Ch 9 - Sampling

Question 1

The application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class

Answer 1

Audit sampling

Question 2

2 reasons to use samples:

Answer 2

1. it’s not possible to test every item (limited manpower & time)
2. it’s not economically desirable to test every item (less efficient & higher costs)

Question 3

T/F: sampling is becoming less important to the industry over time.

Answer 3

True; due to increases in computing power and automation

Question 4

When a test of controls or a substantive test is restricted to a sample, the auditor’s conclusions may be different from the conclusions he would reach if the test were applied in the same way to all items in the account balance or class of transactions

Answer 4

Sampling risk (PCAOB definition)

Question 5

T/F: The auditor did something wrong if there is a high sampling risk

Answer 5

False; the auditor did everything right, but sometimes you just get unlucky and get a sample that doesn’t accurately represent the population

Question 6

T/F: Sampling Risk can NEVER be minimized to zero

Answer 6

True; always testing less than 100% of the population so it can’t be zero

Question 7

T/F: A smaller sample size means a smaller sample risk

Answer 7

False; larger sample size = less sample risk

Question 8

Includes all the aspects of audit risk that are not due to sampling

Answer 8

Non-sampling risk

Question 9

Incorrectly defining the population, selecting inappropriate audit tests/methods, human errors in mathematical calculation, tracing when you should have vouched are all examples of…

Answer 9

Non-sampling risk

Question 10

Sampling that reaches a conclusion about a population in terms of a rate of occurrence is:

Answer 10

Attributes sampling

Question 11

The auditors’ primary objective in selecting a sample of items from an audit population is to obtain:

Answer 11

A representative sample

Question 12

Discovery sampling is particularly effective when:

Answer 12

The auditors are looking for critical deviations that are not expected to be frequent in number.

Question 13

Which of the following is an element of sampling risk?

Answer 13

Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement

Question 14

This year the audit plan, as compared to the prior year, includes a lower risk of assessing control risk too low. Other factors held constant, which of the following is most likely to be correct relating to the planned risk of incorrect acceptance for substantive procedures?

Answer 14

Higher than prior year

NOTE: Decreasing the planned risk of assessing control risk too low would be expected to allow a higher planned assessed risk of incorrect acceptance (thereby allowing a decrease in the scope of substantive audit procedures)

Question 15

In which of the following circumstances is it least likely that tests of controls will be performed?

Answer 15

The expected deviation rate exceeds the tolerable deviation rate

NOTE: because in such a situation testing is only likely to reveal to the auditors that the system is not operating effectively as they expected

Question 16

The use of mathematical/statistical theory to determine appropriate sample sizes and evaluate the sample results.

Answer 16

Statistical Sampling

Question 17

The use of experience and professional judgement to determine appropriate sample sizes and evaluate the sample results (inherently subjective)

Answer 17

Non-Statistical Sampling

Question 18

T/F: Only statistical sampling is allowed by the AICPA and PCAOB standards

Answer 18

False; BOTH statistical and non-statistical sampling are allowed

Question 19

Advantages and Disadvantage of statistical sampling:

Answer 19

Advantages:
- objective
- easy to explain/replicate
- easy to defend in court/regulators (concrete)
- smaller sample sizes –> more efficient
Disadvantages:
- difficult to complete

Question 20

Advantage and Disadvantages of non-statistical sampling:

Answer 20

Advantage:
- easier to complete
Disadvantages:
- subjective
- hard to explain/replicate
- hard to defend in court or to regulators
- larger sampling size –> less efficient

Question 21

T/F: Larger auditing firms prefer Statistical Sampling

Answer 21

True; because they value objectivity and defensibility

Question 22

A set of Statistical Sampling methods used when testing Internal Controls for Operating Effectiveness

Answer 22

Attributes Sampling

Question 23

When doing attributes sampling, the deviation rate also means…

Answer 23

the failure rate

Question 24

The unknown failure rate of a control in the entire population of control instances.

Answer 24

Population Deviation Rate

Question 25

The failure rate of a control in our sample.

Answer 25

Sample Deviation Rate

Question 26

The failure rate in the population that’s acceptable given our Planned Assessed Level of Control Risk.

Answer 26

Tolerable Deviation Rate

Question 27

The width of the Confidence Interval we build around our Sample Deviation Rate.

Answer 27

Allowance for Sampling Risk

Question 28

If the achieved upper deviation rate < tolerable deviation rate...

Answer 28

Means it's good/acceptable; the control is Operating Effectively for our given Planned Assessed Level of Control Risk.

Question 29

What’s the likelihood the Population Deviation Rate is outside our Confidence Interval (specifically to the right of it); relates to the confidence level

Answer 29

Risk of Assessing Control Risk Too Low

Question 30

The uppermost part of our Confidence Interval. This is as bad as we think the Population Deviation Rate is likely to be.

Answer 30

Achieved Upper Deviation Rate

Question 31

T/F: If the Achieved Upper Deviation Rate is equal to or greater than the Tolerable Deviation Rate, we conclude the control is NOT Operating Effectively for our given Planned Assessed Level of Control Risk.

Answer 31

True; needs to be less than the tolerable deviation rate

Question 32

T/F: We focus on whether the Sample Deviation Rate is less than the Tolerable Deviation Rate.

Answer 32

False; We do NOT

Question 33

What's a common internal control in financial reporting?

Answer 33

credit sales to customers over certain amounts require special approval.

Question 34

What is given from the AICPA?

Answer 34

Planned Assessed Level of Control Risk (PALCR) and Tolerable Deviation Rate

Question 35

Do we know what the Population Deviation Rate is?

Answer 35

No, we estimate it by: 1) using the sample deviation rate from PY 2) run a small pilot sample

Question 36

Each row is for a given...

Answer 36

Expected Population Deviation Rate

Question 37

Each column is for a given...

Answer 37

Tolerable Deviation Rate

Question 38

T/F: Each Risk of Assessing Control Risk Too Low is on the same table as Expected Population Deviation Rate and Tolerable Deviation Rate

Answer 38

False; it's on a completely different table

Question 39

T/F: In the Sample Size table, the 1st number in the table is the Sample Size.

Answer 39

True

Question 40

T/F: In the Sample Size table, the 2nd number in parentheses is the number of Deviations / Failures you can find and still accept the control as Operating Effectively.

Answer 40

True

Question 41

T/F: "Eyeballing" is a type of random sampling method

Answer 41

False; it is a Haphazard Selection method & not part of statistical sampling methods

Question 42

For most control testing we will use Haphazard Sample selection.

Answer 42

False; we use Random Sampling

Question 43

What is the Sample Deviation Rate calculation?

Answer 43

Sample Deviation Rate = (actual/found) Deviations in Sample / Sample Size (given in table)

Question 44

T/F: In the Sample Evaluation table, each row is for a given Sample Size.

Answer 44

True

Question 45

T/F: Not every sample size is listed, so always round your sample size up!

Answer 45

False; round it down!

Question 46

T/F: In the Sample Evaluation table, each column is for a number of actual Deviations found.

Answer 46

True; (0-10 deviations)

Question 47

T/F: In the Sample Evaluation table, the number reported in the table is your Achieved Upper Deviation Rate.

Answer 47

True

Question 48

A set of Statistical Sampling methods used when performing Substantive Procedures to test balances/accounts for material misstatements.

Answer 48

Variables Sampling

Question 49

T/F: Attributes Sampling deals in %s and failure rates

Answer 49

True

Question 50

Variables Sampling deals in ___ AND ________________.

Answer 50

$ AND misstatement amounts.

Question 51

2 subcategories of Variables Sampling:

Answer 51

1) Classical Variables Sampling 2) Probability Proportional to Size (PPS) Variables Sampling

Question 52

The actual / unknown misstatement amount in the full population.

Answer 52

Population Misstatement

Question 53

Similar to the Expected Population Deviation Rate in Attributes Sampling; estimated by 1) PY audits 2) pilot sample

Answer 53

Expected Misstatement

Question 54

The Misstatement amount in an account based on our sample results; ex: how misstated A/R is in total based on our sample

Answer 54

Projected Misstatement

Question 55

What’s the likelihood the Population Misstatement is outside our Confidence Interval (specifically to the right of it); relates to the confidence level; similar to Risk of Assessing Control Risk Too Low in Attributes Sampling

Answer 55

Risk of Incorrect Acceptance

Question 56

The width of the Confidence Interval we build around our Projected Misstatement

Answer 56

Basic Precision + Incremental Allowance

Question 57

The uppermost part of our Confidence Interval. This is as bad as we think the Population Misstatement is likely to be; similar to the Achieved Upper Deviation Rate in Attributes Sampling

Answer 57

Upper Limit on Misstatement

Question 58

This is the materiality level for the account

Answer 58

Tolerable Misstatement

Question 59

T/F: If the Upper Limit on Misstatement is < Tolerable Misstatement, then the account/balance is materially misstated.

Answer 59

False; It is NOT materially misstated; you want the Upper Limit Misstatement to be < TM

Question 60

T/F: We do NOT focus on whether the Projected Misstatement is less than the Tolerable Misstatement.

Answer 60

True

Question 61

Sample size for PPS Variables Sampling calculation:

Answer 61

Sample Size (n) = (BV * reliability factor) / (TM - (EM x Expansion Factor)) ** don't need to memorize

Question 62

PPS Variables Sampling selection method:

Answer 62

Monetary Unit Sampling (a form of Systematic Sampling)

Question 63

When we create a listing of items and select every Nth item

Answer 63

Systematic Sampling

Question 64

The increment between each Nth item is referred to as the...

Answer 64

Sampling Interval

Question 65

When the Nth item selected is a dollar amount rather than an account.

Answer 65

Monetary Unit Sample

Question 66

Sampling Interval formula:

Answer 66

Book Value / Sample Size (n)

Question 67

Use the sampling interval to...

Answer 67

To choose 1st acc that beginning and ending balances are between the sampling interval. Multiply the sampling interval by 2, 3, 4, 5, 6 & so on until you have as many accounts as the sample size (n)

Question 68

Systematic/Monetary Unit Sampling automatically results in a...

Answer 68

Stratified Sample

Question 69

Sample where certain accounts are treated differently, usually sampled at a higher or 100% rate

Answer 69

Stratified Sample

Question 70

Stratified Samples as more efficient because...

Answer 70

They focus more of our attention on the riskiest accounts (higher sampling rate is normally applied to the largest/riskiest accounts/transactions)

Question 71

T/F: any account the size of the Sampling Interval or Larger will be selected at a 100% rate

Answer 71

True

Question 72

T/F: Smaller accounts have a likelihood of being selected into the sample in proportion to their size

Answer 72

True

Question 73

T/F: PPS Variables Sampling is NOT biased towards selecting larger accounts into the sample

Answer 73

False; it is biased toward larger accounts

Question 74

T/F: PPS Variables Sampling is very good at detecting understatements.

Answer 74

False; good at detecting overstatements (because it's biased toward larger accounts and balances which have more potential to be overstated than understated)

Question 75

T/F: PPS Variables Sampling is used exclusively to look for overstatements.

Answer 75

True (We will only count overstatements)

Question 76

T/F: if an account is twice the size of the Sampling Interval or larger, the standards tell us to select it as often as it gets hit.

Answer 76

True (ex: if it takes up 4 intervals then copy it into your sample 4 times)

Question 77

Sampling Taint calculation for overstatements:

Answer 77

(BV - Audit Value) / BV

Question 78

Misstatement for individual account calculation:

Answer 78

Sampling taint % * sampling interval

Question 79

You don't have to find the sampling taint if...

Answer 79

If the account balance is equal to or greater than the sampling interval.

Question 80

Basic Precision calculation:

Answer 80

Basic Precision = Reliability Factor x Sampling Interval

Question 81

Is found by using the "0" errors row and the appropriate Risk of Incorrect Acceptance

Answer 81

Reliability factor for Basic Precision

Question 83

2 parts for building the Confidence Interval:

Answer 83

1) Basic Precision 2) Incremental Allowance

Question 84

Upper Limit on Misstatement calculation:

Answer 84

Upper Limit on Misstatement = Projected Misstatement + Basic Precision + Incremental Allowance

Question 85

T/F: If Upper Limit is >= Tolerable Misstatement, then Reject the account

Answer 85

True

Question 86

T/F: Auditors have the right (and often do) reject an account as Materially Misstated even if the Upper Limit on Misstatement is technically below but VERY close to the Tolerable Misstatement

Answer 86

True

Question 87

T/F: The PCAOB requires statistical sampling

Answer 87

False