7 Audit Sampling

Question 1

What is audit sampling

Answer 1

Testing if the clients’ internal controls are reliable
Finding an estimation of control risk
Based on the relative size of the sample to population and number of errors found can find a confidence level
To find how reliable, complete, and accurate the data is

Question 2

Can you know the effectiveness of an internal control structure

Answer 2

You can never know the effectiveness of an internal control structure as the evaluation is based on a sample

Question 3

Sampling for compliance testing

Answer 3

There is a grid matrix for auditors assessment and actual nature which you must be able to draw

Question 4

What is Type 1 sampling risk

Answer 4

‘Type 1’ sampling risk is the risk of over-reliance (on the client’s internal controls)

Question 5

What is Type 2 sampling risk

Answer 5

‘Type 2’ sampling risk is the risk of under-reliance (on the client’s internal controls)

Question 6

What is sampling risk

Answer 6

Sampling risk is Type 1 + Type 2
Is the same no matter the skill of the auditor
Like rolling some dice

Question 7

What is non sampling risk

Answer 7

This is the total risk of human error (i.e. auditor error) i.e.
A. Incorrectly designed test and/or
B. Incorrectly performed test and/or
C. Incorrectly interpreted results.
The total NSR is (A)+(B)+(C).
NSR cannot be measured

Question 8

What is detection risk

Answer 8

The risk of the auditor not reaching the correct conclusion is
DR = Sample risk + non-sample risk
DR can never be zero as sample risk can never be zero

Question 9

What is sample size

Answer 9

Sampling risk can be reduced by increasing the sample size
The sample size is set by the audit senior in their planning

Question 10

Steps in audit sampling

Answer 10

1. Define the purpose of the compliance test.
2. Define the population, the sampling unit, and the attribute of interest.
3. Decide the required level of confidence (in the test results) and use this to determine the sample size.
4. Determine the sample selection method.
5. Perform the test
6. Evaluate the results

Question 11

What is tolerable deviation

Answer 11

The TDR is the maximum percentage rate of errors (deviations) which the auditor would tolerate if they could observe the entire population.
Imagine if we could see every sales order, and we found that 5% of them were not signed by the credit controller.
Would we be willing to rely on this internal control as reliable and effective?
This question relates to the question of materiality.

Question 12

How do you evaluate test results

Answer 12

Each item in our sample is carefully itemised and listed in our working papers. We will prepare a ‘spreadsheet’ schedule showing the document (order) number and with a separate column for each ‘attribute’ examined

Question 13

Finding sampling risk

Answer 13

Need to learn how to use tables to look up sample risk

Question 14

What do you do if you find errors in the

Answer 14

If we have found any exceptions at all, we need to exercise audit judgement.
The audit assistant will discuss the results with the audit senior, who will confer with the audit manager if the problems appear to be serious
Need to make judgement if there is a material effect as a result and if they can rely on the particular control to trust the final numbers and if further substantive testing is needed

Question 15

How do you deal with errors

Answer 15

The auditor senior or manager will need to evaluate the implications and will instruct the audit assistant to:
* Extend the sample size and/or
* Test an alternative internal control (if any exists) and/or
* Perform additional substantive testing (probably during the ‘final’ audit).

Question 16

What to do if weak controls are found

Answer 16

For example, if we found evidence of weak and/or intermittent credit control procedures applied to the approval of sales orders we would almost certainly perform additional substantive procedures designed to:
* Review the frequency and scale of bad debt write-offs and provisions and
* Obtain additional (greater than planned) assurance concerning the existence and collectability of year-end debtors (accounts receivable), and the appropriateness of the doubtful debts provision.