a nonstatistical sample would ordinarily be

fn 2 Cha"ters %:+"roide seera$ -uantitatie i$$ustrations of sam"$e si7es based on statistica$ theory ;heymay be he$"fu$ to an auditor a""$ying "rofessiona$ udgment and ex"erience in considering the e


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comparable to the sample si)e resulting rom an eicient and eecti"ely designed statistical sample&'considering the same sampling parameters(3 howe"er& neither A# section ?$%nor this guide re/uiresthe auditor using nonstatistical sampling to compute a sample si)e using statistical theory whendetermining the sample si)e or the nonstatistical sampling application!

2327 ith nonstatistical sampling the auditor generally relies on proessional 4udgment& in combination withnonstatistical sampling guidance and knowledge underlying statistical concepts& to design and e"aluateaudit samples! A risk associated with nonstatistical sampling is that the auditor0s 4udgment may di"erge

signiicantly rom sampling concepts resulting in testing that is not as eecti"e as statistical sampling!n ?

Some auditors address this risk by pro"iding audit sta with nonstatistical sampling guidance andprocedures that are easy to use& encourage consistency in sampling applications across engagementteams& and are grounded in sampling theory!

Planning t*e !udit "a#ling Procedures

232 hen an auditor plans any audit sampling application& the irst consideration is the speciic accountbalance or class o transactions and the circumstances in which the procedure is to be applied! Theauditor generally identiies items or groups o items that are o indi"idual signiicance to an auditob4ecti"e or assertion! For e+ample& an auditor planning to use audit sampling as part o a substanti"e

test o an in"entory balance& including obser"ing the physical in"entory& would generally identiy itemsthat ha"e signiicantly large balances or that might ha"e other special characteristics 'such as highersusceptibility to obsolescence or damage(! In testing accounts recei"able& an auditor might identiyaccounts with large balances& unusual balances& higher risks& or unusual patterns o acti"ity asindi"idually signiicant items!

2328 The auditor considers all special knowledge about the items constituting the balance or class beoredesigning audit sampling procedures! For e+ample& the auditor might identiy -% products included inthe in"entory that make up -$ percent o the account balance! In addition& he or she might ha"eidentiied se"eral items& constituting an additional 1% percent o the balance that are especiallysusceptible to damage! The auditor might decide that those items& comprising ?$ percent o the balance

should be e+amined 1%% percent and thereore need not be included in the in"entory sub4ect to auditsampling!

2329 Ater the auditor has applied any special knowledge about the account balance or class o transactions indesigning an appropriate procedure& oten a group o items remains that needs to be e"aluated to achie"ethe audit ob4ecti"e! Thus in the preceding e+ample& the auditor might apply audit sampling& eithernonstatistical or statistical& to the remaining $ percent o the account balance! The considerations 4ustdescribed would not be inluenced by the auditor0s intentions to use either nonstatistical or statisticalsampling on the remaining items!

2340 The ollowing /uestions apply to planning any audit sampling procedure& whether it is nonstatistical orstatistical:

hat is the test ob4ecti"e and rele"ant assertion 'hat does the auditor want to learn or be able

to iner about the population hat assertions are being tested(

fn %;here is a$so a "otentia$ ris9 that auditors may misa""$y statistica$ conce"ts

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hat is the auditor looking or in the sample '5ow is a misstatement or de"iation deined(

hat is to be sampled '5ow is the population deined(

5ow is the population to be sampled 'hat is the sampling plan& what is the sampling unit& and

what is the method o selection(

5ow much is to be sampled 'hat is the sample si)e(

hat do the results mean '5ow are the sample results e"aluated and interpreted(

2341 As discussed in chapter 1& audit sampling may not always be eicient or appropriate! For e+ample& theauditor might decide that it is more eicient to test an account balance or class o transactions byapplying only analytical procedures 'assuming the assertions in the account ha"e not been identiied as asigniicant risk& analytical procedures should be supplemented with other procedures& such assubstanti"e tests o details& control tests& or both(! In some cases& legal or regulatory re/uirements mightnecessitate 1%% percent e+amination! In other situations& the auditor might decide that some items shouldbe e+amined 1%% percent because he or she does not belie"e acceptance o sampling risk is 4ustiied& orhe or she belie"es a 1%% percent e+amination is more eicient in the circumstances! The auditor usesproessional 4udgment to determine whether audit sampling is appropriate!

%y#es of "tatistical "a#ling Plans

!ttri+utes "a#ling

2342 Attributes sampling is used to reach a conclusion about a population in terms o a rate o occurrence! Itsmost common use in auditing is to test the rate o de"iation rom a prescribed control to support theauditor0s assessed le"el o control risk! In attributes sampling&n each occurrence o& or de"iation rom aprescribed control& is gi"en e/ual weight in the sample e"aluation& regardless o the dollar amount o thetransactions! For testing the operating eecti"eness o controls that are e+pected to operate with thesame le"el o consistency& regardless o the si)e o transactions& attributes sampling is generally the most

eecti"e method or applying audit sampling to these tests!

2344 Some e+amples o tests o controls in which attributes sampling is typically used include test o controlso"er the ollowing:

Qoucher processing

*illing systems

Payroll and related personnelDpolicy systems

In general& manual control acti"ities are generally susceptible to attributes sampling!

2345 In addition to tests o controls& attributes sampling may be used as substanti"e procedures& such as testsor underDrecorded shipments or understated demand deposit accounts& when the ob4ecti"e is todetermine whether proper re"enue recognition or cutDo occurred& and no misstatements or de"iations

fn / s used in this guide, attributes sam"$ing refers to unstrati.ed attributes sam"$ing Strati.ed attributessam"$ing is not discussed in this guide

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are anticipated3 howe"er& i the audit ob4ecti"e is to obtain e"idence directly about a monetary amountbeing e+amined& such that the sample result may be pro4ected in monetary terms& the auditor generallydesigns a "ariables sampling application!

=aria+les "a#ling

2346 Qariables sampling is used i the auditor desires to reach a conclusion about a population in terms o adollar amount! Qariables sampling is generally used to answer either o these /uestions:

'1( 5ow much 'generally described as dollarD"alue estimation(

'-( Is the account materially misstated 'generally described as hypothesis testing(!

*oth monetary unit sampling '7#S(& discussed in chapter & and classical "ariables sampling& discussedin chapter & are e+amples o "ariables sampling!

2347 The principal use o "ariables sampling in auditing is to substanti"ely test details to determine thereasonableness o recorded amounts3 howe"er& it might also be used i the auditor chooses to estimatethe dollar amount o transactions containing de"iations rom a control 'see ootnote -o chapter &H7onetary #nit SamplingH(& such as when assessing the se"erity o a deiciency in controls!

234 Some e+amples o tests or which "ariables sampling is typically used include tests o the ollowing:

The e+istence o "alid recei"ables

The accuracy o in"entory /uantities and amounts

The occurrence o recorded payroll e+pense

The e+istence o i+edDasset additions

2348 Attributes sampling is generally used to reach a conclusion about a population in terms o a rate ooccurrence3 "ariables sampling is generally used to reach conclusions about a population in terms o adollar amount! 7#S is based on attributes sampling theory& but is applied as a "ariables sample and isable to e+press conclusions in monetary terms!

Relating /alance "*eet and ncoe "tateent "a#ling

2349 Accounts in the balance sheet and income statement are oten related! Auditors& in obtaining directassurance with respect to certain balance sheet accounts 'or e+ample& through conirmations o accountsrecei"ables and perormance o cash reconciliations(& oten also obtain some assurance through suchtesting on some assertions in the related income statement accounts!n $ For e+ample& auditors whoobtain direct assurance rom tests regarding the e+istence o accounts recei"able and completeness and

occurrence o cash collections& oten also obtain some assurance rom these balance sheet tests regardingthe occurrence assertion in the re"enue accounts! The nature and e+tent o the tests perormed on related

fn 5 Simi$ar$y, direct tests of the income statement accounts often "roide some eidence regarding there$ated ba$ance sheet accounts #eaders may a$so .nd further discussion of the use of assertions inauditing both ba$ance and transaction data in the =C! udit >uide Assessing and Responding to AuditRisk in a Financial Statement Audit (See "aragra"hs 22+:%%and tab$e 2%in that guide

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balance sheet accounts 'or e+ample& recei"ables(& in addition to any other e"idence obtained regardingthe rele"ant assertions in related income statement accounts& such as the re"enues account& may beconsidered when determining whether additional audit e"idence regarding one or more assertions needsto be obtained rom direct tests o income statement accounts such as re"enues!

2350 In some cases& the audit procedures perormed on balance sheet accounts may not suiciently addressthe rele"ant assertions and risks in related income statement accounts! For e+ample& suppose anidentiied re"enue risk was that the customcontractual terms in machine and maintenance sales

agreements could re/uire a dierent generally accepted accounting principles 'GAAP( treatment 'ore+ample& a portion o the re"enue should be deerred( that might not be relected properly in theaccounting records! I the procedures perormed on the recei"ables and cash receipts did not ade/uatelyaddress this risk& then additional tests in"ol"ing a sample o re"enue transactions may be needed toreduce the risk o a material misstatement in re"enues related to reali)ation to low! In other situations& allre"enue transactions may ha"e similar contractual terms that result in a clear and consistent GAAPtreatment& and such risk might not be present! hen determining the nature& timing& and e+tent oprocedures perormed on the income statement accounts& the auditor would normally consider the risksand e"idence obtained or planned to be obtained rom other audit procedures related to the assertionsrele"ant to the income statement account!

$eneral #leentation onsiderations

2351 Consideration o the ollowing actors might be helpul in implementing audit sampling procedures!

ontinuing Professional Education

2352 Audit sampling and the concepts o statistical sampling are topics that ha"e appeared in the CPAe+amination or decades! 7any college auditing courses and auditing te+tbooks co"er the principles osampling as applied in auditing! 7any business degree programs also re/uire a course on the applicationo probability and statistics to business data!

2354 The auditor may better understand the application o the concepts o audit sampling by combining li"e

instruction with this guide or a te+tbook! Some auditors attend continuing proessional educational'CP,( programs de"eloped by their irms& whereas others attend such programs de"eloped by theAICPA& a state society o CPAs& a college or uni"ersity& or another CPA irm!

2355 2ele"ant CP, programs are normally directed to appropriate proessional personnel! For e+ample& airm might decide to train all audit personnel to select samples& determine sample si)es& and e"aluatesample results or attributes sampling procedures! 7ore e+perienced audit personnel might be trained todesign and e"aluate "ariables sampling applications!

2356 *ecause o the computational aspects o statistical sampling and the a"ailability o computer programsto design and perorm a sample& courses in applying statistical sampling oten include training in the use

o sotware and practice aids and ocus on using sotware or tables or determining sample si)e&selecting the sample& and drawing a statistical conclusion rom the sample results!

"a#ling $uidelines

2357 Some auditors achie"e greater consistency in sampling applications throughout their practices byestablishing sampling guidelines& such as guidelines about acceptable risk le"els& minimum samplesi)es& and appropriate le"els o tolerable misstatement!

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:se of "#ecialists

235 *ecause statistical sampling concepts are well established as a sub4ect area o desired competence orcertiication as a CPA& auditors ordinarily will ha"e the ability to apply basic statistical concepts andprocedures to audit situations when the occasion arises! Some auditors designate selected indi"idualswithin their irm as audit sampling specialists!n These specialists may consult with other auditpersonnel on the design and e+ecution o planned sampling procedures! In addition& some specialiststeach CP, courses on audit sampling! Some irms train all audit personnel in the essential concepts o

designing and e+ecuting sampling procedures& thus minimi)ing the need or specialist assistance on mostengagements!

2358 Furthermore& some auditors also engage an outside consultant or certain statistical applications! Theconsultant might '1( assist in sol"ing diicult statistical problems arising in practice& '-( re"iewsampling guidelines and methodologies& '?( assist in designing CP, programs& and '( teach courses orspecialists!

"u#er.ision and Re.iew

2359 The irst standard o ieldwork re/uires that assistants be properly super"ised! hen establishing theo"erall strategy or the audit& the auditor determines a materiality le"el or the inancial statements takenas a whole and may /uantiy measurements o risk! #se o /uantiiable concepts& e"en thoughsub4ecti"e& can be useul in communicating audit ob4ecti"es to the auditor0s assistants!

2360 2e"iew o documentation o audit sampling procedures designed by assistants in the planning stagehelps to ensure that the ap

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May 1, 2008 Audit Sampling Guide