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Acco 360 > Chapter 11: Audit Sampling Concepts > Flashcards

Chapter 11: Audit Sampling Concepts Flashcards

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1
Q

What are the 3 different sampling selection of items ?

A
  1. Selecting all items
  2. Select specific items
  3. Audit sampling (+ stratification)
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2
Q

When is it appropriate to select all items ? (3)

A

When population is small, when performing test of details risk = expected high, when auditor plans to do audit data analytics

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3
Q

When is it appropriate to use audit samling?

A

When we want to reach a conclusion about the entire population by selecting a representative sample

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4
Q

What is audit sampling?

A

The application of audit procedure to less tan 100% of items in the population such that all sampling units have a chance of selection to provide auditor with reasonable basis to make conclusion about the entire population

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5
Q

Why is sampling a key part of risk response?

A

To ensure that audit tests are effective and efficient

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6
Q

What is a representative sample?

A

A sample that has the approximately same characteristics as the population.

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7
Q

What is sampling risk?

A

The risk that auditor reaches an incorrect conclusion because sample is not representative of the population

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8
Q

What is an exception rate?

A

% of items in population that include exceptions

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9
Q

What are the 2 ways to control sample risk?

A

1) Adjust sample size
2) Use appropriate method of selecting sample items in population

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10
Q

What is nonsampling risk?

A

Risk that auditor reaches an incorrect conclusion for any reason not related to sampling risk

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11
Q

What are the 2 common nonsampling risks?

A

1)Failure to recognize and interpret exceptions
2)Inappropriate and ineffective audit procedure

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12
Q

What are the 3 phases involved in sampling ?

A

1)Planning to determine sample size
2)Performance (select sample & perform test)
3)Evaluation (eval results and conclude on acceptability of population tested)

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13
Q

What is the purpose of sampling planning?

A

To make sure that audit tests are performed in a manner that provides desired sampling risk and minimizes likelihood of nonsampling error.

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14
Q

What is statistical samplling selection?

A

Random selection of items so that each population items has a know probability of being being included in the sample

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15
Q

What is nonstatistical sampling selection?

A

Select the sample items using nonprobabilistic methods that approximates a random sampling approach.

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16
Q

What are the characteristic of statistical sampling?

A

Use of math to quantify sampling risk in planning and evaluating the sample

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17
Q

What are the characteristics of nonstatistical sampling?

A

it doesn’t quantify risk. Use of professional judgement in considering effect of sampling risk

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18
Q

What are the 3 methods of probabilistic sampling?

A

1)Simple random sample selection
2)Systematic sample selection
3)Probability - proportionate to size sample selection

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19
Q

What is simple random sample selection?

A

sample selection where every possible combination of population items have a chance of selection

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20
Q

What is systematic sample selection?

A

Calculate an interval and then select the items based on the size of the interval

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21
Q

What is probability - proportionate to size sample selection?

A

A variation of systematic sample by unit of interest where here = $

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22
Q

What are the 3 nonprobabilistic methods of sample selection?

A

1)Directed sample selection
2)Block sample selection
3)Haphazard sample selection

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23
Q

What is a directed sample selection?

A

Where each item is selected on basis of some judgmental criteria (ex risky items)

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24
Q

What is haphazard sample selection?

A

Selection of items without bias (close eyes and pick)

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24
What is block sample selection?
Selection of firt item in a block and remainder of block is chosen in sequence
25
What is a sample selection method that is both nonprobabilistic and probabilistic?
The stratified sample selection (sample split into smaller sets of layers with similar characteristics)
26
What is the application phase?
Determine if audit sampling applies
27
How do you sample for exceptions?
Estimate a % of items in population containing an attribute/characteristic of interest. This gives the exception/occurence rate which is used to estimate the expection rate in the entire population
28
What does exception refer to (2) ?
To both deviations from client's control procedure and amount that are not monetarily correct
29
What is a sampling error?
Difference between sample expection rate from actual population expection rate
30
What is the computed upper expection rate (CUER) in test of controls?
The upper limit of the probable population expection rate
31
What are the 9 steps in sampling for tests of controls?
1)Determine whether sampling apllies 2)Determine the test objective 3)Define the attribute and control deviation 4)Define the population 5)Define the sampling unit 6)Determine initial sample size 7)Select the sample and perform audit procedures 8)Conclude on acceptability of the population 9)Communicate with the audit committee, management
32
For test of controls, how do you determine if sampling applies?
Generally applies to manual controls
33
For test of controls, what are the population characteristics? (3)
1)Define attribute and control deviation 2)Define population (items about which auditor wishes to generalize) 3)Define sampling unit
34
For test of controls, what should you consider when determining initial sample size? (3)
1) Tolerable exception rate (TER) 2)Acceptable risk of overreliance (ARO) 3)Estimate the population exception rate (EPER)
35
What is TER ?
Tolerable expetion rate: highest expection rate that auditor will permit in control, determined by deciding what exception rate is material
36
What is ARO?
Acceptable rate of overreliance: risk that auditor conclude that controls are more effective than they actually are (risk that auditor is willing to take)
37
What is EPER?
Estimate the population exception rate: to plan sample size. if low = small sample size
38
What factors impact the sample size?
Population size, TER, ARO and EPER
39
What are the 2 factors with the greatest impact on population size?
TER and EPER
40
How do you evaluate sample results ?
understand cause of errors, project errors observed in sample to population taking into consideration sampling risk. Analyze results quantitatively and qualitatively
41
What is the quantitative assessment of sampling results for test of controls?
calculation of sample expection rate (SER) = actual nbr of exceptions/actual sample size For nonstatistical sampling: Eval sampling risk with TER - SER and eval whether its large to conclude that population exception rate is acceptable
42
What is the qualitative assessment in tests of controls ?
Analyze individual exceptions to determine breakdown in internal controls that allowed them to happen
43
When the sample results suggest that controls are innefective, what are the 3 choices?
1)Expand testing 2)Test compensating controls 3)Evaluate severity of control fialure and revise audit approach
44
What is called statistical sampling to reach a conclusioon about exception rates?
Attributes sampling
45
What are the 2 differences between statistical and nonstatistical sampling for exception rates in test of controls?
1)Calculation of initial sample sized developed from statistical probability distributions using audit software/tables 2)Calculation of estimated upper exception rates that include sampling risk using audit software/tables similar for calculating sample sizes
46
What is sampling distribution?
attributes sampling based on binomial distribution
47
How do you determine if sampling applies for test of details?
very common, just make sure it's not a census (audit of T that satisfies a particular criteron)
48
What are the sampling test objective for test of details?
Provide assurance on 1+ assertion for test of details of balances
49
For test of details, what are the population characteristics?
1)Misstatement conditions (misstatement exists when sample item is misstated) 2)Population (pop definition from test obj) 3)Sampling unit (almost always items making up the account balance)
50
For test of details, how do you determine initial sample size?
sample size= (population recorded amount x confidence factor)/ tolerable misstatement
51
What is tolerable misstatement?
Application of performance materiality to a particular samplign procedure
52
For test of details, What are the facors influencing the sample size? (7)
1)Inherent risk 2)Control risk 3)Results of other substantive procedures related to the same assertion 4)Tolerable misstatement for specific account 5)Expected size/frequency of misstatements 6)amounts of population 7)Nmbr of items in population
53
What is ARIA?
Acceptable risk of incorrect acceptance: risk that auditor is willing to take of accepting a balance as correct when the misstatement in balance is greater than materiality. Primary factor affecting ARIA = assessed control risk
54
when ARIA is low, what does it mean for the performance of substantive test ?
Perform extensive substantive test
55
What are the 3 factors affecting ARIA?
1) Effectiveness of internal control (control risk) 2)Substantive tests 3)Analytical procedures all increase ARIA reduce sample size
56
For test of details, how do you estimate for misstatements in the population ?
Based upon prior experience with client, assessing Inherent risk, tests of control, substantive tests of transactions and analytical procedures already performed
57
For test of details, what is the quantitative evaluation of sample results ?
1) Project known misstatement from sample results to overall population 2) Considering sampling error/risk (ARIA)
58
For test of details, What is the point estimate and how do you calculate it ?
approach that assumes that misstatements in unaudited population are proportional to known misstatement in sample. - Stratum for each; point estimate of misst = (Known misstatement/Recorded value of sample) x recorded book value for stratum Then total all
59
For test of details, When using nonstatistical sampling, what must you consider about the population misstatement? (5)
That it exceeds tolerable amount by considering: 1) Difference between point estimate and tolerable misstatement 2)Extend to which items in population have been audited 100% 3)Whether misstatement tend to be offsetting or only one direction 4)Amounts of individual misstatement 5)Sample size
60
For test of details, Should you request client to correct known misstatement
yes, even if not material
61
For test of details, what is the qualitative evaluation of sample results ? (2)
1)Evaluate nature/cause of each misstatement found 2)Decide if modifications of audit risk is needed
62
For test of details, what are the choices of actions if the misstatement of the population is higher than tolerable misstatement? (5)
1)Take no action until tests of other areas are completed 2)Perform expanded audit tests in specific areas 3)increase sample size 4)Adjust account balance 5)Refuse to give an unqualified opinion
63
What is MUS?
Monetary unit sampling: statistical sampling method developed for auditors. 0 or negative balances do not have a chance of being selected
64
What are the 3 differences between MUS and nonstatistical sampling?
1)Definition of sampling unit is individual $ (in MUS) 2) Population size is the recorded $ population (in MUS) 3)Sample selection is done using PPS (probability proportional to size sample)
65
How do auditors generalize sample to population using MUS? (2)
1)Projecting misstatement from sample results to population 2)Determining related sample error
66
What is a misstatement bound?
statistical result when MUS is an estimate of likely maximum overstatement at given ARIA
67
When using MUS, how do auditors conclude about the acceptability of the population?
compare calculated misstatement bound to tolerable missatement (if > then dont accept)
68
What are the 4 pros of MUS?
1)increase likelihood of selecting high dollar items from population 2)reduce cost of audit testing because several sample items are tested at once 3)easy to apply 4)Provides statistical conclusion rather than nonstatistical one
69
What is the main con of MUS?
Total misstatement bounds resulting when misstatements are found may be too high to be useful to auditor
70
How to deal with exceptions?
use sampling to follow on exceptions
71
How do you use sampling and full population testing together?
Identify exceptions with full population testing and then employ a sampling strategy to test remaining population

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