Module 7: Audit Sampling

Question 1

Audit Sampling

Answer 1

Selection of less than 100% of the population of audit relevance, and the evaluation of that sample, such that the auditor expects the items selected (the sample) to be representative of the population, and thus likely to provide a reasonable basis for conclusions about the population.

Question 2

Formula

Answer 2

Sample Error Rate + Allowance for sampling risk <= tolerable error rate

Question 3

Random-number sampling

Answer 3

Every sampling unit has the same probability of being selected, and every combination of sampling units of equal size has the same probability of being selected. Random numbers can be generated using random number table or a computer program.

Question 4

Systematic sampling

Answer 4

Every nth (population size/ sample size) item is selected after a random start. When a random starting point is used, this method provides every sampling unit in the population an equal chance of being selected. If the population is arranged randomly, systematic selection is essentially the same as random number selection.

Question 5

Sampling Risk

Answer 5

The risk that the auditor’s conclusion based on the sample may be different from the conclusion if the entire population were subjected to the same audit procedure (AU-C 300).

Question 6

Audit Risk

Answer 6

A combination of the risk that a material misstatement will occur and the risk that it will not be detected by the auditor. It consists of (1) the risk (inherent risk and control risk) that the balance or class and related assertions contain misstatements that could be material when aggregated with other misstatements, and (2) the risk (detection risk) that the auditor will not detect such misstatement.

Question 7

Non-sampling risk

Answer 7

Includes all aspects of audit risk that are not due to sampling. It is controlled by adequate planning and supervision of audit work and proper adherence to quality control standards.

Question 8

Test of Controls

Answer 8

Directed toward the design or operation of a control to assess its effectiveness in preventing or detecting material misstatements in a financial statement assertion.

Question 9

Substantive Tests

Answer 9

Used to obtain evidence about the validity and propriety of the accounting treatment of transactions and balances.

Question 10

Dual-purpose tests

Answer 10

Those in which a single sample is used to test a control and to serve as a substantive test of a record balance or class transactions. When a dual-purpose is used, auditors select the sample size as the higher of that required for the two purposes.

Question 11

Attributes Sampling

Answer 11

(used in tests of controls) reaches a conclusion in terms of a rate of occurrence

Question 12

Variables sampling

Answer 12

(used in substantive testing) reaches a conclusion in dollar amounts (or possibly in units).

 (1) Probability-proportional-to-size (PBS) sampling
 (2) Classical variables sampling techniques

Question 13

Random-number sampling

Answer 13

Every sampling unit has the same probability of being selected, and every combination of sampling units of equal size has the same probability of being selected. Random numbers can be generated using a random number table or a computer program.

Question 14

Haphazard sampling

Answer 14

A sample consisting of units selected without any conscious bias, that is without any special reason for including or omitting items from the sample. It does not consist of sampling units selected in a “careless” manner, but in a manner that the auditor hopes to be representative of the population. Haphazard sampling is not used for statistical sampling because it does not allow the auditor to measure the probability of selecting a given combination of sampling units.

Question 15

Advantages of PPS Sampling

Answer 15

1) Generally easier to use.
2) Size of sample not based on variation of audited amounts.
3) Automatically results in a stratified sample
4) Individually significant items are automatically identified
5) Usually results in smaller sample size if no misstatements are expected.
6) Can be easily designed and sample selection can begin before the complete population is available.

Question 16

Advantages of Classical Variable Sampling

Answer 16

1) May result in smaller sample size if there are many differences between audited and book values.
2) Easier to expand sample size if that becomes necessary
3) Selection of zero balances does not require special sample design consideration
4) Inclusion of negative balances does not require special sample design consideration.

Question 17

Tolerable rate (tolerable deviation rate)

Answer 17

The maximum rate of deviation from a prescribed control structure policy or procedure that an auditor is willing to accept without modifying the planned assessed level of control risk.

Question 18

Deviation Conditions

Answer 18

An auditor should identify characteristics (attributes) that would indicate operation of the internal control procedure. The auditor next defines the possible deviation conditions. A deviation is a departure from the prescribed internal control policy or procedure.

Question 19

Ratio Estimations

Answer 19

Classical variable sampling technique that uses the ratio of audited amounts to recorded amounts in the sample to estimate the total dollar amount of the population and an allowance for sampling risk.

(a) Determine audit values for each sample item
(b) Calculate the ratios between the sum of the sample audit values and sample book values
(c) Determine the estimated population value by multiplying the total population book value times this ratio

Question 20

Statistical Sampling

Answer 20

Helps the auditor to:
(1) design a sufficient sample,
(2) Measure the sufficiency of the audit evidence obtained,
and 
(3) evaluate the sample results

Question 21

Risk of incorrect rejection

Answer 21

(alpha risk, type 1 error) The risk that the sample supports the conclusion that the recorded account balance is materially misstated. Know that like the risk of assessing control risk too high, this risk relates to audit efficiency. If the sample results incorrectly indicate that an account balance is materially misstated, the performance of additional audit procedures will generally lead to the correct conclusion.

Question 22

Risk of Incorrect Acceptance

Answer 22

the risk of accepting a population as being materially correct when in fact it is materially misstated. (beta risk, type 2 error) is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated. Know that like the risk of assessing control risk too low, this risk relates to audit effectiveness. If the sample results indicate that an account balance is not misstated, when it is misstated, the auditor will not perform additional procedures and the financial statements may include such misstatements.

Question 23

Block Sampling

Answer 23

A sample consisting of contiguous units. The advantage of block sampling is the ease of sample unit selection. The disadvantage is that the sample selected may not be representative of the overall population. Because this disadvantage use of this method is generally the least desirable method.

Question 24

Discovery Sampling

Answer 24

A procedure for determining the sample size required to have a stipulated probability of observing at least one occurrence when the expected population deviation rate is at a designated level. It is most appropriate when the expected deviation rate is zero or near zero. If a deviation is detected, the auditor must either (1) use an alternate approach or (2) if the deviation is of sufficient importance, audit all transactions.

Question 25

Sequential (stop -or-go) sampling

Answer 25

A sampling plan for which the sample is selected in several steps, with the need to perform each step conditional on the results of the previous steps. That is, the results may either be so poor as to indicate that the control may not be relied upon, or so good as to justify reliance at each step.