For designing an audit sample the standard has particular guidelines which is described in the standards as, “When designing an audit sample, the auditor’s consideration includes the specific purpose to be achieved and the combination of audit procedures that is likely to best achieve that purpose. Consideration of the nature of the audit evidence sought and possible deviation or misstatement conditions or other characteristics relating to that audit evidence will assist the auditor in defining what constitutes a deviation or misstatement. In considering the characteristics of a population, for test of controls, the auditor makes an assessment of the expected rate of deviation based on the auditor’s understanding of the relevant controls or on the exmination of a small number of items from the population. This assessment is made in order to design an audit sample and to determine sample size.” (ISA 530, para A4 to A9).
Regarding the determination of the sample size the standard states that, “The level of sampling risk that the auditor is willing to accept affects the sample size required. The lower the risk the auditor is willing to accept, the greater the sample size will need to be. The sample size can be determined by the application of a statistically-based formula or through the exercise of professional judgment.” (ISA 530, para A10 to A11)
For selecting the sample items the ISA 530 states that, “With statistical sampling, sample items are selected in a way that each sampling unit has a known probability of being selected. With non-statistical sampling, judgment is used to select sample items. Because the purpose of sampling is to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected, it is important that the auditor selects a representative sample, so that bias is avoided, by choosing sample items which have characteristics typical of the population.”(ISA 530, para A12)
Deloitte & Touche, another one of Big Four Firms, states that, “To determine the number of items to be selected in a sample for a particular substantive test of details, the auditor should take into account tolerable misstatement for the population; the allowable risk of incorrect acceptance (based on the assessments of inherent risk, control risk, and the detection risk related to the substantive analytical procedures or other relevant substantive tests); and the characteristics of the population, including the expected size and frequency of misstatements.”
According to the BDO, which is one of the big audit and assurance service provider around the world, states that, “ Sample items should be selected in such a way that the sample can be expected to be representative of the population. Therefore, all items in the population should have an opportunity to be selected. Random-based selection of items represents one means of obtaining such samples. Ideally, the auditor under audit should use a selection method that has the potential for selecting items from the entire period under audit. The auditor’s responses to the risks of material misstatement, describe the auditor’s responsibilities for performing procedures between the interim date of testing and period end.”
In audit sampling procedures materiality and audit risk are interrelated. According to International Standards on Audition (ISA) 315 defines the audit risk as, “Identifying and assessing the risks of material misstatement through understanding the entity and its enviornment.”
According to ISA 315, “The objective of auditor is to identify and assess the risk of material misstatement, whether due to fraud or error, in the financial statement and assertions levels, through understamding the entity and its envioronment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.”
Risk assessment procedures are defined in ISA 315 as, “The audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assesses the risks of material misstatement whether due to fraud or error, at financial statement and assertion level.”
ISA 315 stated that the risk assessment procedures shall include the followings:
A) Inquiries of management and of others within the entity who in the auditor’s judgement may have information that is likely to assist in identifying risks of material missatement due to fraud or error
B) Analytical procedures
C) Observation and inspection
In ISA 320, Materiality is defined as, “ The concept of materiality in applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.”
From the abive literature it is cleat that, the audit sampling is a structured and systematic process which is guided by International Standards on Auditing (ISA) and many other Audit and Assurance Service providers to ensure quality audit report.