Chapter 6 - Sampling and Audit Testing

Question 1

What does audit sampling allow auditors to do?

Answer 1

Draw conclusions about the entire population on the basis of testing a sample from the population

Can be used for both tests of internal controls and detailed substantive procedures

Question 2

Is audit sampling only used for internal controls?

Answer 2

No, it is used for both internal controls and detailed substantive procedures

Question 3

What is audit risk?

Answer 3

The risk the auditor express an inappropriate opinion when the FS are materially misstated

Question 4

What is an audit risk composed of?

Answer 4

Risks associated with audit sampling known as sampling risk
Other risks known as non-sampling risk

Question 5

What is sampling risk?

Answer 5

The risk that a chosen sample is not representative of the entire population, therefore giving the auditor an inappropriate conclusion after testing the sample

Question 6

What must an auditor avoid & ensure when selecting a sample to test?

Answer 6

Avoid any bias
Ensure the sample is representative of the entire population

Question 7

What are the two consequences of sampling risk?

Answer 7

There is a risk that the audit will be ineffective (increasing the audit risk)

There is also a rip that the audit will be inefficient (increasing the audit effort and cost)

Question 8

What are the implications for the audit when the auditor concludes that the controls are effective when they are ineffective?

Answer 8

Increases the audit risk (the risk that the auditor will issue an inappropriate audit opinion)

Question 9

What are the implications for the audit when the auditor concludes that the controls are ineffective when they are effective?

Answer 9

Increased audit effort - the risk is that the audit will be inefficient

Question 10

What are the implications for the audit when the auditor concludes that there is no material misstatement when in reality there IS material misstatement?

Answer 10

Increased audit risk

That is the risk the the auditor will issue an inappropriate audit opinion

Question 11

What are the implications for the audit when the auditor concludes that there is material misstatement when in reality there is no material misstatement?

Answer 11

Increased audit effort

The risk that the audit is inefficient

Question 12

What is non-sampling risk?

Answer 12

The risk that the auditor arrives at an inappropriate conclusion for reasons that are UNRELATED to sampling

Question 13

What are reasons a non-sampling risk could occur?

Answer 13

When an auditor exercises poor professional judgement
Uses inappropriate audit procedure to test the effectiveness of internal control
Relies too heavily on less reliable evidence
Spends too much time testing key internal controls or assertions most at RMM

Question 14

What must you do when selecting a sample?

Answer 14

Ensure that each item in the population has a chance of being selected

Question 15

What are the two types of sampling approaches?

Answer 15

Statistical or non-statistical sampling

Question 16

What is the difference between statistical sampling and non-statistical sampling

Answer 16

Statistical sampling: each sampling item has a known probability (random chance) of being selected.

Non-statistical sampling: selection of the sample is based on judgement

Question 17

How does the auditor chose between statistical sampling and non-statistical sampling?

Answer 17

It is based on the auditor’s professional judgement

Sample size does not affect the reason for one approach or another

Question 18

Does sample size affect the sampling approach an auditor would chose?

Answer 18

No

Question 19

What does statistical sampling involve?

Answer 19

Statistical techniques to calculate the sample size and select sample items RANDOMLY

Probably theory to evaluate sample results, including measuring sampling risk (the risk the sample isn’t representative of the population)

Question 20

Is there a cost difference between statistical sampling and non-statistical sampling?

Answer 20

Yes, statistical sampling can be costly to use as it requires sophisticated computer programs, more training, and potentially more experts to be involved

Question 21

What does non-statistical sampling involve?

Answer 21

The auditor uses professional judgement to determine the sample size, select the same of items and evaluate the sample results

It is easier and less costly to use than statistical sampling, it is used when RMM is assessed as LOW and corroborating evidence is available

Question 22

When would an auditor likely choose to use non-statistical sampling over statistical sampling?

Answer 22

When RMM is assessed as low and corroborating evidence is available

Statistical sampling can also be quite expensive

Question 23

Do you have to choose one statistical sampling or another? (statistical sampling vs. non-statistical sampling)

Answer 23

No, most auditors will use a combination or both statistical and non-statistical sampling

Question 24

What are the sampling techniques available to use?

Answer 24

Random selection
Systematic selection
Haphazard selection
Judgemental selection
Monetary/Dollar-unit sampling

Question 25

What is the random selection sampling technique?

Answer 25

Each sample has EQUAL change of being selected Sampling results can be statistically evaluated to quantify sampling risk Random number generator can be used to select the sample

Question 26

What is the systematic selection sampling technique?

Answer 26

Sample is selected by dividing the number of items in the population by sample size to determine sampling interval to use to select the sample. The starting point within first sampling interval randomly selected 1,000 items in the population, you want a sample of 100. The sampling interval is 10 (1,000/100). You then randomly select a number from 1-10 (within the first sampling interval), then do every 10: 4, 14, 24, 34, 44...

Question 27

What is haphazard selection sampling technique?

Answer 27

Selection of sample without use of structured technique The auditor must avoid any conscious bias or obvious predictability in the sample

Question 28

What is judgmental selection sampling technique?

Answer 28

Selection of sample items auditor believes should be included in the sample (could be appropriate under certain conditions)

Question 29

What is monetary/dollar-unit sampling?

Answer 29

Statistical sampling technique used - each dollar in the population has a equal chance of being selected - gives larger transactions a greater change of being selected and the audit a greater ability to detect overstated transactions Most common type of sampling technique

Question 30

What is the most common sampling technique?

Answer 30

Monetary/dollar-unit sampling

Question 31

What are the sampling factors to consider when selecting a sample?

Answer 31

Defining appropriate population Stratifying the population Defining what is considered an error Tolerable rate of deviations Tolerable level of misstatement

Question 32

What is the defining appropriate population factor in sampling?

Answer 32

The auditor must ensure that the population is appropriate to the audit objective and complete. Appropriateness of population is determined by the audit objective and assertion being tested ex: testing of existence and completeness of inventory involves different populations

Question 33

What is the stratifying population sampling factor?

Answer 33

Auditor can stratify the population by selecting and testing certain items separately to reduce audit risk and improve the audit efficiency Ex: high-value items, higher risk or unusual items, or items over a certain amount

Question 34

What is the defining what is considered an error sampling factor?

Answer 34

The auditor must have a clear understanding of what is considered an error within a population so the results of a sample can be properly evaluated

Question 35

What are the two classifications errors are referred to as?

Answer 35

Deviation - when performing test of controls a deviation occurs when control is not performing as designed/expected Misstatement - when performing substantive procedures. a misstatement occurs when reported amount differs from the actual amount that is determined when performing audit procedures

Question 36

What are errors referred to as when testing substantive procedures?

Answer 36

Misstatement

Question 37

What are errors referred to as when preforming tests of controls?

Answer 37

Deviation

Question 38

What is tolerable rate of deviations when testing controls?

Answer 38

The maximum rate of deviations an auditor is willing to accept before concluding the control is ineffective

Question 39

What is tolerable level of misstatement when performing substantive procedures?

Answer 39

The maximum amount of error the auditor is willing to accept before concluding that the class of transactions or account balance is materially misstated.

Question 40

When testing completeness of inventory what direction do you go?

Answer 40

Floor to sheet I.e. you select the physical items in inventory and track where they have gone to the detailed inventory listing

Question 41

When testing existence on inventory what direction do you go?

Answer 41

Sheet to floor Select the sample of inventory from the detailed inventory listing then ensure those physical items exist on hand.

Question 42

What is key item testing for performing substantive tests?

Answer 42

Auditor uses either statistical or non-statistical approach to identify and substantively test key items. Focuses is on selecting the largest items to obtain coverage over the total population

Question 43

What is a representative sampling (techniques for performing substantive tests)

Answer 43

After key items have been selected, the auditor considers whether the remaining population is significant. If so the auditor must select a representative sample from the remaining population to obtain sufficient appropriate evidence to conclude the population is free from material misstatement

Question 44

What are factors that influence the sample size when testing controls?

Answer 44

Larger sample size is required if the auditor intends to rely more heavily on control to reduce substantive testing Smaller sample size allowed if the auditor is willing to tolerate a higher rate of deviation for that control Larger sample size if the auditor expects the population to have higher rate of deviation for control

Question 45

What are factors that influence the sample size when testing transactions and balances?

Answer 45

Larger sample size is required if auditors assessment of RMM increases Smaller sample size required if auditor performs other substantive procedures directed at the same assertion Larger sample size required if auditor's desired level of assurance increases.

Question 46

When evaluating sample sizes what must a auditor do?

Answer 46

Evaluate the results to provide a reasonable basis to make a conclusion on the entire population Investigate the nature and cause of all deviation and misstatements found to determine the potential impact on the overall risk assessment and FS

Question 47

How does the auditor evaluate the sampling results if no deviations or misstatements are found?

Answer 47

The auditor can (most likely) conclude that the controls are operating effectively and sampled populations are not materially misstated

Question 48

How does the auditor evaluate tests of controls?

Answer 48

They calculate the rate of deviation and compare it to the tolerable rate of deviations to determine whether the control is effective

Question 49

What happens if after additional testing the rate of deviation remains consistent?

Answer 49

The auditor will conclude that the control is not affective at reducing RMM and increase their reliance on substantive procedures

Question 50

What does an auditor do with any anomalies when evaluating substantive tests?

Answer 50

They remove any anomalies before projecting misstatements However, they need a high degree of certainty that the anomaly is not representative of the entire population

Question 51

How does an auditor evaluate substantive tests?

Answer 51

Calculate total projected misstatement from the sample (including anomalies) and compares it to the tolerable level of misstatement to determine if any material misstatement occurred

Question 52

What happens if the projected misstatement exceeds the tolerable level of misstatement?

Answer 52

The auditor considered the next to extend testing (if the auditor considers sample results not representative of the population)

Question 53

What happens if total projected misstatements after additional testing exceeds the tolerable level of misstatement?

Answer 53

The auditor will likely conclude that material misstatement exists

Question 54

What are some factors that impact audit testing?

Answer 54

Nature, timing and extent of audit testing

Question 55

How does the nature of audit testing impact audit testing? (controls or substantive audit)

Answer 55

Depending on the purpose of the test: Test of controls: checking how well clients internal controls work Substantive procedures: directly checking account balances or transactions for errors

Question 56

What do tests of controls involve?

Answer 56

Re-performing certain tasks the client did (check if they were done correctly) Inspecting documents to see if controls were followed Observing staff to watch them perform control activities

Question 57

What does the nature of audit testing include?

Answer 57

The purpose of the test (control or substantive) and type of audit procedures performed

Question 58

What does the timing of audit testing mean? (factors that impact audit testing)

Answer 58

The stage of an audit of when audit procedures are performed and the date audit evidence relates to (before or after year end)

Question 59

What does the extent of audit testing refer to? (factors that impact audit testing)

Answer 59

Refers to the quantity of audit evidence gathered, depends on the audit strategy adopted (combined vs. substantive audit strategy)

Question 60

What happens if the control risk is assessed as low, how does that impact the audit strategy?

Answer 60

The audit strategy will usually rely on controls and reduce the extent of detailed substantive testing required, and increase the reliance on analytical procedures

Question 61

What happens if the control risk is assessed as high, how does that impact the audit strategy?

Answer 61

The audit strategy is to do little or no testing of controls and instead increase the reliance on substantive procedures that provide the most widespread evidence