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ACCT 407 > Module E > Flashcards

Module E Flashcards

1
Q

What is the objective of sampling?

A

To make a statement about a population of interest

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2
Q

Why sample?

A

Examining 100% is cost prohibitive

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3
Q

When is sampling used?

A

When effectiveness can be traded for efficiency…
- Need for exact information is less important
- Number of items comprising the population is large

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4
Q

Uses of Sampling in Auditing

A
  1. Study and evaluation of internal control
  2. substantive procedures
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5
Q

Study and evaluation of internal control - sampling

A

Selecting control attributes to verify effectiveness

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6
Q

Substantive procedures - sampling

A

Selecting components or transactions of account balances for verification

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7
Q

Audit Sampling

A

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.

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8
Q

Sampling Risk

A

Likelihood that the decision based on the sample differs from the decision that would have been made if the entire population were examined

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9
Q

What is the cause of sampling risk?

A

a non-representative sample (i.e., sample does not represent the population)

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10
Q

How can sampling risk be controlled?

A
  1. Determining an appropriate sample size
  2. Ensuring that all items have an equal likelihood of selection
  3. Adjusting for sampling risk
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11
Q

What are the two types of sampling risk?

A

Type I: Risk of incorrect rejection
Type II: Risk of incorrect acceptance

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12
Q

Type I: Risk of Incorrect Rejection (Internal Controls)

A

the risk that the sample supports a conclusion that the control is not operating effectively when, in fact, it is operating effectively

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13
Q

Type I: Risk of Incorrect Rejection (Substantive Testing)

A

the risk that the sample indicates that the recorded balance is materially misstated when, in fact, it is not

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14
Q

Type II: Risk of Incorrect Acceptance (Internal Controls)

A

the risk that the sample supports a conclusion that the control is operating effectively when, in fact, it is not operating effectively

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15
Q

Type II: Risk of Incorrect Acceptance (Substantive Testing)

A

the risk that the sample supports the recorded balance when it is, in fact, materially misstated

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16
Q

Nonsampling Risk

A

Incorrect conclusion unrelated to the nature of the sample (Errors of judgment or execution)

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17
Q

How is nonsampling risk controlled?

A
  1. Training and supervision
  2. Reasonable working conditions
  3. Effort
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18
Q

What are the different approaches to sampling?

A
  1. Statistical sampling
  2. Nonstatistical sampling
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19
Q

Statistical sampling

A

applies laws of probability in selecting sample items and evaluating sample results

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20
Q

What does statistical sampling allow the audit team to do?

A

control exposure to sampling risk

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21
Q

Nonstatistical sampling

A

does not use probability in sample selection and evaluation

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22
Q

What does nonstatistical sampling allow the audit team to do?

A

Does NOT allow audit team to control exposure to sampling risk

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23
Q

Both statistical sampling and nonstatistical sampling are appropriate under ________, as long as results are __________

A

GAAS; consistent

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24
Q

What are advantages of statistical sampling?

A
  1. Design an efficient sample.
  2. Measure the sufficiency of evidence obtained.
  3. Quantify sampling risk.
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25
Q

What are disadvantages of statistical sampling?

A
  1. Training auditors in proper use.
  2. Cost to design sampling application.
  3. Lack of consistent application across audit teams.
26
Q

What are the steps in sampling?

A
  1. Planning
  2. Performing
  3. Evaluating
27
Q

Steps in Sampling: Planning

A
  1. Determine the objective of sampling
  2. Define the characteristic of interest
  3. Define the population (needs to be clear)
28
Q

Example of planning steps of sampling:

A
  1. Does brand of golf ball provide increased distance of 5 yards?
  2. Golf ball distance
  3. All amateur golfers
29
Q

Steps in Sampling: Performing

A
  1. Determine sample size
  2. Select sample items (should be representative and available)
30
Q

What are the methods of Selecting Sample Items?

A
  1. Unrestricted random selection
  2. Systematic random selection
  3. Block selection
  4. Haphazard selection
31
Q

Unrestricted random selection

A

Select items based on random numbers matched to items in population

32
Q

Systematic random selection

A

Bypass a fixed number of items in population, selecting every nth item

33
Q

Block selection

A

Select contiguous units

34
Q

Haphazard selection

A

Select items in a nonsystematic manner

35
Q

Steps in Sampling: Evaluating

A
  1. Measure sample items
  2. Evaluate sample results (make conclusions about the population at large)
36
Q

Attribute Sampling

A

Used to estimate the extent to which a characteristic (attribute) exists within a population

37
Q

When is attribute sampling used?

A

In tests of controls

38
Q

If the upper limit rate of deviation is less than or equal to the tolerable rate of deviation for attributes sampling…

A

rely on controls as planned

39
Q

If the upper limit rate of deviation is greater than the tolerable rate of deviation for attributes sampling…

A

reduce planned reliance on controls

40
Q

Risk of Overreliance

A

Risk of Assessing Control Risk too Low

41
Q

When does risk of overreliance occur?

A

Sample indicates controls are functioning effectively and controls are not functioning effectively

42
Q

What is the result of the risk of overreliance?

A
  1. Auditors conclude that controls are functioning effectively
  2. Effectiveness loss (do not reduce audit risk to sufficient level)
43
Q

Risk of Underreliance

A

Risk of Assessing Control Risk too High

44
Q

When does risk of underreliance occur?

A

Sample indicates controls are not functioning effectively, but the controls are functioning effectively

45
Q

What is the result of the risk of underreliance?

A
  1. Auditors conclude that controls are not functioning effectively
  2. Auditors assess control risk at higher than necessary levels
  3. Efficiency loss (perform more effective substantive procedures than necessary)
46
Q

If the upper limit on misstatement is less than or equal to the tolerable misstatement for variables sampling…

A

Account balance is not misstated

46
Q

Variables Sampling

A

Used to estimate the amount (or value) of a population
Used in substantive procedures

47
Q

If the upper limit on misstatement is greater than the tolerable misstatement for variables sampling…

A

Account balance is misstated

48
Q

Risk of Incorrect Acceptance(Type II) occurs when…

A

The sample indicates the account is not misstated but the account is misstated

49
Q

What is the result of an incorrect acceptance?

A
  1. Auditors conclude that account is not misstated
  2. Effectiveness loss (issue incorrect opinion on misstated F/S)
50
Q

Risk of Incorrect Rejection(Type I) occurs when…

A

Sample indicates account is misstated, but the account is not misstated

51
Q

What is the result of an incorrect rejection?

A
  1. Auditors conclude that account is misstated
  2. Auditors perform additional procedures
  3. Efficiency loss (perform more effective substantive procedures than necessary)
52
Q

Effectiveness losses:

A
  1. Risk of overreliance
  2. Risk of incorrect acceptance
53
Q

Efficiency losses:

A
  1. Risk of underreliance
  2. Risk of incorrect rejection
54
Q

What kind of effect does population size have on sample size?

A

Direct; As population is larger, need to sample more items

55
Q

What kind of effect does expected rate of deviation have on sample size?

A

Direct; As auditors expect higher level of deviations or misstatements in population, need to sample more items

56
Q

What kind of effect does tolerable rate of deviation have on sample size?

A

Inverse; As auditors require lower level of deviations or misstatements, need to sample more items
What we can tolerate goes up, we can have a smaller sample size

57
Q

What kind of effect does sampling risk have on sample size?

A

Inverse; As auditors wish to reduce chance of incorrect decisions, need to sample more items

58
Q

What kind of effect does population variability have on sample size?

A

Direct; As population is more variable, need to sample more items to obtain representative sample Increase sample size for a variable population to encompass the variability

59
Q

Can auditors calculate an upper deviation rate for nonstatistical sampling for tests of controls?

A

No

ACCT 407 (11 decks)

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