14.2 Flashcards
In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also directly consider the
Likely rate of deviations
Allowable risk of underreliance
I only.
The factors necessary to determine sample size in an attribute sampling plan for a large population include (1) the tolerable deviation rate, (2) the acceptable risk of overreliance, and (3) the expected deviation rate.
Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?
Expected amount of misstatements:
Measure of tolerable misstatement:
Yes
Yes
Certain variables sampling plans (e.g., monetary-unit sampling) specifically consider the expected amount of misstatement and the measure of tolerable misstatement or performance materiality in the determination of sample size.
An auditor examining inventory most likely would use variables sampling rather than attributes sampling to
Estimate whether the dollar amount of inventory is reasonable.
Variables sampling is used by auditors to estimate quantities or dollar amounts in substantive testing. Attribute sampling applies to tests of controls and is used to estimate a deviation rate (occurrence rate) for a population. Thus, an auditor who wants to estimate whether the dollar amount of inventory is reasonable uses variables sampling.
In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was
Initially concealed by a forged document.
The discovery of a fraud ordinarily requires broader consideration than the discovery of an error. The discovery of an initially concealed forged document indicates that the integrity of employees may be in doubt.
In a monetary-unit sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement of this sample would be
$2,000.
Monetary-unit sampling is a commonly used method of statistical sampling for tests of details of balances because it provides a simple statistical result expressed in dollars. The projected misstatement in this sampling method equals the actual misstatement of the sampled item when the recorded amount of the item ($10,000) exceeds the sampling interval ($5,000). Thus, the projected misstatement is $2,000 ($10,000 recorded amount – $8,000 audit amount).
If an auditor of a nonissuer discovers an unexpectedly high number of deviations during procedures performed on a sample to test management’s review and approval of time sheets, then the auditor would most appropriately
Increase the assessed risk of material misstatements.
The tolerable deviation rate for a control is the maximum that the auditor can accept without increasing the assessed risk of material misstatement. Deviations increase the probability of misstatements in the accounting records, but they do not always cause misstatements. If deviations from a control on which the auditor intends to rely occur, the auditor should investigate the deviations and their consequences. The auditor then should evaluate whether (1) the tests of controls justify reliance, (2) additional tests of controls are needed, or (3) the potential risks of misstatement should be addressed by performing substantive procedures.
In a sampling application, the group of items about which the auditor wants to estimate some characteristic is called the
Population.
The population is the group of items about which an auditor wishes to draw conclusions. However, the difference between the targeted population (the population about which information is desired) and the sampled population (the population from which the sample is actually drawn) should be understood.
If the size of the sample to be used in a particular test of attributes has not been determined by using statistical concepts, but the sample has been chosen in accordance with random selection procedures,
The auditor may or may not achieve desired precision at the desired level of confidence.
The determination of sample size for a test of attributes is a function of (1) the allowable risk of overreliance, (2) the tolerable deviation rate, (3) the expected population deviation rate, and (4) the size of the population. When the auditor does not use these criteria to determine sample size, (s)he risks not meeting the audit objectives.
When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should
Be related to preliminary judgments about materiality levels.
When planning a sample for a test of details, the auditor should consider how much monetary misstatement in the related account balance or class of transactions may exist without causing the financial statements to be materially misstated. This maximum misstatement is the tolerable misstatement for the sample. It is used in audit planning to determine the necessary precision and sample size. Tolerable misstatement, combined for the entire audit plan, should not exceed the auditor’s preliminary judgments about materiality.
The auditor failed to recognize a deviation included in a sample intended to test controls related to a transaction process. This failure best reflects
Nonsampling risk
Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm’s audit practice in accordance with the quality control standards (AU-C 530).
An auditor may decide to increase the risk of incorrect rejection when
The cost and effort of selecting additional sample items are low.
The risk of incorrect rejection is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not. This risk relates to the efficiency, not the effectiveness, of the audit. Incorrect rejection ordinarily results in the application of additional procedures that finally lead the auditor to the proper conclusion. If the cost and effort of selecting additional sample items are low, a higher risk of incorrect rejection may be acceptable.
The risk of underreliance is the risk that the sample selected to test controls
Indicates that the controls are less effective than they actually are.
One aspect of sampling risk in performing tests of controls is the risk of underreliance. It is the risk that the sample indicates that the controls are less effective than they actually are.
To determine the sample size for a test of controls, an auditor should consider the tolerable population deviation rate, the risk of overreliance, and the
Expected population deviation rate.
A test of controls is an application of attribute sampling. The initial size for an attribute sample is based on (1) the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, (2) the tolerable population deviation rate, (3) the expected population deviation rate, and (4) the population size. However, a change in the size of the population has a very small effect on the required sample size when the population is large. Consequently, population size is often not considered unless it is small.
Stratified mean-per-unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually
Produces an estimate having a desired level of precision with a smaller sample size.
The primary objective of stratification is to reduce the effect of high variability by dividing the population into subpopulations. Reducing the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and confidence level constant.
A CPA’s test of accuracy of inventory counts involves two storehouses. Storehouse A contains 10,000 inventory items and Storehouse B contains 5,000 items. The CPA plans to use sampling without replacement to test for an estimated 5% deviation rate. If the CPA’s sampling plan calls for a specified reliability of 95% and a tolerable rate of 7.5% for both storehouses, the ratio of the size of the CPA’s sample from Storehouse A to the size of the sample from Storehouse B should be
More than 1:1 but less than 2:1.
The relationship between population size and sample size is direct. As the population size increases, so does the necessary sample size, although not proportionally. Generally, the population size has very little effect on the sample size when the population is large. According to the AICPA Audit Guide Audit Sampling, a population greater than 2,000 sampling units is large. If the population has between 200 and 2,000 sampling units, the effect on the sample size is small. For smaller populations, sample size is reduced by the effect of population size. Thus, more items would have to be sampled from Storehouse A than from Storehouse B, but not twice as many.
