Chapter 11 Flashcards
(119 cards)
1
Q
What are the ways to select items for testing? (3)
A
- All items
- Specific items
- Audit sampling
2
Q
When do you chose All item? (3)
A
- Small population of high value
*High risk of error - ADA is used
3
Q
When do you use specific item? (3)
A
- Item with specific value
- Items highly susceptible to misstatement
- Item to test controls
4
Q
When do you use audit sampling? (2)
A
- Control test
- Test of detail
5
Q
What is a representative sample?
A
Sample that reflects the population
6
Q
What is stratification?
A
Separation of population into groups of the same characterisitics
7
Q
True or False? Sampling can improve efficiency and effectiveness?
A
False
8
Q
What is considered “effective” in sampling?
A
Detect deficiencies and misstatement to have enough evidence to make a conclusion
9
Q
What is considered “efficient” in sampling?
A
When you don’t need excessive effort when there’s no deficiency of misstatement
10
Q
What is the goal of representative sampling?
A
Have a representative sample of the population and avoid incorrect conclusion
11
Q
Who do you create a representative sample?
A
Select items that share the same characteristics of the population
12
Q
True of False? Auditor are never 100% sure that the sample is representative?
A
True
13
Q
How to increase the certainty of representative sampling? (3)
A
- Improve design process
- Improve sample selecting
- The way we evaluate results
14
Q
What is sampling risk?
A
Reaching an incorrect conclusion from non-representative sample based on a exception rate
15
Q
What are the general solutions to sampling risks? (2)
A
- Adjust sample size
- Use right sampling method
16
Q
What are non-sampling risks?
A
Reaching an incorrect conclusion from reasons not related to sampling
17
Q
What are common causes of non-sampling risks? (2)
A
- Failure to recognize exceptions
- Ineffective audit procedures
18
Q
What are the phases of sampling? (3)
A
- Planning
- Performance
- Evaluation
19
Q
How is statistical sampling different from nonstatistical sampling?
A
More quantitative and applies mathematic rules
20
Q
How is nonstatistical sampling different form statistical sampling?
A
Not quantitative and uses professional judgement
21
Q
What is a probabilistic sample selection?
A
All item has a chance to be selected
22
Q
What is a nonprobabilistic sample selection?
A
Items are selected based on certain criterias
23
Q
What is simple random sample selection?
A
All have a chance to be selected
24
Q
When do you use simple random sample selection?
A
When you don’t need to emphasize on specific items
25
True or False? You can use replacement when conducting simple random sample selection
True
26
What is systematic sampling?
Every Nth item is selected for the sample
27
What are the advantage/disadvantage of systematic sampling?
* Easy to use
* Possibility of bias
28
What is probability proportional to size?
Variation of systematic sampling where the dollar is the unit of interest
29
What is directed sampling?
Selecting item based on criteria
30
What is the underlying logic of directed sampling?
If higher risk item has no misstatement, less likely RMM in the population
31
What are the most common directed sampling method? (3)
* Most likely to contain misstatement
* Contain selected population characteristic
* Large dollar coverage
32
What is block sampling?
Select first item in a block
33
When is it acceptable to use block sampling
When there is a reasonable amount of block
34
Which assertion is best to test when using block sampling?
Cutoff
35
What is hazard sampling?
Selecting items with the least amount of bias as possible
36
When do we use hazard sampling?
When cost > benefits in directed sampling
37
What is stratified sampling?
Stratify sample before selection
38
Fill in the blank: Stratified sample can improve the ____ of the audit
Efficiency
39
Why do we use sampling for test controls?
To see i the control are effective
40
What kind of statistical sampling do test of control use?
Non-statistical
41
What is an exception rate?
% of item that doesn't meet the criterias
42
What is a sampling error?
Sample exception rate - population exception rate
43
What is sampling risk?
% of being wrong
44
What are the steps in sampling for tests of controls? (6)
* Determine if sampling applies
* Define population characteristics
* Define attribute and control deviation
* Define population
* Define the sampling unit
* Determine initial sample size
45
How to know when sampling applies to tests of control? (2)
* Controls produces documentary evidence
* When using automated controls
46
What is being assessed in test objective? (2)
* Risks
* Transaction cycles
47
How to define population characteristics? (3)
* Define attribute and control deviation
* Define population
* Define sampling unit
48
How do you define attributes and control deviation?
Have a guideline to identify exceptions
49
How do you define a population?
Generalize items
50
Which assertion do you test when defining a population?
Completeness
51
How do you define the sampling unit?
Based on the population and objective of audit test
52
How do you determine initial sample rate? (3)
* Tolerable exception rate
* Acceptable risk of overreliance
* Expected population deviation rate
53
Fill in the blank: Testing control depends on how ____ control operates
Often
54
What is Tolerable exception rate (TER)?
Highest tolerance rate when testing control while still being effective
55
Which factors affect TER? (2)
* Degree of reliance on control
* Significance of control
56
What happens to TER when you have a larger sample?
TER is lowered
57
What is Acceptable risk of overreliance (ARO)?
Risk of accepting that controls are effective (when they might not be)
58
What happens to ARO when controls risk are low?
ARO will be low
59
What happens to ARO if the sample size is larger?
ARO will be lower
60
True or False? TER & ARO has to be the same for different attributes?
False
61
What is estimate of population exception rate (EPER)?
Estimate of the population exception rate
62
What happens to EPER if we have a small sample size?
EPER will be lower
63
How to you estimate EPER?
Using the prior years
64
If prior years are not available, how do you estimate EPER?
Use a small sample of the current year
65
How do you calculate the precision of initial sample size?
TER - EPER
66
What will a smaller precision % applies?
Smaller sample size
67
How do you evaluate sampling results? (4)
* Understand cause of error
* Project error on population
* Consider sampling risk
* Analyze result quali & quanti
68
How do you calculate the sample exception rate (SER)?
Number of exception / sample size
69
How to calculate the true population exception rate ?
TER - SER
70
What happens if SER > EPER?
Sample results to not support preliminary assessed control risk
71
What are the qualitative assessments from sampling? (2)
* Evaluate individual exceptions
* Professional skepticism
72
What to do when sample suggest ineffective controls? (3)
* Expand testing
* Test compensating control
* Evaluate severity of control failure
73
What should be discussed with the audit committee on sampling for test of control?
* Inform of ineffective controls and weakness
* Issue internal control letter (exception, implication, recommendations)
* Inform of significant control deficiencies
74
What is attribute sampling?
Use of statistical sampling to reach conclusion about exception rate
75
Why do we use sampling for tests of details?
To measure if the dollar amount in the account balance are materially mistated
76
How do you determine if sampling applies to substantive test of detail?
Conduct a census hen sampling doesn't applies
77
How do you determine the test objective for test of detail?
Provide assurance on 1 or more assertions
78
How to define population characteristics for test of detail?
Test objective (except completeness)
79
How do you determine initial sample size in test of detail?
Test all significant items
80
How do you calculate sample size for test of detail?
(Population * Confidence factor) / Tolerable misstatement
81
What are the factors influencing sample size? (7)
* Inherent risk
* Control risk
* Result from other substantive procedure related to the same assertion
* Tolerable misstatement
* Excepted size & frequency of misstatement
*Dollar amount of population
* # of item in population
82
When are misstatement tolerable
When the performance materiality is the same or lower
83
What is an acceptable risk of incorrect acceptance (ARIA)?
Risk willing to take that balance in correct when it isn't
84
What is the primary factor affecting auditor's decision about ARIA?
Assessed control risk
85
What happens to ARIA when controls are effective?
Control risk is low --> Increase ARIA
86
On what is based the estimate of misstatement in a population? (5)
* Experience with client
* Inherent risk
* Result of test of control
* Substantive test of transaction
* Analytical procedure
87
True or False? Sample size decrease as the amount of misstatement expected in the population approaches tolerable misstatement
False
88
How do you select sample and perform audit procedure in test of details?
Apply audit procedure to item to detect misstatement
89
How to you generalize the sample in a population in test of detail? (2)
* Projecting known misstatements
* Consider sampling error and risk (ARIA)
90
How do you calculate the point of estimate?
(Known misstatement / Recorded value of the sample) * Recorded book t-value for the stratum
91
What are the qualitative assessment of sampling in test of detail? (2)
* Evaluate nature and cause of misstatements
* Determine if change to the audit risk model is needed
92
When is a population acceptable in test of details? (2)
* Errors < Tolerable amount
* Satisfied with underlying cause of the errors
93
What to do when the population is not acceptable in test of detail?
Wait until test of other audit is completed and evaluate if FS as a whole is misstated and if there is offsetting misstatement
94
When do you perform expanded tests in specific areas? (3)
* Specific misstatements
* Can be in more than one area
* All errors must be projected on the population
95
Why do we increase sample size
* Satisfy tolerable misstatement requirement
96
True or False? Increasing sample size is costly, especially when the difference is small
True
97
When is it not practical to adjust account balance?
When misstatement are above tolerable misstatement
98
When do you use monetary unit sampling (MUS)? (3)
* AR confirmation
* Inventory price test
* Inventory test counts
99
What is MUS sampling unit?
Individual dollar
100
What is an advantage of MUS?
Can emphasize physical unit with larger recorded balance
101
What is a disadvantage of MUS
Can't evaluate likelihood of unrecorded items in the population
102
How is sample selection done with MUS
With probability proportional to size sample selection (PPS)
103
How do you obtain PPS?
Computer software or systematic sampling
104
What is the problem of PPS regarding small balance?
Item with little to zero balance has almost no chance of being selected
105
What is the solution to small balance in PPS?
Do specific audit test for them
106
What is the problem in PPS regarding negative balance?
Inability to be included
107
What is the solution to negative balance in PPS?
Treat them as positive balance
108
What is misstatement bound?
Statistical result when MUS is used, estimates the likely max overstatement at a given ARIA
109
What are the conclusions on the acceptability of population with MUS? (2)
* Bound > tolerable = Not acceptable
* Uses the same alternative as nonstatistical sampling
110
What are the pros of MUS? (4)
* Better chance to select high-dollar item
* Reduce cost of audit testing
* Easy to apply
* Statistical conclusion
111
What are the cons of MUS? (2)
* Total misstatement bound often too high (solution: use larger sample)
112
In which case is it better to use MUS?
When there are zero or few misstatement are expected
113
Fill in the blank: ADA is better for testing the ________ __________
Entire population
114
What are the main functions of ATT in sampling? (2)
* Test every transactions, follow up on exception and control deviation
* Eliminate sampling risk
115
How are sampling and full population used together?
Full population identify exception and employ sampling strategy
116
When is it best to use sampling and full population?
When there is a lot of transaction
117
What is the main problem with ADA and using the full population?
High volume of outliers
118
Where do outliers from ADA come from? (3)
* Inappropriate ATT scoping
* Poorly defined initial parameter
* Poor quality data
119
