14 - III: Audit sampling

Question 1

What topic of audit evidence and concept of audit testing does audit sampling include?

Answer 1

T: sufficiency.
C: extent.

Question 2

What is the definition of sampling?

Answer 2

The selection and evaluation of less than 100% of the population of audit relevance such that the auditor expects the items selected to be representative of the population …

Question 3

What are 2 basic sampling approaches?

Answer 3

1. Non-statistical (judgmental) sampling.

2. Statistical sampling.

Question 4

What does the statistical sampling benefits primarily relate to?

Answer 4

To quantifying the sufficiency of audit evidence.

Question 5

Does statistical sampling still use judgment?

Answer 5

Yes.

Question 6

Statistical sampling: what is attributes sampling?

Answer 6

Tests of controls (related to assessment of control risk).

Question 7

Statistical sampling: what is variable sampling? What are 4 major estimation methods?

Answer 7

Substantive tests to evaluate population’s implied dollar value.

1. Difference estimation.
2. Ratio estimation.
3. Mean-per-unit estimation.
4. Probability-proportionate-to-size (PPS) sampling.

Question 8

Which type of error does it result when there are ineffective I/C in truth and auditor’s conclusion is effective? When effective I/C, but auditor concludes ineffective? Which one leads to audit risk?

Answer 8

Type II error: false acceptance (effectiveness) - Risk of over-reliance on I/C and risk of incorrect acceptance of dollar balance - audit risk.

Type I error: false rejection (efficiency) - Risk of under-reliance on I/C and risk of incorrect rejection of dollar balance

Question 9

What is the risk of sampling?

Answer 9

Sampling may not be representative of the population.

Question 10

What is non-sampling risk?

Answer 10

Any mistakes other than having a sample that is not representative of the population.

Question 11

What does discovery sampling measure?

Answer 11

the probability of at least one error occurring in a sample if the error rate in the population exceeds the tolerable rate.

Question 12

What is systematic sampling?

Answer 12

a procedure where a random start is obtained and then every nth item is selected.

Question 13

What is stratified sampling?

Answer 13

breaks down the population into subpopulations and applies different selection methods to each subpopulation. This selection method is used when the population consists of different types of items (e.g., large balances and small balances).

Question 14

Attributes sampling: What is the 1st step?

Answer 14

Define what is deviation (error) or occurrence based on binomial distribution (hit or miss - only 2 choices).

Question 15

Attributes sampling: How is the sample selected - statistical and non-statistical sampling?

Answer 15

S: usually random selection or systematic.
N: could use block sampling or haphazard sampling (arbitrary selection w/ no conscious bias, but unconscious bias may exist).

Question 16

Attributes sampling: 3 explicit factors and 2 implicit factors for sample size table? Relationship with sample size?

Answer 16

• Expected error rate (related to variation in population) - direct.
• Tolerable (deviation) rate (related to precision) - inverse.
• Ris of over reliance (type II error) - inverse.
• Risk of under reliance (implicit)(type I error) - inverse.
• Population size (implicit) - direct.

Question 17

Attributes sampling: if result does not support the planned control level, what does it mean and what must the auditor do?

Answer 17

Can’t rely on a reduced CR assessment.

Use large samples for substantive testing.
More substantive audit procedures performed.

Question 18

Attributes sampling: formula to compute upper deviation (error) rate (achieved upper precision limit)?

Answer 18

Sample error rate (# of errors found/sample size) + allowance sampling risk

Question 19

Variable sampling: What does this heavily rely on?

Answer 19

Normal distribution (bell curve).

Question 20

Variable sampling: how is the sample selected?

Answer 20

Random sampling - each unit has same chance of selection.

Question 21

Variable sampling: what are 4 explicit factors and 1 implicit factor that influence sample size?

Answer 21

1. Estimated population std deviation (variability) - Direct.
2. Tolerable misstatement (precision) (allowance for sampling risk) - Inverse.
3. Risk of incorrect acceptance (type II error)(confidence) - Inverse.
4. Population size - Direct.

Risk of under reliance - inverse.

Question 22

Variable sampling: formula for allowance for sampling risk? Formula for sample size?

Answer 22

A=Za*N*(S/vn).
Za: coefficient of reliability (and confidence).
N: population size.
S: estimated population std deviation.
n: sample size.

n=(SZaN/A)2small

Question 23

Variable sampling: if 68% of the area is under the bell curve, what is std deviation? 95.5%?

Answer 23

one std deviation.

two std deviation.

Question 24

What is stratification? What does it do to variability/total sample size?

Answer 24

Breaking the population into several groups of relatively similar items.
V: reduce.
T: reduce.

Question 25

Variable sampling: what is difference estimation? When is it useful?

Answer 25

Estimate the population’s dollar value by focusing on the difference between sample items’ audit value and their BV.

When BV known. When hoping to get smaller sample sizes.

Question 26

Variable sampling: what is ratio estimation? When is it useful?

Answer 26

Estimate the population’s dollar value by focusing on the ratio between sample items’ audit value and their BV.

When sample audit values are proportional to BVs.

Question 27

Variable sampling: what is mean-per-unit estimation? Formula for estimated account value? When is it useful?

Answer 27

Estimate the population’s audit value by first calculating the sample’s audit value. Requires a very large sample - tend not to be used. Can stratify the population first.

Average audit value per item x #items.

When you need account value.

Question 28

Variable sampling: what is probability-proportional-to-size (PPS) sampling? When is it useful?

Answer 28

Stratification.
Groups the population into individual dollar items - extreme degree of stratification.
When there are few differences between audit and BV.

Question 29

How should sampling method be selected?

Answer 29

Depends on primary purpose.

Question 30

When the sampling purpose is to test controls, which method should be selected?

Answer 30

Attribute sampling.

Question 31

When the sampling purpose is to detect fraud, which method should be selected?

Answer 31

Attribute sampling - Discovery sampling (stop and go sampling - stops if 1 misstatement is found).

Question 32

When the sampling purpose is to find MM in account balance or transaction class (need dollar value), which method should be selected?

Answer 32

Probability-proportional-to-size sampling (monetary unit sampling).
Variable sampling.

Question 33

When do you use PPS over variable sampling? What is PPS considered to be effective for?

Answer 33

When zero or few misstatements expected because this method drives you to the smallest sample size (more efficient).
for AR and inventory.

Question 34

Probability-proportionate-to-size(PPS) sampling: what does it measure? When is it best used?

Answer 34

An individual dollar associated with the F/S element involved.
When overstatements are the primary concern.

Question 35

Probability-proportionate-to-size(PPS) sampling: Advantage?

Answer 35

Efficiency - since this is ultimate stratification. If there are few differences between audit and BV, PPS sampling may result in smaller sample sizes.

Question 36

Probability-proportionate-to-size(PPS) sampling: Disadvantage?

Answer 36

Not work well in detecting negative balances (understatement) or zero (unrecorded) balances.

Question 37

Probability-proportionate-to-size(PPS) sampling: what are 3 consideration to determine the sample size?

Answer 37

1. Reliability factor (from AICPA table): risk of incorrect acceptance/# of over stmt allowed.
2. The population BV (dollar amount).
3. The tolerable misstatement (net of any expected misstatements).

Question 38

Probability-proportionate-to-size(PPS) sampling: formula for sample size (n)?

Answer 38

n=(reliability factor x population BV) / tolerable misstatement.

n=BV / sampling interval
Sampling interval: tolerable misstatement / reliability factor.

Question 39

Probability-proportionate-to-size(PPS) sampling: how does it select the sample?

Answer 39

Systematic selection - starts w/ random starting point and a specified sample interval (population BV / sample size).

Question 40

Probability-proportionate-to-size(PPS) sampling: in order to evaluate recorded BV, the auditor must compute upper limits on misstatement (confidence interval). What are 3 elements consists of upper limits on misstatement?

Answer 40

Basic precision.
Projected misstatement.
Incremental allowance.

Question 41

Probability-proportionate-to-size(PPS) sampling: what is projected misstatement - BV greater/equal to sample interval? BV less than?

Answer 41

For items having a BV greater than or equal to the sample interval, the projected misstatement is the actual misstatement identified (there is no further projection - difference between actual and audit value).

Less: apply tainting percentage to the sample interval from which that account was selected.

Question 42

Probability-proportionate-to-size(PPS) sampling: projected misstatement (tainting): sample interval: $2,000. BV: $250. Audit value: $200. What is the tainting and projected misstatement?

Answer 42

T: $50/250=.20.
P: $2,000 x .20 = $400.