What is Audit Sampling?

Taking part of a population, subjecting it to audit procedures, projecting results to a population

What are the characteristics of Statistical Sampling?

Based on formulas

Helps find an appropriate audit sample

Helps evaluate evidence obtained

Helps evaluate results and quantify Sampling Risk

What are the characteristics of Non-Statistical Sampling?

Based on human decision

Equally acceptable as Statistical Sampling

What are the characteristics of Substantive Tests?

Variables sampling

Probability proportionate to size sampling

What type of sampling are Control Tests?

Attribute Sampling

What is Sampling Risk?

Risk that your sample isn’t representative of population

Can happen even if audit is done properly

What is the risk of assessing Control Risk too high?

A risk of Control Testing - Auditor works to make Control Risk lower

More substantive tests - Sample overstates Control Risk, Leads to an under-reliance on internal control, over-testing, and overall audit inefficiency

Audit ends up being effective (correct result), but you do more work

What is the risk of assessing Control Risk too low?

A risk of Control Testing - Complement to Confidence Level

Inverse relationship to Sample Size

Higher accepted risk of assessing Control Risk too low = Smaller Sample

Lower accepted risk of assessing Control Risk too low = Larger Sample

What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?

Leads to higher Detection Risk - Fewer substantive tests

Sample understates Control Risk

This error leads to over-reliance on internal control, undertesting, and overall audit ineffectiveness.

Does NOT necessarily mean that the Financial Statements are materially misstated – it does mean that if there is one, you are less likely to find it

What is the risk of Incorrect Acceptance?

A risk of Substantive Testing - Auditor accepts a balance as fairly stated, when in fact it is not fairly stated

Hurts audit effectiveness

Wrong conclusion reached

Efficient, but not effective

What is the risk of Incorrect Rejection?

A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated

Hurts audit efficiency

Wrong recommendations given

Effective, but not efficient

What is Non-Sampling Risk?

Risk of human (auditor) missing an error

Also called exception, error or deviation.

How does Sampling Risk compare to Non-Sampling Risk?

Sampling Risk deals with the chance that your audit sample is flawed

Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed

What is Attribute Sampling?

Looking at Control Procedures - Were invoices approved when paid?

Errors are stated in terms of %, not dollar amounts

For example, 5 invoices out of 100 were not properly paid. Error rate is 5%

Hint: If you see Error Rate on the Exam, they are referring to Attribute Sampling.

How do you determine if Control Procedures are operating properly or not operating properly?

Control Procedures are either operating properly or they are not operating properly – based on Error Rate and the tolerance you have for errors

What is the Tolerable Rate?

Error rate in population that you are willing to accept/tolerate

Inverse relationship to Sample Size

Higher Tolerable Rate = Smaller Sample

Lower Tolerable Rate = Larger Sample

If you’re willing to accept a higher probability that errors exist, there is less pressure on the sample

What is the Expected Population Error Rate?

What Error Rate are you expecting? - Judgment call, based on experience

Direct relationship to Sample Size

More errors = Larger Sample

Less errors = Smaller Sample

What is the basic premise of Attribute Sampling?

Attribute in the sample gives information about the entire audit population

Used to estimate Internal Control error rate

For what is the Expected Population Deviation (error) Rate used?

Used to determine initial level of Control Risk

What is the Allowable Risk of Overreliance?

Risk of Assessing Control Risk too low

Gives you the Sampling Risk

When is Attribute sampling used?

Attribute sampling is only useful when there is documented evidence (an audit trail) to test

Use when the existence of an error needs to be verified or debunked

What is Classic Variable Sampling?

Testing for a dollar amount

Value in sample gives information about value in entire population.

What functions are used in conjunction with Classic Variable Sampling?

Mean Per Unit = Sample Average x Number in Population

Stratification - Decreases effect of variance in population and reduces sample size

What are the characteristics of Probability Proportionate to Size (PPS) sampling?

A form of Variable Sampling

Does NOT use Standard Deviation

Auditor focuses on a dollar amount

Larger or more valuable items get picked more often as part of the sample

What is Projected Misstatement?

Misstatement found in sample – have to project it to remainder of population

How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?

PPS:

Easier to use, Results in a stratified (homogenous) sample, Results in a smaller sample size to audit, Easy to design

Classic Variables Sampling:

Easy to expand sample size, Selecting zero and negative balances easy

What factors affect sample size?

Tolerable rate for error - Inverse relationship with sample size

Risk of assessing Control Risk too low - Inverse relationship with sample size

Expected population error rate - Direct relationship with sample size

Population size does NOT affect the sample size - as population is larger, sample size doesn’t grow.

What is the formula for Audit Sampling?

SER + ASR < TER

SER = Sample Error Rate

ASR = Allowance for Sampling Risk

TER = Tolerable Error Rate

What is Allowance for Sampling Risk?

The amount that you add to the Sampling Error Rate to get some cushion for your sample.

As high as you think the population error rate could go based on experience.

What is the Tolerable Error Rate?

The amount of error rate that you can accept - If population error rate is less than TER, then accept the Control as effective

If population error rate is more than TER, do more testing to get SER lower or conclude control isn’t effective. Do more substantive testing

What are the steps to develop a sampling plan?

Determine Test Objective - for example, have sales shipments been billed?

Define Population and Deviation - take a sample of shipping document, trace forward to see if billed

Determine Sample Size based on tolerable rate for error, risk of assessing Control Risk too low, and expected population error rate.

Select Sampling Technique

After a Sampling Plan is developed, what are the steps in sampling?

Perform the Sampling Plan

Evaluate Results

Document Results

What is Systematic Sampling?

Every certain # of a population is selected

Population needs to be randomly ordered

Primary advantage is that population doesn’t require pre-numbering

What is Sequential Sampling?

Also called Stop or Go sampling

Each audit step determines the next step

What is Discovery Sampling?

Audit is testing an area that is so crucial that zero population errors can be tolerated

Any phony employees on payroll?

How does Block Sampling compare to other sampling methods?

Easy to implement, but is the worst method of sampling.