Chapter 8 Flashcards
(21 cards)
When does an auditor use sampling?
1) Tests of controls
2) Tests of balances
Why do auditors use samples?
Given the size and complexity of most entities needing a financial statement audit, it is not economical to examine all the accounting records and supporting documents.
Auditing standards recognize and permit which 2 methods of audit sampling?
Statistical and non-statistical.
Non-statistical sampling
A sampling method where the auditor does not strictly apply statistical techniques and has the ability to apply some judgement to evaluate the results.
Statistical sampling
Sampling that uses the laws of probability to select and evaluate the results of an audit sample, thereby permitting the auditor to quantify the sampling for the purpose of reaching a conclusion about the population.
What are the 2 advantages that have caused LESS sampling?
- Many companies have developed well-controlled, automated accounting systems that can process routine transactions with no or few errors. Rather than rely on audit sampling to test routine transactions processed by these automated information systems, auditors can test the processing software control configurations and general computer controls.
- The advent of powerful audit software such as IDEA allows auditors, in some situations, to download and examine entire populations of data rather than rely on a sample from the population.
Audit sampling
The selection and evaluation of less than 100% of the items in a population of audit relevance selected in such a way that the auditor expects the sample to be representative of the population and thus likely to provide a reasonable basis for conclusions about the population.
Sampling risk
The possibility that the sample drawn is not representative of the population and that, as a result, the auditor will reach an incorrect conclusion about the account balance or class of transactions based on the sample.
Representative sample
A sample where, the evaluation of the sample will result in conclusions that are similar to those that would be drawn if the same procedures were applied to the entire population.
What are the 2 types of sampling errors?
Type 1 (Risk of incorrect rejection) and Type 2 (Risk of incorrect acceptance)
Risk of incorrect rejection (Type I)
- In testing an internal control, this is the risk that the sample supports a conclusion that the control is not operating effectively when, in truth, the control is operating effectively. When an auditor is evaluating the level of reliance that can be placed on a control in the context of a financial statement audit, this risk is also commonly referred to as the risk of under-reliance or the risk of assessing control risk too high.
- In substantive testing, this is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is actually not materially misstated.
- Relates to the EFFICIENCY of the audit. This type of decision error can result in the auditor conducting more audit work than necessary in order to reach the correct conclusion.
Risk of incorrect acceptance (Type II)
- In testing a control, this is the risk that the sample supports a conclusion that the control is operating effectively when, in truth, it is not operating effectively. When an auditor is evaluating the level of reliance that can be placed on a control in the context of a financial statement audit, this risk is also commonly referred to as the risk of overreliance, or the risk of assessing control risk too low.
- In substantive testing, this is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is actually materially misstated.
- Relates to the effectiveness of the audit. This type of decision error can result in the auditor failing to detect a material misstatement in the financial statements, which can lead to litigation against the auditor by parties that rely on the financial statements.
Non-sampling Risk
The risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation.
What are the 3 factors that are the most important inputs to determine sample sizes?
(1) desired level of assurance in the results of the sample (or confidence level)
(2) acceptable defect rate (or tolerable error)
(3) historical defect rate (or expected error)
Confidence level
Represents the probability that a given interval includes the true, but unknown, measure of the characteristic of interest.
Expected population deviation rate
The deviation rate that the auditor expects to exist in the population.
Tolerable deviation rate
The maximum deviation rate from a prescribed control that the auditor is willing to accept without altering the planned assessed level of control risk.
The major advantages of statistical sampling are:
(1) design an efficient sample.
(2) measure the sufficiency of evidence obtained.
(3) quantify sampling risk.
the disadvantages of statistical sampling include additional costs of:
(1) training auditors in the proper use of sampling techniques.
(2) designing and conducting the sampling application.
(3) lacking consistent application across audit teams due to the complexity of the underlying concepts.
Auditors use three major types of statistical sampling techniques:
- Attribute sampling - Sampling used to estimate the proportion of a population that possesses a specified characteristic.
- Monetary-unit sampling - Attribute-sampling techniques used to estimate the dollar amount of misstatement for a class of transactions or an account balance.
- Classical variables sampling - The use of normal distribution theory to estimate the dollar amount of misstatement for a class of transactions or an account balance.
What are the steps of Attribute Sampling?
- Determine the test objectives.
- Define the population characteristics:
Define the sampling population.
Define the sampling unit.
Define the control deviation conditions.
3.Determine the sample size.
The desired confidence level or risk of incorrect acceptance.
The tolerable deviation rate.
The expected population deviation rate. - Select sample items.
- Perform the auditing procedures
Understand and analyze any deviations observed. - Calculate the sample deviation rate and the computed upper deviation rate.
- Draw final conclusions.
