Deck 5 Flashcards
Sampling (31 cards)
The ________ is the maximum rate of deviations (errors or failures in following a control procedure) that an auditor is willing to accept in a population without changing their planned reliance on the internal control. In simpler terms, it’s the highest error rate the auditor can tolerate before deciding that the control is not effective enough to rely on.
TOLERABLE DEVIATION RATE
UPPER DEVIATION RATE = ?
SAMPLE DEVIATION RATE (DEVIATION RATE in sample tested) + ALLOWANCE FOR SAMPLING RISK (cushion to protect against undetected deviations)
*if upper deviation rate is equal or less to tolerable deviation rate, auditor may rely on control
*if upper deviation rate is greater than tolerable deviation rate, auditor may NOT rely on control
Reducing planned reliance on controls = reassesses control risk as high (interchangeable Terms) (T/F)
TRUE
Risk of assessing control risk too low (sampling risk) has an inverse relationship with SAMPLE SIZE (T/F)
TRUE; the more risk the auditor is willing to accept, the smaller the sample size
Tolerable Deviation Rate has an inverse relationship with sample size (T/F)
TRUE; the the greater the tolerable deviation rate, the smaller the sample size
Expected (Population) Deviation Rate/likely rate of deviation has a direct relationship with sample size (T/F)
TRUE; the greater the expected deviation Rate, the greater the sample size
___________ includes all aspects of audit risk that are not due to sampling. It is always present and cannot be measured; the auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality control of all firm practices. It can arise because an auditor failed to recognize misstatements in documents examined. includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.
NONSAMPLING RISK
_______ arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.
SAMPLING RISK
__________ examines the rate of occurrence in a sample: the attribute either exists or does not exist. It’s more useful for tests of CONTROLS, such as the examination of time cards for proper approval. statistical use of testing controls to quantify sampling risk.
ATTRIBUTE SAMPLING
the auditor assesses control risk too ____ (low or high) because the control risk based on the auditor’s sample is greater than the true operating effectiveness of the client’s control activity.
HIGH
Assessing control risk too high means the auditor believes the controls are less effective than they actually are. This happens when the sample results suggest more control failures or deviations than truly exist in the entire population of transactions.
the risk of_____________ is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated (sample results fail to identify an existing material misstatement)
INCORRECT ACCEPTANCE
the risk of_____________ is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when in fact it is not materially misstated (sample results identify an existing material misstatement)
INCORRECT REJECTION
the risk of incorrect rejection and the risk of assessing control risk too high relate to the ________ of the audit; these 2 errors generally result in an auditor performing unnecessary additional procedures
EFFICIENCY
both the risk of incorrect acceptance and the risk of assessing control risk too low relate to the _______ of an audit in detecting an existing material misstatement
EFFECTIVENESS
the ________ rate is used to evaluate a balance after a sampling has been performed, NOT to determine the sample size for a test of controls
UPPER DEVIATION
when determining the sample size for a test of controls, the auditor should consider the expected deviation rate (the auditor’s best estimate of the deviation rate in the population before the sampling plan is executed), the tolerable deviation rate, and the allowable risk of assessing control risk too low (T/F)
TRUE
___________ is the actual rate of control failures (deviations) in the entire population of transactions or controls
TRUE DEVIATION RATE
Random Sampling and Systematic Sampling are sample methods of ______ .
STATISTICAL SAMPLING; every population has an equal chance of being selected
If the degree of assurance desired in a sample is high, the auditor should allow for a _____ (high or low) level of sampling risk.
LOW
What does the following represent?
*Separate into relatively homogenous groups
*Each group is tested as a separate population
*generally results in a reduced sample size
*commonly used when a population has highly variable recorded amounts
STRATIFICATION
sample size has an _______ relationship with the tolerable misstatement and the acceptable level of risk
INVERSE
sample size has a ______ relationship with the expected misstatement, standard deviation (population variability), and assessed level of risk
DIRECT
a lower risk of incorrect acceptance (the chance the auditor wrongly concludes the account is okay when its not) means the auditor wants to be more sure and take fewer chances of missing errors. to do this, the auditor needs to test a ________ (higher or lower) sample size
HIGHER
Probability-Proportional-to-Size (PPS) sampling, also known as dollar-unit sampling, is an audit sampling technique where the sampling unit is defined as an individual dollar within the population. This means that each dollar in the population has a chance of being selected, and once a dollar is selected, the entire account or item containing that dollar is audited.
The primary objective of PPS sampling is to identify overstatement errors in the population (T/F)
TRUE
