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?

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- 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?

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- Based on human decision
- Equally acceptable as Statistical Sampling

What are the characteristics of Substantive Tests?

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- Variables sampling
- Probability proportionate to size sampling

What type of sampling are Control Tests?

Attribute Sampling

What is Sampling Risk?

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- 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?

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- 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?

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- 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?

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- 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

What is the risk of Incorrect Acceptance?

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- 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?

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- 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?

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- Risk of human (auditor) missing an error
- Also called exception- error or deviation.

How does Sampling Risk compare to Non-Sampling Risk?

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- 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?

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- 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?

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- Error rate in population that you are willing to accept/tolerateInverse relationship to Sample Size
- Higher Tolerable Rate = Smaller SampleLower 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?

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- 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?

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- 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 Over-reliance?

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- Risk of Assessing Control Risk too low
- Gives you the Sampling Risk

When is Attribute sampling used?

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- 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?

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- 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?

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- 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?

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- 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?

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- 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?

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- 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?

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- Perform the Sampling Plan
- Evaluate Results
- Document Results

What is Systematic Sampling?

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- 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?

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- Also called Stop or Go sampling
- Each audit step determines the next step

What is Discovery Sampling?

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- 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.