## SA 530 – Sampling Risk, Non-Sampling Risk & Key Definitions

### Sampling Risk

Sampling risk is the risk that the auditor's conclusion based on a sample differs from the conclusion that would have been reached if the entire population were tested.

#### Types of Sampling Risk

```

Sampling Risk

├── Test of Controls

│ ├── Risk of Over-Reliance → Affects EFFECTIVENESS (audit risk increases)

│ └── Risk of Under-Reliance → Affects EFFICIENCY (more work done unnecessarily)

│

└── Test of Details

├── Risk of Incorrect Acceptance → Leads to AUDIT RISK (serious)

└── Risk of Incorrect Rejection → Affects EFFICIENCY (not audit risk)

```

Risk	Test	Impact
Over-reliance (conclude controls are effective when they are not)	TOC	Threatens effectiveness — audit risk increases
Under-reliance (conclude controls are weak when they are fine)	TOC	Threatens efficiency — unnecessary extra work
Incorrect acceptance (conclude balance is fairly stated when it is not)	TOD	Leads to audit risk — serious
Incorrect rejection (conclude balance is misstated when it is fine)	TOD	Affects efficiency — unnecessary work, does NOT affect audit risk

> The two dangerous risks are over-reliance and incorrect acceptance — both result in the auditor missing a real problem.

---

### Non-Sampling Risk

Risk arising from causes other than sampling — cannot be reduced by increasing sample size.

Examples of non-sampling risk:

Use of inappropriate audit procedures
Misinterpretation of audit evidence

Sources of non-sampling risk:

Human mistakes
Misinterpreting sample results
Relying on erroneous information

---

### Important Defined Terms (SA 530)

#### 1. Stratification

The process of dividing a population into sub-populations (strata), each containing sampling units with similar characteristics (often monetary value). Stratification allows focused testing of high-value items while still covering low-value items.

#### 2. Tolerable Misstatement

A monetary amount set by the auditor representing the maximum misstatement in the population that the auditor is willing to accept while still concluding the financial statements are fairly presented.

> Think of it as the auditor's 'materiality threshold' at the assertion level for sampling purposes.

#### 3. Tolerable Rate of Deviation

A rate of deviation from prescribed internal control procedures set by the auditor — the maximum rate the auditor is willing to accept while still relying on the control.

> If actual deviation rate exceeds tolerable rate → the control cannot be relied upon.

Worked example

### Example 1

Example – Risk of Over-Reliance (TOC):

An auditor samples 40 out of 500 cash vouchers to test the approval control. The sample shows only 1 deviation (2.5% rate). The auditor concludes the control is effective. But if the actual population has a 15% deviation rate, the sample gave a misleadingly low picture — the auditor has over-relied on the control. This is a Type I sampling risk error that increases audit risk.

### Example 2

Example – Risk of Incorrect Acceptance (TOD):

An auditor samples debtors worth ₹5 lakh from a ₹50 lakh population and finds no misstatements. The auditor accepts the balance as fairly stated. In reality, ₹8 lakh of fictitious debtors exist in the untested portion. The sample led to incorrect acceptance — audit risk materialises and the auditor may issue a wrong opinion.

### Example 3

Example – Tolerable Rate of Deviation vs Actual:

Auditor sets tolerable rate of deviation at 5% for the purchase approval control. Testing 60 vouchers reveals 4 deviations (6.7% rate). Since 6.7% > 5%, the auditor cannot rely on this control and must expand substantive testing.

### Example 4

Example – Stratification in Practice:

A debtor population of ₹1 crore has 500 accounts. The auditor stratifies: Stratum 1 (>₹5 lakh, 20 accounts, ₹40 lakh) — test 100%; Stratum 2 (₹1–5 lakh, 80 accounts, ₹35 lakh) — sample 30; Stratum 3 (<₹1 lakh, 400 accounts, ₹25 lakh) — sample 15. This concentrates effort where misstatement risk is highest.

⚠️ Common exam mistakes

Thinking non-sampling risk can be reduced by increasing sample size — it cannot; non-sampling risk arises from human error and procedural failures, not from sample incompleteness.
Mixing up the four types of sampling risk — remember the mnemonic: Over-reliance and Incorrect Acceptance are the 'bad' ones (affect audit risk); Under-reliance and Incorrect Rejection just cause inefficiency.
Confusing tolerable misstatement (a monetary amount — used in TOD) with tolerable rate of deviation (a percentage — used in TOC).
Thinking stratification is the same as block sampling — stratification is a design technique to improve representativeness; block sampling simply picks a consecutive sequence without stratifying.
Forgetting that risk of incorrect rejection does NOT affect audit risk — it only causes the auditor to do unnecessary extra work, not to miss a real problem.

Bare-Act text SA 530, Para 5(c) · SA 530 – Audit Sampling (ICAI) · click to expand

Sampling risk: The risk that the auditor's conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

SA 530 – Sampling Risk, Non-Sampling Risk, and Important Terms

Worked example

⚠️ Common exam mistakes