Mod 7 Audit Sampling Key Concepts Flashcards Preview

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Flashcards in Mod 7 Audit Sampling Key Concepts Deck (76):
0

Sampling (3 part definition)

1 taking part of the population

2 doing some audit tests

3 then projecting the results

1

If your testing but not projecting...

That's not sampling

2

A sample represents the population...

When it is drawn randomly

3

Sampling risk

Risk that sample does not represent the population

4

Nonsampling risk

Risk of human error

5

Risk of assessing control risk too low

Overreliance on internal controls

by raising detection risk and performing less substantive tests

6

For the Risk of assessing control risk too low, what is sacrificed?

Effectiveness

7

Risk of assessing control risk too low doesn't mean...

2) but...

Doesn't mean financial statements are misstated

2) but there's a high risk that they are

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Risk of assessing control risk to high...

Under reliance (on internal controls)

Perform more work than needed

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What does the Risk of assessing control risk to high sacrifice?

Efficiency

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Efficiency

Quickly

11

Effectiveness

Reach the right conclusion

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Incorrect acceptance

Auditor incorrectly concludes $ amount is fairly stated

13

Incorrect acceptance sacrificed...

Effectiveness

14

Incorrect rejection

Auditor incorrectly concludes $ amount is not fairly stated

15

Incorrect rejection sacrificed...

Efficiency

16

Sacrificing effectiveness can effect...

Outcome of your opinion on financial statements

17

What are 2 other terms with the same meaning as "error"

1 exception

2 deviation

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Error, exception, deviation mean that...

2) example 2

Something is not coming out the way it should

2) shipping documents are not billed or are billed for incorrect
Amount

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Attribute sampling

Looking at control procedures

To see whether it's operating effectively or it's not

20

Nonstatistical sampling involves more...

Judgement

21

Tolerable rate

Error rate in population auditor's willing to live with

22

Tolerable rate involves...

Judgement

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The term "rate" is...

Always used in testing a control procedure (not a $ amount)

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Example of a rate

Shipping documents that aren't billed properly
If 3 aren't billed properly from a sample of 100, the rate is 3 %

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Expected population error rate

What error rate the auditor thinks exists based on past experience

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Risk of assessing control risk too low is part of...

Attribute sampling

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Relation of tolerable rate to sample size

2) what does this mean?

Inverse

2) If you can tolerate higher error rate in population, sample size
Can be smaller

28

Relation of expected population error rate to sample size

2) what does this mean?

Direct

2) if you think there is a higher error rate in the population, you need
A bigger sample size

29

Relation of risk of assessing control risk too low to sample size

2) what does this mean?

Inverse

2) if you're going to assess control risk too low, to assess it higher
You can get away with a smaller sample size

30

If you want to go from a confidence interval of 90% to 95%, you need...

A bigger sample size

31

Compliment confidence interval, how is it calculated if confidence interval is 95%?

If confidence interval = 95%
The compliment confidence interval = 5% = (1 - 95%)

32

What is the equation for tolerable error rate?

Sample error rate + allowance for sample risk < or = tolerable error rate

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Example of sample error rate

Tested 100 documents and found 5 not billed

So sample error rate = 5%

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Allowance for sampling risk is determined...

As a judgement of the auditor

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If sample error rate + allowance for sampling risk is greater than the tolerable error rate

Controls are not operating effectively

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If sample error rate + allowance for sampling risk is less than or equal to the tolerable error rate then...

Controls are operating effectively

37

6 steps of sample planning

1 determine objective of test
2 define your population
3 determine the sample size
4 select the sampling technique
5 perform sampling plan
6 evaluate results/document

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1 determine objective of test
2 define your population
3 determine the sample size
4 select the sampling technique
Are all part of...

Planning in the sample plan

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Sample plan:

1) determine objective of test example

Want to see if shipments have been billed

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Sample plan:

Define your population and deviation example

Population = shipping documents

Deviation = shipments not billed

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Sample plan:

Determine the sample size

Use statistical or nonstatistical sampling

42

Sample plan:

Select the sampling technique example 2

1 random number generator

2 every nth item

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Randomly

Every item in population has an equal chance to get into the sample

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Systematic sampling

Every nth item

45

Systematic sampling (every nth item) is random because...

It's a random start

46

Discovery sampling, main objective

Ex.

Wants to virtually assure sample finds errors in population

Ex. Want to find phony employees on the payroll

47

Variables sampling involves...

$ amounts

48

Higher confidence level

Higher level of assurance that sample represents the population

49

Relation of confidence interval to sample size

What does this mean?

Direct

2) to obtain a higher level of assurance that the sample represents
the population, you need a bigger sample size

50

Precision

+ or - range

Ex. 100 + or - 3, 3 is the precision

51

Relation of precision to sample size

What does this mean?

Direct

2) if you want to be more precise you need a larger sample size

52

Relation of variability in the population to sample size

Direct

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Relation of tolerable misstatement to sample size

What does this mean?

Inverse

2) if you can tolerate higher tolerable misstatement, your sample
Size can be smaller

54

Projected misstatement:

Logical unit less than sampling interval, equation

Projected misstatement =
Percentage of account misstated x sampling interval

55

Projected misstatement:

Percentage of account misstated AKA "taint" calculation

% of account misstated = misstatement/book value

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Projected misstatement:

Logical unit greater than sampling interval

Actual amount of misstatement is considered to be projected misstatement

57

Classical variables sampling uses...

Normal distribution theory (standard deviations) to evaluate
Selected characteristics of the population

58

Variations of classical variables sampling:

Mean per unit method, Estimated Total Audited Value Calculation (ETAV)

ETAV = population size x average audited value

59

ETAV

Estimated total audited value

60

Variations of classical variables sampling:

Mean per unit method, projected misstatement calculation

Projected misstatement =
Population BV - estimated total audited value (ETAV)

61

Variations of classical variables sampling:

Difference Estimation Method, calculate average difference in sample

2) calculate projected misstatement

Average difference (in sample) = avg. BV - avg. audited value (AV)

2) projected misstatement = population size x avg. difference (sample)

62

Variations of classical variables sampling:

Difference Estimation Method, calculate Estimated total audited value (ETAV), assuming an overstatement has occurred.

ETAV = Population BV - projected misstatement (overstatement)

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Variations of classical variables sampling:

Ratio Estimation Method, calculate estimated total audited value (ETAV)

ETAV = (Sample Avg. AV/Sample Avg. BV) x Population BV

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Example of population BV

Total book value of accounts in population

65

Variations of classical variables sampling:

Ratio Estimation Method, calculate Projected Misstatement

Projected Misstatement =
Population BV - estimated total audited value (ETAV)

66

advantages of Probability proportional to size (PPS) sampling:

Generally...

Easier to use

67

advantages of Probability proportional to size (PPS) sampling:

Size of sample...

Not based on variation of audited amounts

68

advantages of Probability proportional to size (PPS) sampling:

Automatically...

Results in stratified sample

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advantages of Probability proportional to size (PPS) sampling:

Individually...

Significant items are automatically identified

70

advantages of Probability proportional to size (PPS) sampling:

Usually results in a...

Smaller sample size if no misstatements are expected

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advantages of Probability proportional to size (PPS) sampling:

Can be easily designed and...

Sample selection can begin before the complete population
Is available

72

advantages of classical variables sampling:

May result in a smaller sample size if...

There are many differences between audited and book values

73

advantages of classical variables sampling:

Easier to expand...

Sample size if that becomes necessary

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advantages of classical variables sampling:

Selection of zero balances...

Does not require special sample design considerations

75

Inclusion of negative balances does...

Not require special sample design considerations