6- Audit Sampling

Question 1

What is Audit Sampling?

Answer 1

Taking part of a population- subjecting it to audit procedures- projecting results to a population

Question 2

What are the characteristics of Statistical Sampling?

Answer 2

Based on formulas Helps find an appropriate audit sample Helps evaluate evidence obtained Helps evaluate results and quantify Sampling Risk

Question 3

What are the characteristics of Non-Statistical Sampling?

Answer 3

Based on human decision Equally acceptable as Statistical Sampling

Question 4

What are the characteristics of Substantive Tests?

Answer 4

Variables sampling Probability proportionate to size sampling

Question 5

What type of sampling are Control Tests?

Answer 5

Attribute Sampling

Question 6

What is Sampling Risk?

Answer 6

Risk that your sample isn’t representative of population Can happen even if audit is done properly

Question 7

What is the risk of assessing Control Risk too high?

Answer 7

A risk of Control Testing - Auditor works to make Control Risk lower More substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiency Audit ends up being effective (correct result)- but you do more work

Question 8

What is the risk of assessing Control Risk too low?

Answer 8

A risk of Control Testing - Complement to Confidence Level Inverse relationship to Sample Size Higher accepted risk of assessing Control Risk too low = Smaller Sample Lower accepted risk of assessing Control Risk too low = Larger Sample

Question 9

What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?

Answer 9

Leads to higher Detection Risk - Fewer substantive tests Sample understates Control Risk This error leads to over-reliance on internal control- under-testing- and overall audit ineffectiveness. Does NOT necessarily mean that the Financial Statements are materially misstated - it does mean that if there is one- you are less likely to find it

Question 10

What is the risk of Incorrect Acceptance?

Answer 10

A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated Hurts audit effectiveness Wrong conclusion reached Efficient- but not effective

Question 11

What is the risk of Incorrect Rejection?

Answer 11

A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated Hurts audit efficiency Wrong recommendations given Effective- but not efficient

Question 12

What is Non-Sampling Risk?

Answer 12

Risk of human (auditor) missing an error Also called exception- error or deviation.

Question 13

How does Sampling Risk compare to Non-Sampling Risk?

Answer 13

Sampling Risk deals with the chance that your audit sample is flawed Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed

Question 14

What is Attribute Sampling?

Answer 14

Looking at Control Procedures - Were invoices approved when paid? Errors are stated in terms of %- not dollar amounts For example- 5 invoices out of 100 were not properly paid. Error rate is 5% Hint: If you see Error Rate on the Exam- they are referring to Attribute Sampling.

Question 15

How do you determine if Control Procedures are operating properly or not operating properly?

Answer 15

Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors

Question 16

What is the Tolerable Rate?

Answer 16

Error rate in population that you are willing to accept/tolerate Inverse relationship to Sample Size Higher Tolerable Rate = Smaller Sample Lower Tolerable Rate = Larger Sample If you’re willing to accept a higher probability that errors exist- there is less pressure on the sample

Question 17

What is the Expected Population Error Rate?

Answer 17

What Error Rate are you expecting? - Judgment call- based on experience Direct relationship to Sample Size More errors = Larger Sample Less errors = Smaller Sample

Question 18

What is the basic premise of Attribute Sampling?

Answer 18

Attribute in the sample gives information about the entire audit population Used to estimate Internal Control error rate

Question 19

For what is the Expected Population Deviation (error) Rate used?

Answer 19

Used to determine initial level of Control Risk

Question 20

What is the Allowable Risk of Over-reliance?

Answer 20

Risk of Assessing Control Risk too low Gives you the Sampling Risk

Question 21

When is Attribute sampling used?

Answer 21

Attribute sampling is only useful when there is documented evidence (an audit trail) to test Use when the existence of an error needs to be verified or debunked

Question 22

What is Classic Variable Sampling?

Answer 22

Testing for a dollar amount Value in sample gives information about value in entire population.

Question 23

What functions are used in conjunction with Classic Variable Sampling?

Answer 23

Mean Per Unit = Sample Average x Number in Population Stratification - Decreases effect of variance in population and reduces sample size

Question 24

What are the characteristics of Probability Proportionate to Size (PPS) sampling?

Answer 24

A form of Variable Sampling Does NOT use Standard Deviation Auditor focuses on a dollar amount Larger or more valuable items get picked more often as part of the sample

Question 25

What is Projected Misstatement?

Answer 25

Misstatement found in sample - have to project it to remainder of population

Question 26

How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?

Answer 26

PPS: Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design Classic Variables Sampling: Easy to expand sample size- Selecting zero and negative balances easy

Question 27

What factors affect sample size?

Answer 27

Tolerable rate for error - Inverse relationship with sample size Risk of assessing Control Risk too low - Inverse relationship with sample size Expected population error rate - Direct relationship with sample size Population size does NOT affect the sample size - as population is larger- sample size doesn’t grow.

Question 28

What is the formula for Audit Sampling?

Answer 28

SER + ASR < TER SER = Sample Error Rate ASR = Allowance for Sampling Risk TER = Tolerable Error Rate

Question 29

What is Allowance for Sampling Risk?

Answer 29

The amount that you add to the Sampling Error Rate to get some cushion for your sample. As high as you think the population error rate could go based on experience.

Question 30

What is the Tolerable Error Rate?

Answer 30

The amount of error rate that you can accept - If population error rate is less than TER- then accept the Control as effective If population error rate is more than TER- do more testing to get SER lower or conclude control isn’t effective. Do more substantive testing

Question 31

What are the steps to develop a sampling plan?

Answer 31

Determine Test Objective - for example- have sales shipments been billed? Define Population and Deviation - take a sample of shipping document- trace forward to see if billed Determine Sample Size based on tolerable rate for error- risk of assessing Control Risk too low- and expected population error rate. Select Sampling Technique

Question 32

After a Sampling Plan is developed- what are the steps in sampling?

Answer 32

Perform the Sampling Plan Evaluate Results Document Results

Question 33

What is Systematic Sampling?

Answer 33

Every certain # of a population is selected Population needs to be randomly ordered Primary advantage is that population doesn’t require pre-numbering

Question 34

What is Sequential Sampling?

Answer 34

Also called Stop or Go sampling Each audit step determines the next step

Question 35

What is Discovery Sampling?

Answer 35

Audit is testing an area that is so crucial that zero population errors can be tolerated Any phony employees on payroll?

Question 36

How does Block Sampling compare to other sampling methods?

Answer 36

Easy to implement- but is the worst method of sampling.