A3 - Attribute Sampling

Question 1

what is sample risk?

Answer 1

sample is not representative of the population

Question 2

what are the two sampling methods?

Answer 2

1. Statistical sampling method: evaluated quantitatively. require each item to have an equal chance of being selected
2. Non-statistical sampling method: evaluated using auditor judgement

Both are GAAS and the auditor must exercise professional judgement in both methods

Question 3

what are the 4 rules about sampling?

Answer 3

• Rule 1: Always assume that the population being sampled is normally distributed, that is, it can be described by a “normal” or “bell-shaped” curve
• Rule 2: for a CPA to estimate about populations that have mathematical validity, the samples have to be unrestricted and randomly selected. which means that each item must have an equal chance, and CPA cannot use “bias” in decide which item will be selected (the only area where the CPA does NOT use judgement)
• Rule 3: If the sample is large and randomly selected, the sample will likely have SAME statistical characteristics (mean and standard deviation)
• Rule 4: Standard deviation is a measure of “variability” which refers to the range of values w/in the population. Sample risk

Question 4

what are the 2 types of sampling procedures?

Answer 4

• Attribute sampling: is primarily used for testing internal controls => TEST OF CONTROLS
• Variable sampling and PPS (probability-proportional-size) sampling are typically used in substantive testing of account balances => DOLLAR VALUES

Question 5

what are the sampling risks in substantive testing?

Answer 5

• Risk of incorrect acceptance: the risk that sample results FAIL to identify an existing MM => auditor’s fear/concern => not effective
• Risk of incorrect rejection (lack of efficiency): the risk that sample results MISTAKENLY indicate a MM => not efficient

Question 6

what are the sampling risks in tests of controls?

Answer 6

• Risk of assessing control risk too LOW: risk of over reliance. sample results indicate a lower deviation rate than actually exists => not effective
• Risk of assessing control risk too HIGH (lack of efficiency): risk of under reliance. sample results indicate a greater deviation rate than actually exists => not efficient

Question 7

what is DEVIATION (errors) rate?

Answer 7

the deviation rate in sampling is the auditor’s best estimate of the deviation rate in the population from which it as selected

Note: We are concerned with the worst case scenario, so we generally do not bother with low end of the range. The top end of the range is formally known as the “upper deviation rate” = sample deviation rate + allowance for sampling risk

Question 8

what are the factors when determining the sample size?

Answer 8

1. Risk of assessing control risk too low: INVERSE relationship to sample size.
   + want less risk => more sample size
   + accept more risk => less sample size
2. Tolerable deviation rate: INVERVE relationship to sample size
   + want less deviation (errors) => more sample size
   + accept more deviation => less sample size
3. Expected deviation rate: DIRECT relationship to sample size
   + expect less deviation => less sample size
   + expect more deviation => more sample size

Question 9

what is stop-or-go sampling?

Answer 9

is designed to avoid oversampling for attributes by allowing auditor to stop an audit test before completing all steps if there are only few errors are expected in the population