Chapter 11 - Audit Sampling Concepts

Question 1

What are the 3 ways that a practitioner can select items for testing?

Answer 1

1. Select all items in the population (100% examination)
2. Selecting specific items
3. Audit sampling

Question 2

What is audit sampling? Provide a few examples.

Answer 2

Audit sampling is a selective examination of data used when:

1. less than 100% of the items in the population under examination are being audited, and
2. each item (sampling unit) in the population could be selected as part of the sample.

Examples:

• Selecting a random sample of customers and confirm their A/R balance
• Select a random sample of sales invoices throughout the year and trace back to shipping documents

Question 3

What is the population?

Answer 3

A set of accounts or transactions from which the auditor wishes to draw a conclusion.

Question 4

What is a representative sample?

Answer 4

A sample with the same characteristics as those of the population.

Question 5

What is sampling risk and how can it be controlled?

Answer 5

Sampling risk is the risk that the auditor reaches an inappropriate conclusion because the sample is not representative of the population.

Controlling sampling risk:

• Adjust sample size (increasing sample size decreases sampling risk)
• Use an appropriate method of selecting the sample

Question 6

What is non-sampling risk and how can it be controlled?

Answer 6

Non-sampling risk is that the auditor makes an incorrect conclusion due to the failure to recognize exceptions, and/orinappropriate or ineffective audit procedures.

Controlling Non-sampling risk:

• Give clear instructions
• Effective supervisor review
• Careful planning
• Ensure Auditors are qualified, knowledgeable, trained, etc.

Question 7

What is the difference between statistical/non-statistical sampling and probabilistic/non-probabilistic sample selection?

Answer 7

Statistical/non-statistical sampling is used in the planning and evaluation phases of audit sampling for things such as determining sample sizes, assessing sampling risk, etc.

Probabilistic/non-probabilistic sample selection is used in the performance phase of audit sampling, and deals with actually choosing the individual items for testing.

Question 8

What is statistical sampling?

Answer 8

Statistical sampling applies mathematical rules so that auditors can measure sampling risk in planning the sample and evaluating the results.

Question 9

What is non-statistical sampling?

Answer 9

In non-statistical sampling auditors use their professional judgment to select sample items that will provide the most useful information, and to reach their conclusions on the populations.

Question 10

What is probabilistic sample selection?

Answer 10

When using probabilistic sample selection, the auditor randomly selects items such that each population item has a known probability of being included in the sample.

*** Must be used when a statistical sampling approach is taken

Question 11

What is non-probabilistic sample selection?

Answer 11

When using non-probabilistic sample selection, the auditor selects sample items using professional judgment rather than probabilistic methods.

Question 12

What are the 3 common non-probabilistic sample selection methods?

Answer 12

Directed sample selection—each item in the sample is selected on the basis of some judgmental criteria.

Block sample selection—auditors select the first item in a block and the remainder of the block is chosen in sequence.

Haphazard sample selection—items are chosen without regard to their size, source, or other distinguishing characteristics.

Question 13

What are the 3 common probabilistic sample selection methods?

Answer 13

Random sample—a sample in which every possible combination of population items has an equal chance of being selected.

Systematic selection—the auditor calculates an interval and selects the items for the sample based on the size of the interval and a randomly selected number between zero and the sample size.

Probability proportionate-to-size

Question 14

What is stratified sampling?

Answer 14

Stratified sampling—a method of sampling in which all the elements in the total population are divided into two or more subpopulations that are independently tested.

• Each strata have a set of similar characteristics
• Can test each strata using different methodologies and sample sizes
• Can help improve audit efficiency

Question 15

What are the differences between the 3 types of audit tests (tests of controls, substantive tests of details of balances, and substantive tests of details of transactions)?

i.e., what are we measuring for each of the different tests?

Answer 15

Tests of controls - Measuring the operating effectiveness of controls.

Substantive tests of details of transactions - Measuring the monetary correctness of individual transactions in the accounting system (and the operating effectiveness of controls if performed as part of a dual test).

Substantive tests of details of balances - Measuring whether the dollar amounts of account balances are materially misstated.

Question 16

What is the sampling method used for tests of controls?

Answer 16

Attribute sampling—a statistical, probabilistic method of sample evaluation that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest.

Question 17

What are the steps in testing controls using attribute sampling? (6)

Answer 17

1. Define the test objective
2. Define the population characteristics (attribute, control deviation, population, sampling unit)
3. Determine initial sample size
4. Select sample and perform procedures
5. Evaluate sample results (quantitative and qualitative)
6. Conclude on acceptability of the population

Question 18

What are the drawbacks of non-statistical sampling?

Answer 18

1. The auditor cannot quantify sampling risk.

2. Auditor bias in sampling selection

Question 19

What is a tolerable misstatement?

Answer 19

Tolerable misstatement is the application of performance materiality to a particular sampling procedure (can’t exceed PM).

Higher TM = lower sample size

Question 20

What is the acceptable risk of incorrect acceptance (ARIA)?

Answer 20

Acceptable risk of incorrect acceptance (ARIA)—the risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is greater than tolerable misstatement.

Higher ARIA = lower sample size

Question 21

What is the formula used to project misstatements found in the representative sample to the population from which the sample was selected?

Answer 21

($ misstatements in sample / $ book value of items tested) * ($ book value of population)

Question 22

What is monetary unit sampling (MUS)?

Answer 22

Monetary unit sampling (MUS) is a statistical sampling method developed specifically for auditors.

It is the most commonly used statistical method of sampling for tests of details of balances because it has the statistical simplicity of attribute sampling yet provides a statistical result expressed in dollars (or another appropriate currency).

Question 23

What are the advantages of monetary unit sampling?

Answer 23

• MUS automatically increases the likelihood of selecting high dollar items from the population being audited.
• MUS often reduces the cost of doing the audit testing because several sample items are tested at once.
• MUS is easy to apply.
• MUS provides a statistical conclusion rather than a non-statistical one.

Question 24

During the audit, a new staff member failed to record a client’s 10-cent calculation error as an error. What type of error or risk does this mistake exemplify? Why?

Answer 24

This is an example of non-sampling risk or error. The auditor failed to recognize the exception as an error.

Question 25

Provide two examples of directed sample selection that could be used for the audit of inventory.

Answer 25

The auditor could select items most likely to contain misstatements, such as items that have been purchased from abroad and have foreign exchange in the pricing calculation. A second example could be items containing key items or large dollar values. For example, the auditor could choose to count those products where the value on hand is expected to be more than $55,000

Question 26

List the three features of probabilistic sample selection.

Answer 26

1. A method of sample selection in which it is possible to define the set of all possible samples 2. Every possible sample item has a known probability of being selected 3. The sample is selected by a random process

Question 27

List one advantage and one disadvantage associated with systematic sample selection.

Answer 27

Advantage: Easy to use because the sample selection can be done quickly Disadvantage: Possibility of bias

Question 28

An auditor is counting a sample of inventory items. Provide two examples of potential errors or misstatement that could occur.

Answer 28

The client could neglect to count the inventory item The count could be different from the auditor’s count

Question 29

The auditor has decided to circularize accounts payable confirmations. What is the likely population?

Answer 29

The population is the accounts payable master file. The auditor would select from all vendors listed in the file, whether there is an accounts payable balance or not, as the auditor is looking for potential understatement.