Sampling Theory

and
its various types
 Definition

• Sampling is a part of our day to day life which

we use advertantly or inadvertantly.
• Sampling is concerned with the selection of a
subset of individuals within a statistical
population.
• Each observation measures one or more
properties such as weight, location,colour of
observable bodies distinguished as independent
object
• In survey sampling weights can be applied to the
data to adjust for sample design.
Basic principle of sample survey
• Sample survey is the study of the
unknown population on the basis of a
proper representative sample drawn from
it.
• Sample survey comprise the following
steps
• (1) law of statistical regularity
• (2) Principle of inertia
• (3) Principle of optimization
• (4) Principle of validity
Several stages of sampling process
• 1 Defining the population of concern
• (2) specifying a sampling frame, a set of
possible events
• (3) specifying a sampling method for selecting
items
• (4) determining the sampling size
• (5) Implementing the sampling plan
• (6) sampling and data collecting
• (7) data which can be selected
 Statistical or Non statistical
sampling
• A sample is called statistical sample if it
meets these three criteria
• 1)The sample size must be determined
objectively or quantitatively
• 2) The sample members must be selected
randomly .
• 3) The sample results must be evaluated
mathematically.
 Nonstatistical sampling
• A sample is non statistical if it does not meet to one or
more of the three criteria for a statistical sample. For
example let an auditor uses audit software to select
random sample and employs statistical table to evaluate
the results. However the auditor sets the sample size at
60 because that was the sample size used in the
previous year . The auditor has not explicitly considered
the factors of statistical sampling in determining the
sample size.so this sample is a non statistical.
 How to determine the sample
size
• To find the sample size of statistical sampling auditors
consider several factors. These includes materiality, the
expected error rate or amount, the risk of over reliance
or the risk of incorrect acceptance, audit risk, inherent
risk, control risk, standard deviation and population size.
These factors are needed to obtain the required sample
size from statistical sampling.
 Use of statistical sampling
• Statistical sampling is especially appropriate when the
population is made up of a large number of similar
transactions and internal control is good.
• If there are numerous homogeneous transactions in an
account the auditor can select relatively few items
examine them and draw a valid conclusion on the whole
population.
• The auditor should also consider the computer
environment in deciding between a nonstatistical and
statistical sample. If the client’s records are
computerized statistical sampling is generally easy to
apply. In a manual system nonstatistical sampling may
be appropriate.
 Advantage of a statistical
approach
• The primary advantage of using a statistical
sampling approach is that risk is objectively
determined.
• Using the statistical table the auditor might reach
this conclusion in a substantive test at 5% risk.
the amount of error in the population is between
$5000 and $9000.
• In a test of control the conclusion might be at
10% risk. The rate of deviation does not exceed
4.2%.
 Use of non statistical sampling
• There are many situation in which non
statistical approach is appropriate. If an
account has a small number of
transactions the time and cost to set up a
statistical sample is generally not
justifiable. A non statistical method is best.
Also in the case if the account totals to an
immaterial amount but the auditor still
wants to examine it contents a non
statistical sampling is used.
• Non statistical sampling is also more
appropriate if the population or potential
errors are difficult to specify in advance.
• Non statistical methods would also be
used in sensitive areas such as legal
expense and political donations.
• A nonstatistical sampling is also best when
the auditor is relating transaction from two
or more accounts.
 Advantage of non statistical
sampling
• One advantage is that personnel do not have to
be trained in statistical techniques.
• Also statistical sampling software is not needed
and computer access is not necessary.
• The non statistical methods are more defensible
when auditors favouring a non statistical
approach believe that the use of professional
judgement is a better defense say in court than
a statistical measure of risk.
 Probability and nonprobability
sampling and its advantage
• Probability sampling- It is a sample in which
every unit in the population has a chance of
selection in sample. Eg: we want the total
income of adults living in a given street. Identify
all adults living there and randomly select one
adult from each household. If more than one
adult in household we add all income and take
thus we get total income of street.
• Probability Sampling includes Simple random
sampling, systematic sampling , stratified
sampling, probability proportional to size
sampling , cluster and multistage sampling.
 Non probability sampling

• In this sampling method some elements of population

have no chance of selection.
• It involves the selection of elements based on
assumption regarding the population of interest which
forms the criteria of selection. Ex: we visit every
household in a given street and interview the person to
answer the door. in every household more than one
occupant so it is a nonprobability sampling the person
who is unemployed can answer but employed person is
not available due to his work.
• It includes convenience sampling,quota sampling and
purposive sampling.
 Errors in sample surveys
Total errors can be classified into two types -1)Sampling
errors and 2) Non sampling errors.
• Error includes systematic biases as well as random
errors.
• Sample errors- it induced by the sample design. It
include the following
• 1) Selection bias: when the true selection probabilities
differ from those assumed in calculating the results.
• 2) Random sampling error- Random variation in the
results due to the elements in the sample selected at
random.
 Non sampling error
• These are the errors which can impact the final survey
estimates caused by problems in data collection and
processing or sample design.
• It includes following
• 1) Over coverage- include data from outside of the
population
• 2) Under coverage- sampling frame not include
elements in population
• 3) Measurement error- when responds misunderstand
the question
• 4) Processing error- mistakes in data coding
• 5) Non Response- failure to obtain complete data from
all selected individuals
 Types of sampling
• 1) Simple random sampling(SRS)- it is a
particular case of random sampling. In
SRS each unit of the population has equal
and independent chance of being included
in the sample.In this sampling selection of
one unit in the sample does not effect the
selection of other unit. This minimizes the
bias and simplifies analysis of results.SRS
may be with or without replacement
according as a unit selected is not or is
 Systematic sampling
• This is a convenient method when complete list of sampling
units(sample frame) is available or can be easily prepared.The
sampling scheme consists of only the first unit at random and the
rest are then automatically selected according to some
predetermined pattern. If we have N units in the population and a
sample of size n is drawn. Then we first determine an integer such
that K=n/N here k is called sampling interval.
• In this sampling first sample unit is selected at random from first
group of k units and thereafter every kth unit is selected.
• It is not simple random sampling because of different subsets of the
same size have different selection probabilities.
• It is less accurate than simple random sampling.
 Stratified sampling
• In this sampling population is divided into mutually
exclusive subpopulation and then selects random
sample from these subpopulations.
• There are several benefits of stratified sampling
• 1) Dividing the population into distinct independent strata
can enable researchers to draw inferences about
specific subgroup that may be lost in a more generalized
random sample.
• 2) This method can lead more efficient statistical
estimates.
• 3) This is useful in the case where data are more readily
available for individual, preexisting strata within a
population than for overall population .
• 4) in this method each stratum is treated
as an independent population . different
sampling approaches can be applied to
different strata, potentially enabling
researchers to use the approach best
suited
• A stratified sampling approach is most
effective in following conditions
1) Variable within strata are minimized
2) 2) Variability between strata are
maximized
3) The variables upon which the population
is stratified are strongly correlated with
the desired dependent variable.
 Cluster sampling
• In this sampling we select respondents in
clusters(groups) .Sampling is often clustered by
geographical or by time periods. It is more cost effective
. Clustering can reduce travel and administrative costs.
• For example if surveying households within a city we
might choose to select 100 city blocks and then interview
every house hold.but in this method a single trip to visit
several households in one block rather than having to
drive to a different block for each households.
• In the above example the sample only requires a block
level city map for initial selections and then a household
level map of the 100 selected blocks rather than a
household map of the whole city.
• Cluste sampling generally increases the
variability of sample estimates above that
of SRS. It requires a large sample than
SRS to achieve the same level of
accuracy. This is cheaper than SRS.
• It is commonly implemented as multistage
sampling.
 Probability proportional to size
sampling
• In this sampling the selection probability for each
element is set to be proportional to its size measure, up
to a maximum of 1. This is also called PPS sampling . In
this simple PPS design these selection probabilities can
be used as the basis for Poisson sampling.
• Systematic sampling theory is used to create a
probability to size sample.this is done by treating each
count within the size variable as a single sampling unit.
Samples are then identified by selecting each intervals
among these counts within the size variable. This
method is sometimes called PPS sequential or monetary
unit sampling in the case of audits or forensic sampling.
 Example of PPS
• we have 6 schools with population of
150,180,200,220,260,490 students respectively. In total
1500 students we want to use student population as the
basis of a PPS sample of size 3.
• First we allocate 1st school numbers 1 to 150 , the 2nd
school 151 to 330(150+180), the 3rd school 331 to
530and so on the last school 1011 to 1500 . We then
generate a random start between 1and 500(1500/3) and
count the throughout population by multiple of 500. If we
random start was 131 then allocated numbers are
131,631,1131 i.e the 1st , 4th and 6th schools.
 Multi stage sampling
• In this type of sampling the population is composed of 1st
stage of sampling unit each of which is supposed to
compose of 2nd stage sampling units each of which again
is turned to compose of 3rd stage sampling.this is going
on until we reach the ultimate sampling unit.
• This is a complex form of cluster sampling in which two
or more level of units are embedded one in the other.
The 1st stage consisting of constructing the clusters that
will be used in sample form. In 2nd stage a sample of
primary units is randomly selected from each cluster.in
following stages in each of those selected clusters
additional unit of samples are selected. All ultimate units
are selected in last step.
 Advantage of multistage
sampling
• It can substantially reduce sampling cost.
• It saves also computational labour .
• It adds flexibility into the sampling process.
• .
 Demerit of multistage sampling

• It is less accurate than stratified sampling.

• It completes in several stages.
• It takes long time in process.
Example of multistage sampling
• Suppose in order to find the extent of
unemployment in India we may take state,
district , police station and household as
the first stage,2nd stage ,3rd stage and the
ultimate sampling units respectively.
 Attribute sampling
• It involves selecting a small number of transactions and
making assumptions about how their characters
represent the full population of which the selected items
are a part.
• This concept is frequently used by auditors to test a
population for certain characters such as the presence of
an authorizing signature or approval stamps on a
document.
• The concept can be used to determine whether various
accounting controls are functioning in a reliable manner.
• The result of attribute sampling is binary either a
condition exist or not exist.
 Use of attribute sampling
• It is heavily used for testing the internal
controls. the results of these tests can be
then used by a company’s external
auditors who can choose to rely or not on
the tested abilities of the accounting
controls when developing their own
procedures for how the company’s
financial statement will be audited.
 Variable sampling
• It is used for measurement for hardness , tensile
strength, resistance and other physical
properties of desired sample.
• The variables used for measurement are on a
continuous scale and limits for rejection are
clearly demarcated for the entire range.
• The sample size selected for testing is between
4 to 25. The sample size is kept low due to a
homogeneous quality is ensured during
designing and unnecessary expenditure is not
done on testing.
• In the sample set for variable sampling the original
values are taken as reference values and the measured
values are compared with them. The acceptance level is
decided by confidence interval restricted by the normal
distribution curve and all the values lying outside them
are rejected.
• The curve is divided into 3 zones. Zone 1 and 3 are short
zones and zone 2 is known as long zone.
• The upper limits and lower limits of deviation are kept as
+3 sigma and -3 sigma respectively. hence it not only
saves a lot of inspection cost it also keeps a check on
controlling all the risk levels.
 Discovery sampling
• The method of sampling to assess
whether the percentage error is not in
excess of a specified percentage of the
population is called discovery sampling.
• The sampling considers the population
rate and the confidence level. If the
sample does not have any errors then the
actual error rate is below the minimum non
acceptable rate.
 Monetary unit sampling
• This method of sampling is a value weighted
selection where sample size ,selection and
evaluation will result in a conclusion in monetary
amounts.
• The objective of this sampling is to determine
the accuracy of financial accounts.
• It is based on attribute sampling testing.
• It is often used in tests of controls and
appropriate when each sample can be placed
into one or two classification exception or no
exception.
Steps of monetary unit sampling
• Determine a sample size
• Select the sample
• Perform the audit procedures
• Evaluate the results and arriving at a conclusion about
the population
• It turns monetary amount into units ex; a receivable
balance of $ 50contains 50 sampling units.
• Monetary balances can also be subject to varying
degree of exception Ex; a payable balance of $4000can
be understand as $4,$40,$40000 and the auditor will
clearly be interested in larger misstatement.
 Audit hypothesis testing
• Hypothesis testing is a statistical method for
• 1) Drawing inferences about a population based
on sample data from such population
• 2) assessing the statistical significance of the
difference between populations on a variable of
interest based on sample data from such
populations.
• 3) choosing among alternatives course of action
 Objective of hypothesis testing
• It is the basic form of statistical inference. Its
objective is to determine whether or not sample
data support a belief i.e hypothesis about the
population from which the sample is drawn.
• For example one may want to know if a policy is
equally supported equally by men and women.
After drawing a random sample of appropriate
size one can test the hypothesis that no
difference exists in the extent to which men and
women support the policy.
 Different terms of hypothesis
testing
• statistical significance- it occurs when the difference
between an observed sample statistics and a
hypothesized population parameter is considered to be
attributable to chance.
• Null hypothesis- it asserts that there exists no difference
between a population parameter and a single variable. It
is denoted by H0. for example if an auditor thought that
the mean dollar value µ of errors made by entity staff
when entering data was $100, the null hypothesis used
by auditor is H0/µ=100
• Alternative hypothesis- it is denoted by HA .and is
assertion that answers the question about the variable of
a interest. In case of above example auditor thought that
the mean value of such errors was greater than $100
then alternative hypothesis is denoted by HA/µ>100.
• If auditor thought that mean dollar value of such errors
was less than $100 the alternative hypothesis would be
stated as HA/µ<100.
• If auditor thought that mean dollar value of such errors
was not $100 i.e either greater or less than $100 then
alternative hypothesis would be stated as HA/µ not equal
to 100.
 Test statistic

• It is used to determine whether the auditor

should reject or not reject the null
hypothesis. The test statistic is the point
estimator of the population parameter
being tested.
• It expresses the variable of Interest
obtained from the sample in standardized
form.
 Standardized test statistic
• It expresses the value of variable of interest as estimated
by the sample in terms of a known and predictable
probability distribution. for example the test statistic for a
population mean based on a sample mean is

• T=x-µ/s:√n or T is calculated after dividing x-µ/s by √n

• Where T=test static
• x= sample mean
• µ= population mean specified in null hypothesis
• S= sample standard deviation
• n= sample size
 sampling with replacement
• If an element may appear multiple times in
one sampling it is called sampling with
replacement. For example if we catch fish
measure them and immediately return
them to the water before counting with the
sample it is an example of Sample with
replacement(WR)
 Sampling without replacement
• Sampling schemes may be without
replacement(WOR) if no element can be
selected more than once in the same
sample. For example if we catch the fish
and measure the fish and use it for our
purpose it is called sampling without
replacement.
 Sampling risk
• Sampling risk is the risk that the auditor,s
conclusions based on a sample may be
different from the conclusion if the entire
population were the subject of the same
audit procedure.
 Non sampling risk
• Non sampling risk is the risk that the
auditor forms the wrong conclusion which
is unrelated to sampling risk.An example
of such situation would be where the
auditor adopts inappropriate audit
procedure or does not recognize a control
deviation.