Flashcards in Audit Sampling Deck (36):
Taking part of a population- subjecting it to audit procedures- projecting results to a population
Based on formulas
Helps find an appropriate audit sample
Helps evaluate evidence obtained
Helps evaluate results and quantify Sampling Risk
Based on human decision
Equally acceptable as Statistical Sampling
Probability proportionate to size sampling
Risk that your sample isn't representative of population
Can happen even if audit is done properly
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
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
Leads to higher Detection Risk - Fewer substantive tests
Sample understates Control Risk
This error leads to over-reliance on internal control- under-testing- 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
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
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
Risk of human (auditor) missing an error
Also called exception- error or deviation.
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
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.
Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors
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 Error Rate are you expecting? - Judgment call- based on experience
Direct relationship to Sample Size
More errors = Larger Sample
Less errors = Smaller Sample
Attribute in the sample gives information about the entire audit population
Used to estimate Internal Control error rate
Used to determine initial level of Control Risk
Risk of Assessing Control Risk too low
Gives you the Sampling Risk
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
Testing for a dollar amount
Value in sample gives information about value in entire population.
Mean Per Unit = Sample Average x Number in Population
Stratification - Decreases effect of variance in population and reduces sample size
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
Misstatement found in sample - have to project it to remainder of population
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
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.
SER + ASR < TER
SER = Sample Error Rate
ASR = Allowance for Sampling Risk
TER = Tolerable Error Rate
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.
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
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
Perform the Sampling Plan
Every certain # of a population is selected
Population needs to be randomly ordered
Primary advantage is that population doesn't require pre-numbering
Also called Stop or Go sampling
Each audit step determines the next step
Audit is testing an area that is so crucial that zero population errors can be tolerated
Any phony employees on payroll?