What is the Allowance for Sampling Risk?

The allowance for sampling risk is the level of uncertainty associated with sampling. It is calculated as the difference between the tolerable deviation and the expected mean of the population. An auditor needs to take this allowance into consideration when deciding whether the findings generated from a sample are reasonable. The allowance can assist them in deciding whether the sample findings are representative of the population from which the sample was taken.

Example of an Allowance for Sampling Risk

An auditor is evaluating the accuracy of accounts payable records by reviewing a sample of 100 invoices out of a total population of 1,000 invoices for a company. In the sample, the auditor finds two errors in invoice amounts. To project these sample results to the full population, the auditor calculates an error rate based on the sample (2 errors out of 100 invoices, or 2%). Applying this 2% error rate across the full population of 1,000 invoices would imply 20 possible errors.

The auditor might decide to add an allowance for sampling risk to account for the uncertainty that their sample may not perfectly reflect the population. They might adjust their estimate by increasing the potential errors in the population from 20 to, say, 25 errors to provide a buffer. This buffer helps ensure that their conclusion remains reasonable even if the actual error rate in the population is slightly higher than observed in the sample.