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Flashcards in Deck 17 Deck (20):

PPS sampling

Method designed to estimate overstatement errors; technique used to estimate the dollar amount of error in a population


Incorrect acceptance

The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated


A principal advantage of statistical methods of attribute sampling over nonstatistical methods is:

That they provide a scientific basis for planning the sample size


Sampling interval (PPS sampling)

Recorded amount of population/sample size


Standard deviation

Measure of the variability of a frequency distribution about its mean


Statistical concept of precision

describe the auditor's evaluation of sampling results by calculating the possible error in either direction


Inputs for PPS sampling include:

Tolerable misstatement, risk of incorrect acceptance, and recorded amount of population being sampled


Tolerable deviation rate (Mistakes)

How many mistakes can we tolerate before we can say this control is not operating effectively


Mean-per-unit estimation

- Variables sampling plan that uses the average value of the items in the sample to estimate the true population
- sensitive to variability so stratify population


Ratio estimation

- Variables sampling plan that uses the ratio of the audited values of items to their book values to project the true population value


Difference estimation

variables sampling plan that uses the average difference between the audited values of items and their book values to project the actual population value


Advantages of PPS sampling:

Automatically stratifies the sample (emphasizes larger items )


Disadvantages of PPS sampling:

Zero balances, negative balances, and understated balances generally require special considerations


Sampling interval (from book) =

tolerable misstatement/reliability factor


Sample size (from book) =

recorded amount of the population/sampling interval


When does a significant deficiency exist?

Exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting


When does a material weakness exist?

Exists when there is a reasonable possibility of material misstatement


Control deficiency

- Least severe
- Design or operation of a control does not allow management or employees to prevent, or detect and correct misstatements on a timely basis


Material weakness

- The worst
- Deficiency, or a combination of deficiencies, where there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis


Significant deficiency

- Bad
- Deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those charged with governance