Audit Sampling Flashcards
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?
Used mathematical formulas vs. Judgement to quantify risk, determine sample size, and evaluate sample results.
Based on formulasHelps find an appropriate audit sampleHelps evaluate evidence obtainedHelps evaluate results and quantify Sampling Risk
What are the characteristics of Non-Statistical Sampling?
Auditors use judgement rather than mathematical formula to estimate risk, determine sample size, and evaluate sample results
Based on human decisionEqually acceptable as Statistical Sampling
What are the characteristics of Substantive Tests?
$ubstantive testing; used to detect material misstatements; they include test of details and substantive analytical procedures (at the end of audit)
Variables samplingProbability proportionate to size sampling
What type of sampling are Control Tests?
Attribute Sampling-a statistical sampling method used to estimate the rate (%) of occurrence (exception) of a specific characteristic (attribute)
What is Sampling Risk?
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?
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?
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?
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?
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?
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?
All aspects of audit risk that are not due to sampling.
Risk of human (auditor) missing an errorAlso called exception- error or deviation.
How does Sampling Risk compare to Non-Sampling Risk?
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?
Statistical sampling method used to estimate rate of occurrence of a specific characteristic or attribute in a population
Looking at Control Procedures - Were invoices approved when paid? Errors are stated in terms of %- not dollar amountsFor 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?
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 is the Expected Population Error Rate? (Expected Deviation Rate)
What Error Rate are you expecting? - Judgment call- based on experienceDirect relationship to Sample SizeMore errors = Larger SampleLess errors = Smaller Sample
What is the basic premise of Attribute Sampling?
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
Expected Deviation Rate-auditors best estimate of the rate of deviation from a prescribed control procedure.
What is the Allowable Risk of Over-reliance?
Risk of Assessing Control Risk too low
Gives you the Sampling Risk
When is Attribute sampling used?
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?
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?
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
