Flashcards in Audit Sampling Deck (43):
What increases the auditor's required sample size?
A small tolerable misstatement combined with a high misstatement frequency increases the sample size which may lead to the conclusion by the auditor that all items of the account should be examined
What is random sampling with replacement?
Refers to a sample selection method which assumes that items in the population can be reselected because they are returned to the population after selection
What is sampling for attributes
If auditor is concerned with the existence of an error or the nonexistence of an error, this is appropriate
What is sampling for variables
Concerned with the determining the dollar amount of a variable such as the dollar value of receivables or inventory
What is stratified random sampling
Technique which stratifies the population into subpopulations and then applies random sampling methodology to each strata
Statistical sampling are either based on variable or attribute sampling. What is variable
Is measurement of a continuous variable (a variable such as number of items in inventory or amount of AR). The variable being estimated can take on a continuum of values, 0 to infinity. Variable sampling is based on the normal distribution. Most applicable to substantive tests.
Corresponds to the term quantities
Statistical sampling are either based on variable or attribute sampling. What is attribute
Attribute sampling is based on the binomial distribution and sample items must be binomial in nature (right or wrong, correct or incorrect). It is most applicable to tests of compliance.
Corresponds to the term error rate.
How do you determine the projected error of a Probability proportional to size sample (PPS) with a sampling interval of 10k when auditor discovers AR with recorded amount of 5k and an audit amount of 2k?
For accounts with a book value less than the sampling interval, calculate a tainting % = ( recorded amount- audit amount ) / recorded amount.
The tainting % is multiplied by the sampling interval to determine projected error. Tainting % = 60% and projected error is 6k
Probability proportional to size (PPS) sampling, also known as dollar unit sampling, what is it?
Primary objective - It is best at concluding on overstatements as contrasted to understatements - due to the characteristics of the underlying statistical theory.
It does not assume a normal distribution. (identify overstatement errors). Note controls not being properly applies is not the main emphasis.
The book value of the unit determines how probable it is that it will be included in the sample, not whether it is over or understated.
When using PPS, the auditor controls the risk of incorrect acceptance by specifying a risk level when planning the sample.
In PPS how is the sampling interval calculated
= the book value of the population / sample size
Why would an auditor decide to increase the risk of incorrect rejection?
Risk of incorrect rejection relates to audit efficiency.
This would increase the likelihood of improperly concluding that a balance is materially misstated when it is not. Such an improper conclusion will typically result in application of additional audit procedures, and in the consideration of other audit evidence that will ordinarily lead the auditor to the correct conclusion.
When the costs and effort of selecting these additional sample items is low, the cost of incorrectly rejecting the balance will be low.
What happens if an auditor discovers a deviation from the prescribed control procedure?
Understand the consequence of the deviation as they relate to the FS and the audit. Cannot assume it is isolated and should not report right away as it could be immaterial.
What is audit sampling?
Is the application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.
Statistical and nonstatistical sampling techniques are acceptable.
What is beta risk
It is the risk of accepting an incorrect/unacceptable population, which can never be ignored.
What do the difference and ratio estimation methods measure?
It measures the difference between audit and book values or the ratio of audit to book values. As these differences should not be great, the population of these differences will have little variance. In statistical sampling the less variation in a popn, the smaller the required sample to provide an estimate of a population.
Difference and ratio estimation methods are more efficient because the differences between audit and book values are expected to vary less than the actual items in the population.
What is precision
Precision, the allowance for sampling risk, is used to construct an interval around the sample results in which the true population characteristic is expected to lie.
Possible error in either direction from the sample results is considered.
This applies to classical variables sampling.
What is the projected error
Projected error/misstatement is the difference between the client's book value and the auditor's estimate of the audited value.
What results in a larger sample size
Larger population. For populations greater than or equal to 5k items, the population size no longer affects sample size.
Decrease in the allowance for sampling risk results in larger sample size.
Increase in the expected error occurrence rate results in larger sample size.
How is recording the population in a systematic pattern?
If a cyclical or periodic pattern exists which is related to the attribute being tested, a bias may result - making the sample not random and results not valid.
What is the objective of the allowance for sampling risk?
It is to estimate the confidence interval (range of procedural deviations) of the population
How is there assurance that the FS taken as a whole are not materially misstated?
Tests of controls relate to the internal control and the internal control of and by itself does not provide assurance. In addition to an effective internal control system, substantive tests including analytical procedures and tests of transactions and balances are required.
What is systematic selection
Systematic selection with a random start usually provides a good representation of the entire population because all items in the population have an equal opportunity of being selected
What is stratified selection
Populations are often stratified into homogeneous groups to reduce variability in the sample and results in smaller sample sizes.
What is block selection
Samples items should be selected in such a way that the sample can be expected to be representative of the population allowing all items to have an equal opportunity of being selected.
Block sample consisting of sequential items may preclude items which makes this the least desirable technique for an auditor to use.
What is sequential selection
It is an alternative to a fixed sample plan. Instead of examining a single sample of a specified size, the sample is taken in several steps, with each step conditional on the results of the previous step.
When can discovery sampling be used
Can be used only when the expected error rate is extremely low (eg less than 1%)
What can change the sample size and what has the smallest effect if changed by 25%?
Changing the tolerable rate will significantly affect the sample size. The assurance desired has a very major effect on sample size. A change in the planned assessed level of control risk is likely to result in a change in the tolerable rate, and thus result in a change in sample size.
The changes in population size have a very small effect on the size of an attirbutes sample.
What does statistical sampling do over nonstatistical?
Helps the auditor to design an efficient sample, measure the sufficiency of the audit evidence obtained, and evaluate the sample results.
What are similarities between statistical and nonstatistical sampling
They may both be used to reduce the level of audit risk to a relatively low level. They do not directly affect the risk of nonsampling errors. Auditors can minimize the failure to detect errors and irregularities with either.
What is the sample size designed for dual purpose testing?
The auditor will select the larger of the two samples that would otherwise be required for separate purposes.
In test of controls, how does the rate of errors compare to the rate of deviations and what does auditor usually find
The rate of deviations in the sample is usually exceeds the rate of error in the accounting records
The existence of a deviation from a control activity may or may not indicate that an error exists in the accounting records. For example, an invoice which has not been footed to test math accuracy may still be correctly totaled and properly recorded in the accounting records.
What is sampling vs nonsampling risk
Nonsampling risk is unrelated to the math of the sampling process. An example is choosing an inconsistent audit procedure or failure to detect an error on a document inspected or failure to perform audit procedures required by the sampling plan.
Sampling risk includes the possibility that the sample size selected may be too small to achieve the sampling objective. (risk that sample does not reflect the popn)
What happens if the auditor changes the expected population deviation rate? If increase in rate
An increased popn deviation rate will require an increase in sample size when the planned assessed level of control risk is to remain the same. The allowance for sampling risk will decrease when expected popn deviation rate increases.
This would not impact the tolerable rate or the risk of assessing control risk too low.
How is sample size determined when testing controls
Sample size inputs - tolerable rate of deviation, expected deviation rate (same direction), risk of assessing control risk too low (inverse relationship), population size (same, popn has limited effect on sample size)
What is needed to evaluate the results of attribute sampling?
Attribute - sample size which is used to calculate the deviation rate for sample
Ratio estimation sampling technique - when is it appropriate
Based on comparing the ratio of the book value to the audited value of the sampled items. The total book value must be known and it must correspond to the sum of the individual book values. There must be some observed differences between the audit values and the book values to obtain valid conclusions when the technique is used. Ratio estimation will be more efficient in terms of required sample size than alternative methods when the audited values are nearly proportional to the book values.
What risks relate to the efficiency of an audit
Risk of incorrect rejection
Risk of assessing control risk too high
Results in auditor performing unnecessary additional procedures
What risks relate to the effectiveness of an audit
Risk of incorrect acceptance
Risk of assessing control risk too low
Effectiveness in detecting an existing material misstatement
How does the auditor estimate the appropriate sample size required in estimation sampling for variables
The auditor must first know the acceptable level of risk.
Objective is to estimate the audited dollar amount of the population.
Does not consider qualitative aspects in considering appropriate sample size.
What is needed for attribute sampling for test of controls?
Need the allowable risk of assessing control risk is too low (do not usually use sampling if too high)
Expected population deviation rate
When is systematic sampling used
Random start is obtained and then every nth item is selected. Can be used when forms are not consecutively numbered.
When is stratified sampling used
No special reason for using. Breaks down popn into subpopns and applies different selection methods to each subpopn. This is used when the popn consists of different types of items (large and small balances).