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

8

## Risk of assessing control risk to high...

###
Under reliance (on internal controls)

Perform more work than needed

9

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

### Efficiency

10

## Efficiency

### Quickly

11

## Effectiveness

### Reach the right conclusion

12

## 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

18

##
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

19

## 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

23

## The term "rate" is...

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

24

## 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 %

25

## Expected population error rate

### What error rate the auditor thinks exists based on past experience

26

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

### Attribute sampling

27

##
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

33

## Example of sample error rate

###
Tested 100 documents and found 5 not billed

So sample error rate = 5%

34

## Allowance for sampling risk is determined...

### As a judgement of the auditor

35

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

### Controls are not operating effectively

36

## 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

38

##
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

39

##
Sample plan:

1) determine objective of test example

### Want to see if shipments have been billed

40

##
Sample plan:

Define your population and deviation example

###
Population = shipping documents

Deviation = shipments not billed

41

##
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

43

## Randomly

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

44

## 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

53

##
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

56

##
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)

63

##
Variations of classical variables sampling:

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

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

64

## 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

69

##
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

71

##
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

74

##
advantages of classical variables sampling:

Selection of zero balances...

### Does not require special sample design considerations

75