In this video, we walk through 6 AUD practice questions teaching about sampling methods. These questions are from AUD content area 3 on the AICPA CPA exam blueprints: Performing Further Procedures and Obtaining Evidence
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Sampling Methods
When conducting an audit, selecting the appropriate sampling method is critical to ensuring reliable conclusions. Auditors use sampling to test controls and verify details in financial statements, as examining an entire population is often impractical. The choice of sampling method depends on the objective of the procedure—whether the auditor is testing controls (attribute sampling) or evaluating financial statement balances (variable sampling). Below, we break down the key sampling methods, their purposes, and their relationships to sample size.
Attribute Sampling: Testing the Effectiveness of Controls
Attribute sampling is used when an auditor wants to determine whether a control is functioning properly. This method evaluates the presence or absence of a specific characteristic within a population, making it useful for tests of controls.
When to Use Attribute Sampling
Auditors use attribute sampling when assessing whether a company is complying with internal controls, such as:
- Whether transactions were properly authorized
- Whether invoices include required approvals
- Whether entries were posted accurately and completely
For example, if an auditor is testing whether all purchase orders above $5,000 have managerial approval, they would use attribute sampling to check a sample of transactions for this control.
Variable Sampling: Testing Monetary Misstatements
Variable sampling is used for substantive testing, where the goal is to determine whether an account balance or transaction total contains material misstatements.
When to Use Variable Sampling
Auditors apply variable sampling when assessing:
- Existence and valuation of accounts receivable
- Accuracy of recorded inventory balances
- Depreciation calculations for fixed assets
For instance, when testing accounts receivable for overstatement, the auditor may select a sample of customer balances and confirm the amounts directly with customers.
Monetary-Unit Sampling (PPS Sampling): A Focus on Overstatement
Monetary-unit sampling (also known as probability-proportional-to-size or PPS sampling) is a type of statistical sampling used in substantive testing. It gives higher-dollar items a greater chance of selection, making it particularly effective for detecting overstatements.
When to Use PPS Sampling
- When testing assets and revenue accounts for overstatement
- When the population contains a few large-dollar items and many small-dollar items
For example, an auditor testing inventory might use PPS sampling to ensure high-value inventory items are more likely to be included in the sample.
Statistical vs. Nonstatistical Sampling
Auditors choose between statistical and nonstatistical sampling based on the need for quantifiable risk assessment.
Statistical Sampling
- Uses probability theory to determine sample size and evaluation
- Allows the auditor to quantify sampling risk
- Includes PPS sampling and classical variable sampling
Nonstatistical Sampling
- Relies on auditor judgment rather than mathematical formulas
- Does not quantify sampling risk but is still commonly used in practice
For example, an auditor using nonstatistical sampling might select a sample based on prior experience rather than statistical calculations.
Understanding Sample Size and Its Relationships
The size of the sample an auditor selects depends on several key factors:
- Tolerable misstatement (inverse relationship): Higher tolerable misstatement means a smaller sample size.
- Expected misstatement (direct relationship): Higher expected misstatement requires a larger sample size.
- Standard deviation (direct relationship): More variability in the population increases sample size.
- Population size (limited effect): Population size generally has little impact unless the population is very small.
For example, if an auditor expects a high level of misstatements in an account, they will need to test more items to ensure an accurate conclusion.
Conclusion
Selecting the appropriate sampling method is crucial for achieving audit objectives. Attribute sampling is used for control testing, while variable sampling evaluates misstatements in financial balances. PPS sampling is ideal for overstatements, and statistical sampling provides quantifiable risk assessment. Understanding how sample size is affected by tolerable misstatement, expected misstatement, and variability ensures auditors design effective and efficient sampling procedures.
