Abstract This article describes a method of selecting optimal audit sampling plans for compliance testing. The method requires the auditor to select an acceptable β risk, the risk of improper acceptance or of overreliance on internal control. This risk is then treated as a constraint in choosing a sampling plan that minimizes total cost of type 1 errors and sampling. The applicability of this approach to compliance testing is demonstrated. Previous approaches to selecting a sampling plan are shown to be sensitive to misspecification of the acceptable error rate. A method is developed that allows the auditor to consider costs and risks over the full range of acceptable values for this error rate. Methods for finding the optimal sampling plan are derived, and the sensitivity of results to input misspecifications is investigated.
Finley et al. (Sun,) studied this question.