A3 - Variables Sampling

Question 1

what is variable sampling (also known as estimation sampling)?

Answer 1

• It is a statistical sampling method
• used to estimate if the dollar value of the population is reasonable
• used primarily in substantive testing
• Preliminary estimates of materiality levels

Question 2

what is tolerable misstatement?

Answer 2

• the maximum monetary misstatement in the related account balance or class of transactions that the auditor is willing to accept
• Auditors desired = materiality precision

Question 3

what are the considerations for sample selection?

Answer 3

• Variability = Uncertainty = Larger sample size
• Stratification (separated a highly variable population into smaller groups of similar items, which is treated as a separate population) = Reduces variability = Smaller sample size

Question 4

what are the 3 commonly used classical variables sampling plans?

Answer 4

1. Mean-per-Unit Estimation (use avg. values) = Avg. sample size x Number of items in population
2. Ratio Estimation = (audited values / book values) x total book value
3. Difference Estimation (avg. difference) = ((audited value - book value) / # items tested) x population

Question 5

what are the factors to determine sample size?

Answer 5

• Tolerable misstatement
• Expected misstatement
• Acceptable level of risk
• Characteristics of the population
• Assessed risk of MM

Question 6

What is Probability-Proportional-to-Size (PPS) sampling?

Answer 6

• is the technique in which the sampling unit is defined as an individual dollar in a population. Once a dollar is selected, the entire account (containing that dollar) is audited.
• PPS automatically emphasizes larger items, so the higher dollar amount, the higher chance it will be selected => advantages: smaller sample compared to other methods
• Disadvantages of PPS sampling: zero, negative, or and understated balances would be missed or need special design considerations

Question 7

what is PPS sample size determination?

Answer 7

Sampling interval = tolerable misstatement / reliability factor
* reliability factor is the risk of incorrect acceptance

Sample size = recorded amount of the population / sampling interval

Question 8

when should an auditor use dual-purpose samples?

Answer 8

used only when LOW RISK

Question 9

what is statistical concept that the auditor used to evaluate sampling results by calculating the possible error in either direction?

Answer 9

Precision