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AUD > 14 Evidence - Sampling > Flashcards

14 Evidence - Sampling Flashcards

1
Q

What is nonstatistical (judgment) sampling?

A

It use the auditor’s subjective judgment to determine the sample size (number of items to examine) and sample selection (which items to examine).

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2
Q

What is statistical sampling?

A

It randomly selects sample items and uses an appropriate statistical method to evaluate the results, including measurement of sampling risk.

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3
Q

What is confidence level?

A

Also called the reliability level, is the percentage of times the sample should adequately reflect the population.

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4
Q

What is precision?

A

The allowance for sampling risk, is a measure of how closely the sample represents the population.

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5
Q

What are the types of random selection in statistical sampling?

A
  1. simple random sampling
  2. stratified random sampling
  3. probability-weighted, including monetary-unit, sampling
  4. systematic random sampling
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6
Q

What does statistical sampling help an auditor do?

A
  1. design an efficient sample
  2. measure the sufficiency of evidence obtained
  3. evaluate the results
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7
Q

What is sufficiency?

A

The measure of the quantity of evidence. It relates to the design and size of the sample

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8
Q

What are efficient samples?

A

The minimum samples necessary to provide sufficient appropriate evidence.

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9
Q

What can statistical sampling apply to?

A

Tests of controls (attribute sampling) and tests of details (variables sampling)

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10
Q

What is sampling risk?

A

The risk that the auditor’s conclusion based on a sample may differ from the conclusion when the same procedure is applied to the entire population.

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11
Q

What are the two type of erroneous conclusions that may be drawn due to sampling risk?

A
  1. controls are more effective than they actually are (overreliance), or a material misstatement does not exist when in fact it does exist (incorrect acceptance)
  2. controls are less effective than they actually are (underreliance), or a material misstatement exists when in fact it does not exist (incorrect rejection)
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12
Q

What is incorrect acceptance?

A

Accepting a conclusion based on a sample, in which the auditor believes a material misstatement does not exist, when in fact it does exist.

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13
Q

What is incorrect acceptance?

A

Accepting a conclusion based on a sample, in which the auditor believes a material misstatement does not exist, when in fact it does exist.

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14
Q

When an erroneous conclusion determines that controls are more effective than they are (overreliance), what is the result?

A

It affects audit effectiveness and is more likely to result in an inappropriate opinion.

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15
Q

When an erroneous conclusion determines that controls are less effective than they ar (undereliance), what is the result?

A

It affects audit efficiency and results in more work.

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16
Q

What is nonsampling risk?

A

The risk of an erroneous conclusion caused by a factor not related to sampling risk.

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17
Q

What are examples of nonsampling risk?

A
  1. applying inappropriate procedures
  2. misinterpreting audit evidence
  3. not recognizing misstatements or control deviations
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18
Q

What decreases nonsampling risk?

A

Adequate planning and effective quality control

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19
Q

When determining sample design, size, and selection what does an auditor consider?

A

The purpose of the audit procedure(s) and the characteristics of the population

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20
Q

How does an auditor determine sample design, size, and selection?

A
  1. the auditor defines the nature of a control deviation or misstatement
  2. the auditor chooses the population to be sampled
  3. the auditor determines whether it is complete
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21
Q

What does an auditor consider in the sample design, size, and selection for tests of controls?

A

The auditor assesses the expected deviation rate based on the understanding of internal control. If the rate is unacceptably high, controls ordinarily are not tested.

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22
Q

What does an auditor consider in the sample design, size, and selection for tests of details?

A

The auditor assesses the expected misstatement. If the expected misstatement is high, an increased sample size or 100%b audit may be needed.

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23
Q

How is sample size related to the sampling risk?

A

Sample size is inversely related to the acceptable sampling risk.

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24
Q

What factors determine sample size for tests of controls?

A
  1. The tolerable rate of deviation in the population
  2. The expected rate of deviation in the population
  3. The desired level of assurance (complement of the risk of overreliance) that the actual rate of deviation is not greater than the tolerable rate
  4. The number of individual items (sampling units) in the population (if the population is very small)
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25
Q

What may the desired assurance (confidence level) be based on for tests of controls?

A

The extent of the reliance on the relevant controls.

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26
Q

What may the desired level of assurance (confidence level) be based on for tests of details?

A
  1. Assessed risks of material misstatement
  2. Evidence provided by other substantive procedures performed on the same assertion
  3. Tolerable misstatement
  4. Expected misstatement
  5. If relevant, stratification of the population and the sampling units in each stratum
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27
Q

What do auditors also consider for tests of details?

A

Auditors also consider a measure of variance, standard deviation.

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28
Q

What does an auditor do if the appropriate (or alternative) procedures cannot be performed on a sample item?

A

The auditor treats the item as a misstatement or a control deviation.

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29
Q

When may an auditor select a replacement item?

A

If the appropriate (or alternative) procedures cannot be performed on a sample item, and the auditor is satisfied that the initially selected item is not a misstatement or a control deviation they may select a replacement item.

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30
Q

If a misstatement or control deviation is identified what should the auditor do?

A

Investigate the causes and evaluate the effects.

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31
Q

Why is it important to investigate the causes and evaluate the effects of identified misstatements and control deviations?

A

They may have a common feature, such as type of transaction or period of time, and the auditor may wish to examine all items with that feature.

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32
Q

What can the presence of a common feature indicate?

A

fraud, if intentional

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33
Q

Why does an auditor evaluate the qualitative aspects of misstatements?

A

To determine whether they are differences in accounting principles or their application, or to determine if they are caused by fraud.

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34
Q

What is another qualitative aspect of misstatements?

A

The potential effect they have on other parts of the audit.

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35
Q

Should the auditor project the results of sampling to the population?

A

Yes

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36
Q

What is the projection for tests of details?

A

projected misstatement

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37
Q

What is the projection for tests of controls?

A

the sample deviation rate

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38
Q

What should the auditor include in the evaluation of sampling results?

A

Sampling risk and whether the results provide a reasonable basis for conclusions about the population.

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39
Q

What may be required if there’s an unexpectedly high deviation rate for tests of controls and there is no other audit evidence?

A

A higher assessed risks of material misstatement may be required.

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40
Q

If there’s an unexpectedly high misstatement amount and there is no other audit evidence, this could indicate?

A

It may indicate that a transaction class or account balance is materially misstated.

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41
Q

The closer the projected misstatement is to tolerable misstatement?

A

The more likely that actual misstatement is greater than tolerable misstatement.

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42
Q

What does it mean if the expected misstatement used to calculate sample size is less than the projected misstatement?

A

It means that it is more likely that sampling risk is unacceptable.

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43
Q

What should an auditor do if sampling does not provide a reasonable basis for conclusions?

A

The auditor may:

  1. Ask management to investigate misstatements abd make needed adjustments
  2. Perform further audit procedures, for example, increasing sample size
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44
Q

What are the basic steps in a statistical plan?

A
  1. determine the objectives of the plan
  2. define the population
  3. determine acceptable levels of sampling risk
  4. calculate the sample size
  5. select the sampling approach
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45
Q

What are examples of determining the objectives of the statistical plan?

A
  1. For a test of controls - to conclude that control is reasonably effective
  2. For a test of details - to conclude that a balance is not misstated by more than an immaterial amount
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46
Q

What does it mean to define the population in a statistical plan?

A

This step includes defining the sampling unit (an individual item in the population) and considering the completeness of the population.

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47
Q

What is defining the population for tests of controls?

A

Defining the period covered

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48
Q

What does defining the population for tests of details include?

A

Determining whether individually significant items should be defined.

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49
Q

What are examples of acceptable levels of sampling risk?

A

5% or 10%

50
Q

How are sample sizes calculated?

A

By using tables or sample-size formulas

51
Q

What is stratification?

A

Dividing the population into subpopulations or strata

52
Q

What is the primary objective of stratification?

A

To minimize variability

53
Q

Why may an auditor sample a smaller number of items when using stratification?

A

The auditor may use a smaller number of items while holding the allowance for sampling risk (precision) and the confidence level constant because variance within each subpopulation or stratum is lower than the population as a whole.

54
Q

What does stratification allow an auditor to do?

A

It allows the auditor to apply more audit effort to larger elements or more risky parts of the population.

55
Q

What is an example of stratification?

A

dividing a population into strata of dollar increments - ex - transactions under $500, transactions between $501-2,000, and transactions above $2,001

56
Q

What are examples of sampling approaches?

A
  • random sampling
  • systematic sampling
  • block sampling
57
Q

What is random sampling?

A

When each item in the population has an equal and nonzero probability of selection.

58
Q

How is random sampling done?

A

By generating random numbers from a random number table or computer program and tracing them to associated documents or items in the population.

59
Q

What is systematic sampling?

A

When a random start is selected and taking every nth item in the population. The value of n is computed by dividing the population by the number of sampling units.

60
Q

When should an auditor not use systematic sampling?

A

A systematic sampling plan assumes the items are arranged randomly in the population. If they are not, a random selection method should be used.

61
Q

How do you calculate a systematic sampling plan?

A

Dividing the population by the number of sample units required. The random start plus the interval determines the next number. - Ex. if the population contains 8,200 items and a sample of 50 is required, every 164th item is selected. If the random start is the 35th item, then the second item in the sample is the 199th item (35+164), the third item is 363 (199+164). The process is continue until the 50 items are identified.

62
Q

What is block (cluster) sampling?

A

Randomly selecting groups of items as the sampling units rather than individual items.

63
Q

What is an example of block sampling?

A

The inclusion in the sample of all cash payments for May and September.

64
Q

What is one problem with block sampling?

A

That the variability of items within the blocks may not be representative of the variability within the population.

65
Q

What is the advantage of block sampling?

A

It avoids assigning random numbers to individual items in the population. Instead, blocks (clusters) are randomly selected.

66
Q

How does an auditor document the sampling procedures?

A

By preparing appropriate working papers.`

67
Q

What is attribute sampling used for?

A

To test the effectiveness of controls (tests of controls). It tests binary propositions.

68
Q

An auditor tests the effectiveness of the approval of purchase orders. They select a sample of purchase orders from the population of all purchase orders issued during the year and inspects each one in the sample for the required approval. What is this an example of?

A

attribute sampling, tests of controls

69
Q

How is the deviation rate used in attribute sampling?

A

The deviation (failure) rate in the application of the control in the sample is used to project the deviation rate to the whole population. Ex - 5/100 in the sample is 5%, so the whole population would be projected to have a 5% deviation (failure) rate

70
Q

How can an auditor determine the appropriate sample size for attribute sampling?

A

By specifying a tolerable deviation rate, a preliminary expected deviation rate, and the risk of overreliance, and then consulting a table.

71
Q

What does variables sampling apply to?

A

To dollar values or other quantities for tests of details

72
Q

What are the primary methods of variables sampling?

A
  • mean-per-unit
  • difference estimation (of population misstatement)
  • monetary-unit sampling
73
Q

What is the mean-per-unit method of variables sampling?

A

It averages the audit amounts of the sample items and multiplies the average by the number of items in the population to estimate the population amount. An allowance for sampling risk (achieved precision at the desired level of confidence based on the normal distribution) is then calculated.

74
Q

How would an auditor estimate a population amount using mean-per-unit for a random sample of 50 of 1,000 receivables balances with and audited value of $8,000?

A

The average audited receivable would be 160.00 = 8,000/50 and the projected balance would be $160,000 = 160.00*1,000

75
Q

What is the difference estimation method of variables sampling?

A

Difference estimation determines differences between the audit and recorded amounts of items in the sample.

76
Q

How do you calculate the difference estimation?

A
  1. Determine the differences between the audit and recorded amounts of items in the sample
  2. Add the differences
  3. Calculate the mean difference
  4. Multiplies the mean by the number of items in the population
  5. An allowance for sampling risk (achieved precision at the desired level of confidence based on the normal distribution) is then calculated.
77
Q

How do you calculate the difference estimation?

A
  1. Determine the differences between the audit and recorded amounts of items in the sample
  2. Add the differences
  3. Calculate the mean difference
  4. Multiplies the mean by the number of items in the population
  5. An allowance for sampling risk (achieved precision at the desired level of confidence based on the normal distribution) is then calculated.
78
Q

What is ratio estimation?

A

It is similar to difference estimation except that it estimates the population misstatement by multiplying the recorded amount of the population by the ratio of the total audit amount of the sample items to their total recorded amount.

79
Q

What is monetary-unit sampling?

A

It uses the dollar or another monetary unit as the sampling unit.

80
Q

What are other terms used to describe monetary-unit sampling?

A

Probability-proportional-to-size (PPS) or dollar-unit sampling (DUS)

81
Q

When is it appropriate to use monetary-unit sampling?

A

For testing account balances (typically assets) for overstatement when some items may be far larger than others in the population. It stratifies the population because the larger account balances have a greater chance of being selected.

82
Q

Is monetary-unit sampling useful if few misstatements are expected?

A

Yes

83
Q

What does monetary-unit sampling (MUS) not require?

A

It does not require the use of a measure of variance (ex- standard deviation or expected deviation rate) to determine sample size or interpret the results.

84
Q

What are binary questions?

A

yes/no or error/nonerror

85
Q

What does attribute sampling test?

A

It tests the effectiveness of controls because it can estimate a rate of occurrence of control deviations in a population.

86
Q

What does attribute sampling require?

A

Evidence indicating performance of the control being tested. Ex - a control indicating that the purchasing agent has signed all purchase orders before sending them to the vendor

87
Q

When is it helpful to use attribute sampling?

A

large populations of documentary evidence

88
Q

Can the performance of any task that leaves evidence of its execution suitable for attribute sampling?

A

Yes

89
Q

What are examples of activities subject to controls that may be tested using attribute sampling?

A
  • billing
  • voucher processing
  • payroll
  • inventory pricing
90
Q

What are the steps for testing controls using attribute sampling?

A
  1. define the objectives of the plan
  2. define the population
  3. define the deviation conditions
  4. determine the sample size
91
Q

How does an auditor define the objectives of the plan for testing controls?

A

The auditor should clearly state what it is to be accomplished, for example, to determine that the deviation rate from an approval process for a transaction is at an acceptable level.

92
Q

What is a sampling unit?

A

the individual item included in the sample.

93
Q

Why is defining the attribute of interest important?

A

So that deviations (departures) from the control may be determined and the sample items properly evaluated. Ex - is it acceptable for another person to sign for the supervisor during vacation periods?

94
Q

How is sample size determined in attribute sampling?

A

Tables from the AICPA Audit Guide are used.

95
Q

What is the inverse effect of allowable risk of overreliance on sample size?

A

The higher the allowable risk, the smaller the sample size.

96
Q

What usually used as allowable risk of overreliance used by auditors?

A

5% or 10%. The auditor can specify other levels of risk, but the tables most often presented use only these two.

97
Q

What is tolerable deviation rate?

A

The maximum rate of deviations from the prescribed control that the auditor is willing to accept without altering the assessed risk of material misstatement.

98
Q

What is the relationship between deviations and misstatements?

A

Deviations increase the likelihood of misstatements but do not always cause misstatements.

99
Q

What happens if the auditor cannot tolerate any deviations?

A

Sampling is inappropriate and the whole population must be investigated.

100
Q

Why is it necessary to estimate the deviation rate in the current population?

A

To determine the appropriate sample size.

101
Q

How can the deviation rate of the current population be estimated?

A

It can be based on the prior year’s findings or a pilot sample of 30 to 50 items.

102
Q

What should the auditor do if the expected rate is higher than the tolerable rate?

A

The tests of control should be omitted and the auditor should not rely on the effectiveness of the control.

103
Q

Why is using standard sampling tables, which are based on large populations, for sampling plans of small populations a conservative approach?

A

It overstates the sample size and the risk of overreliance is not affected.

104
Q

What effect does a change in population size have if the population is large?

A

If the population is large a change in the size has a very small effect.

105
Q

How does an auditor perform the sampling plan?

A

An auditor takes a random sample, each item in the population should have an equal and nonzero chance of being selected.

106
Q

How does an auditor select a random sample?

A

By using a random number table or a computer program. These can be used to identify the items to be selected if the random number and the item in the population correspond.

107
Q

Can sampling be with or without replacement?

A

Both, the tables are designed for sampling with replacement, resulting in a conservative sample size because a slightly larger sample size than necessary is selected.

108
Q

In practice, do auditors normally sample using replacements?

A

No, additional evidence is obtained by choosing the same item more than once.

109
Q

What does it mean to sample without replacement?

A

It means that a population item cannot be selected twice.

110
Q

How does an auditor evaluate and document sample results?

A
  1. calculating the sample deviation rate
  2. determining the achieved upper deviation limit
111
Q

How do you calculate the sample deviation rate?

A

number of deviations in the sample / sample size

Example: 3 deviations / 150 sample size = 2%

112
Q

How is the achieved upper deviation limit calculated?

A

Using a table, cross referencing the sample size with the number of deviations.

Example: If the achieved upper deviation limit is 5.1% (3 deviations, 150 sample size), the auditor can state at a 95% confidence level (due to using the 5% risk of overreliance table) that the true occurrence rate is not greater than 5.1%

113
Q

What is the difference between the achieved upper deviation limit (from a standard table) and the sample rate?

A

The allowance for sampling risk (achieved precision)

Example: If the achieved upper deviation limit is 5.1% (3 deviations, 150 sample size), And the deviation rate is 2% (3/150), the allowance for sampling risk is 3.1%

114
Q

How does an auditor know if a sample does not support the planned reliance on the control?

A

If the sample deviation rate exceeds the expected population deviation rate, the achieved upper deviation limit exceeds the tolerable rate at the given risk of overreliance.

Example: If the achieved upper deviation limit is 6% (4 deviations, 150 sample size), using a 5% overreliance table, the 6% is greater than the 5% which means the sample does not support the reliance on the control

115
Q

How should deviations be analyzed?

A

They should be analyzed individually to determine its nature, importance, and probable cause.

116
Q

What is “true state of the population”?

A

The actual rate of deviations in the population

117
Q

What does it mean if the true deviation rate is less than than the tolerable rate?

A

The auditor should have an expectation of the effectiveness of the control tested

118
Q

What does it mean if the true deviation rate exceeds the tolerable rate?

A

The auditor should not have an expectation of the effectiveness of the control tested

119
Q

What are the advantages of Monetary-Unit Sampling (MUS)?

A
  • the largest items are selected for testing (the population is stratified)
  • it is ideal for testing for overstatement
  • small sample sizes may be appropriate, especially when no misstatements are expected
  • it is relatively easy to apply, especially if no misstatements are discovered
  • the sample size and sample evaluation can be calculated without dependence on the estimated variation (standard deviation) of the population
  • the sample selection process may begin even before the complete population is available for testing
120
Q

What are the disadvantages of MUS?

A
  • items with zero or negative balances have no chance of selection
  • it is useful only for detecting overstatement errors
  • sample sizes become relatively large if a significant amount of misstatement is expected
  • the calculated allowance for sampling risk tends to be overstated when a significant amount of misstatement is found in the sample
121
Q

What are the steps for MUS?

A
  1. Determine the objective of the plan
  2. Determine the population and sampling unit
  3. Determine the sampling interval and sample size
  4. Select the sample
  5. Execute the sampling plan
  6. Evaluate and document the results

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