A3, M7-M9 Flashcards
What is audit sampling?
applying an audit procedure to less than 100% of the items in an account balance
What is assumed when the auditor samples (4 things)?
- Normally distributed population
- Each sample has an equal chance of being selected.
- If sample is large + randomly selected, sample will be representative.
- Auditor considers standard deviation in selecting the sample.
What is statistical sampling?
- auditor specifies the sampling risk they are willing to accept
- then, they calculate the sample size the provides that degree of reliability
What is nonstatistical sampling?
- sample size is not determined mathematically
- auditor uses their judgement to determine sample size
In statistical sampling, how are results evaluated?
quantitatively
In non-statistical sampling, how are results evaluated?
using auditor judgement
T/F: Only statistical sampling provides a sample that provides sufficient appropriate audit evidence.
False, both methods do this.
Which sampling method is acceptable under GAAS, statistical or non-statistical?
Both are acceptable.
T/F: Professional judgement is only used in nonstatistical sampling.
False, it is used in both statistical and nonstatistical sampling.
T/F: Only statistical sampling is random sampling.
False, both are versions of random sampling.
What six things is professional judgement used for?
- Identify population and sampling unit.
- Select the appropriate sampling method.
- Evaluate the appropriateness of audit evidence.
- Evaluate the nature of deviations or errors.
- Consider sampling risk.
- Evaluate the results from the sample and project them to the population.
What are four advantages of statistical sampling over non-statistical sampling?
- designs efficient sample
- measures sufficiency of audit evidence obtained
- provide objective basis for evaluating sample results
- quantifies sampling risk to limit risk to an acceptable level
What are the two types of sampling?
- Attribute Sampling
- Variables Sampling or PPS Sampling
What is attribute sampling used for?
used to estimate rate of occurrence, testing controls
Attribute sampling usually deals with what types of questions?
“yes” or “no” questions
What are variable sampling and PPS sampling used for?
used to estimate a numerical quantity, substantive testing
What is sampling risk?
- the possibility that the sample is not representative of the population
- therefore, the auditor will reach a different conclusion that the conclusion that would have been reached if the full population was tested
What are the two risks in Variable and PPS sampling (names only)?
- Risk of Incorrect Acceptance
- Risk of Incorrect Rejection
What is the risk of incorrect acceptance?
The sample provides that the balance is NOT materially misstated, but the population IS materially misstated.
The risk of incorrect acceptance results in an (inefficient/ineffective) audit.
Ineffective, because the audit did not work right!
What is the risk of incorrect rejection.
The sample provides that the balance IS materially misstated, but the population is NOT materially misstated.
The risk of incorrect rejection results in an (inefficient/ineffective) audit.
Inefficient, because you perform more procedures when something is MM. However, those procedures were not necessary.
What are the two risks in attribute sampling (names only)?
- Assessing Control Risk too Low
- Assessing Control Risk too High
What is the risk of assessing too low (defined + use relationship between deviation rate and tolerable rate)?
You say that the control risk is LOW (DR is below TR), but it is actually high control risk (DR is above TR).
When you assess control risk too low, this results in an (inefficient/ineffective audit).
Ineffective audit, because you did not obtain the correct result and now you will obtain less persuasive evidence.
When you assess control risk too low, sample has a (higher/lower) deviation rate than the population.
lower
What is the risk of assessing too high (defined + use relationship between deviation rate and tolerable rate)?
You say that the control risk is HIGH (DR is above TR), but it is actually LOW control risk (DR is below TR).
When you assess control risk too low, this results in an (inefficient/ineffective audit).
Inefficient, because you perform more substantive procedures than needed.
When you assess control risk too low, sample has a (higher/lower) deviation rate than the population.
higher
The term “reduces planned reliance on controls” is synonymous with what other term?
Reassess control risk as high
What is non-sampling risk?
all aspects of audit risk that are not due to sampling
What is the tolerable deviation rate?
maximum rate of deviation the auditor will tolerate without modifying planned reliance on control
What is the deviation rate?
auditor’s best estimate of the deviation rate in the population
What are the first four steps of attribute sampling?
- Define Objective
- Identify Population, including the period covered
- Define Sampling Unit
- Define Attributes of Interest to determine deviations (what error are we looking for)
T/F: The objective of the test can be positive, in the sense that you look for the rate that they do things right.
False, you are looking for what they do wrong.
What are steps five through nine of attribute sampling?
- Determine sample size.
- Select sample.
- Evaluate sample results.
- Form conclusions about internal control.
- Document the sampling procedure.
What three factors are considered in determining sample size for attribute sampling?
- Sampling Risk (Risk of Assessing Too Low)
- Tolerable Deviation Rate
- Expected Deviation Rate
What relationship does Sampling Risk (Risk of Assessing Too Low) have with sample size?
Inverse. If the risk is assessed high, then the auditor will tolerate being more wrong, and the sample will be smaller.
What relationship does tolerable deviation rate have with sample size?
Inverse. If the tolerable rate is high, you can accept more risk, so sample will be smaller.
What relationship does expected deviation rate have with sample size?
Direct. If population is expected to have high deviation, you want a larger sample.
Why is population size not considered a factor in sample size?
Population size is not an issue as long as the population is large.
How is “large” defined for a population?
more than 5,000 items
What is block sampling?
uses a consecutive series of items within the population as the sample
What methods are acceptable to select the sample?
random selection or systematic (every nth after a random starting point)
How are the sample results evaluated after you obtain the sample deviation rate?
- Add the Allowance for Sampling Risk to get the Upper Deviation Rate.
- Compare this upper deviation rate to the tolerable rate.
What is the purpose of the allowance for sampling risk?
a cushion to protect against undetected deviations
If upper deviation rate is higher than tolerable rate, then …
Do not rely on the control, AND
- reassess control risk as high and change NET of procedures, OR
- select another control
If upper deviation rate is (less than/ less than or equal to) the tolerable deviation rate, then …
less than or equal to; auditor may rely on the control
How do you determine the confidence level in problem?
1 minus the Sampling Risk (of assessing too low)
What is discovery sampling?
attribute sampling used when the population deviation rate is believed to be 0 or close to 0
When is discovery sampling used?
when looking for a critical characteristic (fraud)
When is stop-or-go sampling used?
when few errors are expected in a popluation
What is stop-or-go sampling?
sampling technique that allows an auditor to stop testing once they’ve found enough evidence to support a conclusion
When selecting a sample for substantive tests, what may the auditor do for the sampling procedure?
stratification of the sample, when the population has highly variable amounts
T/F: Stratification typically results in a (larger/smaller) sample size.
reduced
What is tolerable misstatement?
maximum monetary misstatement that the auditor is willing to accept
What are the three most commonly used variable sampling plans?
- Mean per Unit Estimation
- Ratio Estimation
- Difference Estimation
What is mean per unit estimation (calculation)?
Average Sample Value TIMES Number of Items in Population
What is ratio estimation (calculation)?
(Audited Amount for Sample/Book Amount for Sample) * Total Population Book Amount
What is difference estimation (calculation)?
- (Audited Amount of Sample - Book Amount of Sample) / Items in Sample
- (1) * Total Items in Population
- Book Amount in Population - (2)
Which of the three sampling methods for variable sampling is sensitive to variability in the population? What should be done to remediate this?
Mean per Unit Estimation; stratify the sample
When are ratio estimation and difference estimation only effective?
auditor expects large numbers of overstatements and understatements
When is ratio estimation most effective?
if there is a correlation between book values and audit amounts
What are the first three steps in variables sampling?
- Objective of Test
- Population
- Sampling Unit
What are steps four through 8 in variables sampling?
- Determine Sample Size
- Select the sample
- Evaluate the sample results
- Form conclusions about balances tested
- Document the sampling procedures
What five factors affect sample size in variables sampling?
- expected misstatement
- standard deviation (population variability)
- assessed level of risk
- tolerable misstatement
- acceptable level of risk
What is the relationship between expected misstatement and sample size (direct/indirect)?
Direct. If you expect a higher misstatement, increase sample size.
What is the relationship between standard deviation and sample size (direct/indirect)?
Direct, because higher standard deviation means higher variability and a larger sample.
What is the relationship between assessed level of risk and sample size (direct/indirect)?
Direct, because the higher you assess the risk (RMM), the larger sample you want.
What is the relationship between
tolerable misstatement and sample size (direct/indirect)?
Inverse, because higher tolerable misstatement means are willing to accept more risk with a smaller sample size.
What is the relationship between acceptable level of risk and sample size (direct/indirect)?
Inverse, because if you accept more risk, then you can have a smaller sample.
How should the sample be selected in variables sampling?
Random, so that the sample is expected to be representative of the population.
How are sample results evaluated for variable sampling?
- Take the projected misstatement and apply to determine the auditor’s “point estimate.”
- Add an “allowance for sampling risk” to the point estimate (+ and -) to create a range.
- Compare the book value presented to this range.
What should the auditor do when using ADA for substantive testing?
Group the data into 3 categories, (1) no misstatements, (2) contains possible misstatements that are clearly inconsequential, (3) contains possible misstatements that are NOT clearly inconsequential.
What is probability proportional to size (PPS) sampling?
sampling unit is the individual dollar in the population
What happnes when a dollar is selected in PPS smpling?
the entire account containing that dollar is audited
What is the biggest advantage of PPS sampling?
automatically emphasizes larger items by stratifying the sample
What is teh biggest disadvatnge of PPS sampling?
Zero balances, negative balances, and understated balances require special design considerations.
How is the sampling interval determined for PPS sampling (calculation)?
Tolerable Misstatement / Reliability Factor
How is the sample size determined for the PPS sampling?
Recorded Amount of the Population / Sampling Interval
How is the reliability factor determined?
Use a table based on risk of incorrect acceptance and the corresponding reliability factor.
How do you select a PPS sample once you have a sampling interval and sample size?
- Start with a random number as the first selection. Select the account that falls in the range containing that value.
- Add the sampling interval to that number to get your next selection.
The range for each account is (inclusive/exclusive) of the last value.
inclusive
What columns need to be created in a table for PPS sampling?
cumulative total and range
Which items will surely be selected in PPS sampling?
items greater than the sampling interval
When do the errors found need to be projected in evaluating sample results for PPS? When do they NOT need to be projected?
- Projected when the book value of the item is equal to or less than the sampling interval
- Not projected when book value of the item is greater than the sampling interval
What are the columns used in a table to project the error?
Book Value, Audit Value, Difference, Difference Divided by Audit Value, Sample Interval, Projected Error
How do you get the percentage applied to the sample interval to determine projected error?
(Audited Value - Book Value) / Audited value
How do you determine the total projected error?
Add all the projected errors from each item in the sample.
If the auditor finds deviations (errors), what should be considered (all types of sampling)?
- nature and cause of errors
- possible relationship of deviation to other parts of the audit
T/F: Risk of incorrect acceptance is set by the auditor.
True.
When the sample sample is being used to perform test of controls and test of details, what is the sample size?
the larger of the two samples (if otherwise designed separately)
If you have more than one factors having opposing effects on the sample size, how do you determine sample size?
Indeterminate, unless you have information on the relative strength of the factors.
Deviations from pertinent control activities at a given rate would ordinarily be expected to result in misstatements at a (lower/higher) rate. Explain this statement.
lower; Even though controls may not always work, they generally result in fewer misstatements.
If an auditor discovers lots of deviations from controls, they would …
increase assessment of RMM
If an item in a sample cannot be located, what does the auditor do (test of controls)?
Treat it like a deviation.
In a csv file, keeping “Roses, tulips, and violets” in quotations results in how many columns?
1 column instead of 3
(Attribute/variable sampling) is used to determine the completeness of billing transactions?
attribute
What is audit data analytics?
(1) data analytic techniques that enable auditors to analyze and review
(2) financial and nonfinancial data to
(3) discover patterns, relationships, and anomalies during an audit
What five steps should be performed when applying ADAs?
- Plan the ADA
- Access and obtain the data
- Review and analyze the relevance and reliability of the sourced data
- Perform the ADA using the selected tools and techniques
- Evaluate and address the outcomes
Most ADAs are performed using (software/manual labor).
software
What three software packages are common for audit data analytics?
- Data Extracts and Preparation
- Data Modeling
- Data Visualization
What does data extracts and preparation software do?
extract, transform, and load (ETL) data in preparation for analysis
What does data modeling software do?
perform common data analytic (audit) procedures
What does data visualization software do?
create charts, graphs, diagrams, and dashboards
As the complexity of the ADA technique increases, what happens to the value it brings to the audit?
increases
What are the four broad categories of data analytics that may be applied as ADA?
- Descriptive Analytics
- Diagnostic Analytics
- Predictive Analytics
- Prescriptive Analytics
What are descriptive analytics (full definition)?
explains what happened or what is happening with data
What are descriptive analytics (two words)?
explains “what”
What are three common descriptive analytics techniques?
- summary statistics,
- data sorting and filtering, and
- aging data
What are diagnostic analytics (full definition)?
used to understand the underlying cause of results, uncovering correlations, patterns, and relationships among data to explain outcomes
What are diagnostic analytics (two words)?
explains “why”
What is a common diagnostic analytical procedure?
drill-down and drill-through analysis
What are predictive analytics?
use historical data and facts and make predictions, estimates, and assertions about future events
What are predictive analytics (three words)?
what will happen
What are common predictive analytics techniques?
regression, forecasting, time-series modeling, classification, sentiment analysis
What are prescriptive analytics?
(1) prescribe course of actions
(2) to help optimize decisions to reach desired outcomes
What is the most advanced type of analytic?
prescriptive analytics
What are common prescriptive analytical techniques?
- what-if analysis
- decision support and automation
- machine learning/AI
- natural language processing
Which two of the ADA techniques deal with the past?
Descriptive
Diagnostic
Which two of the ADA techniques deal with the future?
Predictive
Prescriptive
What are the different data storage repositories, from largest to smallest?
- Data Lake
- Data Warehouse
- Data Mark
- Data Cubes
- Databases
- Tables Spreadsheets
Which of the data repositories is the central repository?
Data Warehouse
What is a data lake?
contains all structured and unstructured data
What is a data warehouse?
structured and organized database tables available for analysis
What is a datamart?
subset of database tables used for specific business segments
What is a data cube?
database table transformed for drilling down
What is a database?
structured tables available for specific analysis
What is a table?
single sheet of attributes and records
What is a spreadsheet?
data files that may contain tables or other values
How does the auditor usually get access to the data they need for ADAs?
Auditor makes a request for data and receives it in formats that can be imported into data analytics software.
What are the seven data file formats, in order from least to most complex?
- TXT file
- CSV file
- Microsoft Excel Spreadsheet
- Database/Access Database File
- XML File
- Hypercube File
- Compressed (ZIP) file
What key benefit do TXT and CSV files have that XLSX files do not have?
TXT and CSV files are not limited on rows.
What does a hypercube file do?
allows automated updates of linked audit documentation when the underlying data changes
What is the key benefits of a ZIP file?
easier to share and saves storage space
What three key traits does structured data have?
- organized
- consistent data types and formats
- easily searchable
What do relational databases do?
combine multiple tables using foreign keys
What are attributes in a table?
columns, represent characteristics that describe the objects
What are the three categories of attributes?
- primary key
- foreign keys
- descriptive attributes
What are records in a table?
rows
What are fields in a table?
spaces at the intersection of columns and rows
What is the information placed in a field called?
data value
What is normalization (databases)?
a database design technique that reduces redundancy by dividing large tables into several smaller tables that are linked together
T/F: Primary key is required in every table.
True.
What is a primary key?
contains a unique identifier
What is a foreign key?
an attribute in a table which is the primary key of another table
What are database keys?
primary and foreign keys
What are composite keys?
two attributes combined together create a unique identifier for a row
What is unstructured data?
- in its original unmodified format, and
- remains that way until transformed and modified for analysis
What is discrete data?
quantitative data, that cannot be broken into portions, fractions, or decimals (whole numbers)
What is continuous data?
quantitative data that can be broken into decimals, units, fractions, and parts
What is interval scale data?
shows each point on a line where zero does NOT mean the absence of something
What is an example of interval scale data?
Average temperature, because 0 degrees does not mean the absence of temperature.
What is ratio scale data?
shows each point on a line where zero means the absence of something
What is an example of ratio scale data?
Average salary, because $0 salary means an absence of salary.
What is nominal scale data?
qualitative data that describes categories with no numerical relationship
What is ordinal scale data?
qualitative data that describes the rank or order of data
What should the auditor do to ensure the reliability of data obtained from the entity’s information systems?
perform general IT controls testing
What should the auditor do if the information comes from a service organization employed by the audited entity?
request a SOC 1 report to provide assurance on their controls
When does data result in more reliable audit evidence (source of data)?
- auditor directly sources it
- data comes from a source independent of the entity being audited
When does data result in more reliable audit evidence (controls)?
controls are deemed effective
Scaling on the y-axis should typically start at what value?
zero!
When does data result in more reliable audit evidence (originals v copies)?
original documents are provided
When does data result in more reliable audit evidence (oral or written)?
written documentation
What type of chart is most appropriate for a period-over-period analysis?
bar or column chart
What is classification?
(1) a predictive analytic
(2) that allows the auditor to utilize historic data to make predictions about
(3) what classes or categories would best fit a new data point
What should an auditor focus on when looking at classification on a scatterplot?
the points that do not clearly fit with their neighbors
What chart is most appropriate for trend analysis?
line charts
What items go into the “clearly inconsequential” bucket?
does not pose risk of material misstatement individually or in the aggregate
What does the auditor need to document about clearly inconsequential items?
why the items are classified like this, including amounts or the nature of the item
What is done with the “not clearly inconsequential” bucket items?
determine the potential misstatements
What are the three groups that the “not clearly inconsequential” items can go into after determining potential misstatements?
- No Actual Misstatement
- Misstatement, but Clearly Inconsequential
- Misstatements that are Not Clearly Inconsequential
Aging the accounts receivable data is a (descriptive/predictive) procedure.
Descriptive, because you are summarizing the AR.
Accounts receivable analysis to determine potential bad debt expense is a (descriptive/predictive) procedure.
Predictive because you are trying to predict bad debt expense.
T/F: Data mining can be done manually?
False, you need a computer!
