Module E

Question 1

What is the objective of sampling?

Answer 1

To make a statement about a population of interest

Question 2

Why sample?

Answer 2

Examining 100% is cost prohibitive

Question 3

When is sampling used?

Answer 3

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

Question 4

Uses of Sampling in Auditing

Answer 4

1. Study and evaluation of internal control
2. substantive procedures

Question 5

Study and evaluation of internal control - sampling

Answer 5

Selecting control attributes to verify effectiveness

Question 6

Substantive procedures - sampling

Answer 6

Selecting components or transactions of account balances for verification

Question 7

Audit Sampling

Answer 7

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.

Question 8

Sampling Risk

Answer 8

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

Question 9

What is the cause of sampling risk?

Answer 9

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

Question 10

How can sampling risk be controlled?

Answer 10

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

Question 11

What are the two types of sampling risk?

Answer 11

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

Question 12

Type I: Risk of Incorrect Rejection (Internal Controls)

Answer 12

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

Question 13

Type I: Risk of Incorrect Rejection (Substantive Testing)

Answer 13

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

Question 14

Type II: Risk of Incorrect Acceptance (Internal Controls)

Answer 14

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

Question 15

Type II: Risk of Incorrect Acceptance (Substantive Testing)

Answer 15

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

Question 16

Nonsampling Risk

Answer 16

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

Question 17

How is nonsampling risk controlled?

Answer 17

1. Training and supervision
2. Reasonable working conditions
3. Effort

Question 18

What are the different approaches to sampling?

Answer 18

1. Statistical sampling
2. Nonstatistical sampling

Question 19

Statistical sampling

Answer 19

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

Question 20

What does statistical sampling allow the audit team to do?

Answer 20

control exposure to sampling risk

Question 21

Nonstatistical sampling

Answer 21

does not use probability in sample selection and evaluation

Question 22

What does nonstatistical sampling allow the audit team to do?

Answer 22

Does NOT allow audit team to control exposure to sampling risk

Question 23

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

Answer 23

GAAS; consistent

Question 24

What are advantages of statistical sampling?

Answer 24

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

Question 25

What are disadvantages of statistical sampling?

Answer 25

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

Question 26

What are the steps in sampling?

Answer 26

1. Planning 2. Performing 3. Evaluating

Question 27

Steps in Sampling: Planning

Answer 27

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

Question 28

Example of planning steps of sampling:

Answer 28

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

Question 29

Steps in Sampling: Performing

Answer 29

4. Determine sample size 5. Select sample items (should be representative and available)

Question 30

What are the methods of Selecting Sample Items?

Answer 30

1. Unrestricted random selection 2. Systematic random selection 3. Block selection 4. Haphazard selection

Question 31

Unrestricted random selection

Answer 31

Select items based on random numbers matched to items in population

Question 32

Systematic random selection

Answer 32

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

Question 33

Block selection

Answer 33

Select contiguous units

Question 34

Haphazard selection

Answer 34

Select items in a nonsystematic manner

Question 35

Steps in Sampling: Evaluating

Answer 35

6. Measure sample items 7. Evaluate sample results (make conclusions about the population at large)

Question 36

Attribute Sampling

Answer 36

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

Question 37

When is attribute sampling used?

Answer 37

In tests of controls

Question 38

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

Answer 38

rely on controls as planned

Question 39

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

Answer 39

reduce planned reliance on controls

Question 40

Risk of Overreliance

Answer 40

Risk of Assessing Control Risk too Low

Question 41

When does risk of overreliance occur?

Answer 41

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

Question 42

What is the result of the risk of overreliance?

Answer 42

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

Question 43

Risk of Underreliance

Answer 43

Risk of Assessing Control Risk too High

Question 44

When does risk of underreliance occur?

Answer 44

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

Question 45

What is the result of the risk of underreliance?

Answer 45

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)

Question 46

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

Answer 46

Account balance is not misstated

Question 46

Variables Sampling

Answer 46

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

Question 47

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

Answer 47

Account balance is misstated

Question 48

Risk of Incorrect Acceptance(Type II) occurs when...

Answer 48

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

Question 49

What is the result of an incorrect acceptance?

Answer 49

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

Question 50

Risk of Incorrect Rejection(Type I) occurs when...

Answer 50

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

Question 51

What is the result of an incorrect rejection?

Answer 51

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

Question 52

Effectiveness losses:

Answer 52

1. Risk of overreliance 2. Risk of incorrect acceptance

Question 53

Efficiency losses:

Answer 53

1. Risk of underreliance 2. Risk of incorrect rejection

Question 54

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

Answer 54

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

Question 55

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

Answer 55

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

Question 56

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

Answer 56

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

Question 57

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

Answer 57

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

Question 58

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

Answer 58

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

Question 59

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

Answer 59

No