A5 (1) - Audit Sampling Flashcards
Situations where Sampling May Not Apply
1- Risk assessment procedures
2- Tests of automated application controls
3- Analyses of security and access controls
4- operation of the control environment
Statistical Sampling - Advantages
a. Measure the sufficiency of the audit evidence obtained.
b. Provide an objective basis for quantitatively evaluating sample results.
c. Design an efficient sample.
d. Quantify sampling risk so as to limit risk to an acceptable level.
Risk of Incorrect Acceptance in Substantive Testing
Sample results fail to identify an existing material misstatement).
Risk of Incorrect Rejection in Substantive Testing
Sample results mistakenly indicate a material misstatement).
Risk of Assessing Control Risk Too Low
Sample results indicate a lower deviation rate than actually exists in the population).
Risk of Assessing Control Risk Too High
Sample results indicate a greater deviation rate than actually exists in the population
Summary Charts
See the working paper file
Tolerable Deviation Rate
maximum rate of deviation from a prescribed procedure without modifying planned reliance on internal control.
Deviation Rate in the sample
Auditor’s best estimate of the deviation rate in
the population
Attribute sample procedures
1- Define the Objective of the Test 2- Define the Population 3- Define the Sampling Unit 4- Define the Attributes of Interest 5- Determine the Sample Size 6- Select the Sample 7- Evaluate the Sample Results 8- Form Conclusions about the Internal Control Tested 9- Document the Sampling Procedure
Upper (maximum) deviation rate
Sum of the sample deviation rate and the allowance for sampling risk
If the upper deviation rate is less than or equal to the auditor’s tolerable deviation rate,
Rely on the control
If the upper deviation rate exceeds the auditor’s tolerable deviation rate,
NOT rely on the control. Instead,
1- test compliance with some other internal control
2-Modify the nature, extent, or timing of related substantive tests
OTHER ATTRIBUTE SAMPLING MODELS - Discovery Sampling
Discovery sampling is a special type of attribute sampling appropriate when the auditor believes the population deviation rate is zero or near zero. (e.g., fraud).
OTHER ATTRIBUTE SAMPLING MODELS - Stop-or-Go Sampling
Allowing the auditor to stop an audit test before completing all steps. It is used when few errors are expected in the population
SAMPLING IN SUBSTANTIVE TESTS: VARIABLES SAMPLING
Statistical sampling method used to estimate the numerical measurement of a population, such as a dollar value (
Tolerable Misstatement
Maximum monetary misstatement in the related account balance or class of transactions that the auditor is willing to accept
Projected Misstatement
projects the misstatement results of the sample
If the total projected misstatement is less than the tolerable misstatement for the account balance or class of transactions
the auditor should consider the risk that such a result might be obtained even though the true monetary misstatement for the population exceeds tolerable misstatement.
If the total projected misstatement is close to the tolerable misstatement
There is an unacceptably high risk that the actual error
In the population exceeds the tolerable misstatement
Variables Sampling Plans - (1) Mean-per-Unit Estimation (MPU)
Estimate =average sample value x number of items in population)
very sensitive to the variability of the population
Variables Sampling Plans - (2) Ratio Estimation
Audited (correct) values of items to their book values to project.
Require smaller sample sizes than the MPU method; however, they are only effective when the auditor expects large numbers of over- and understatements
Variables Sampling Plans - (3) Difference Estimation
Average difference between the audited (correct) values of items and their book values to project the actual population value.
Sampling procedures
1- Define the Objective of the Test - accounts receivable
2- Define the Population -5,000 accounts by $4,500K.
3- Define the Sampling Unit - 5,000 accounts
4- Determine the Sample Size
5- Select the Sample
6- Evaluate the Sample Results
7- Form Conclusions
8- Document the Sampling
Sample size will increase/decrease by changing any of the items in the formula
A. Sample size will increase as the following increase
(a) Expected misstatement (b) Standard deviation (population variability) (c) Assessed level of risk
B. Sample size will decrease as the following increase (inverse relationship):
(a) Tolerable misstatement (b) Acceptable level of risk
Difference between Book value and audited value
Book Value = Total sample value (e.g..total 200 account receivables .)
Audit value = Total audited accounts within the sample
PPS Sampling
Technique where the sampling unit is defined as an individual dollar in a population.
Sample size using PPS method
Interval = Tolerable misstatement / Reliability factor
Sample size = Recorded amount of population / Sampling interval
Reliability factors correspond to the risk of incorrect acceptance and are generally obtained from a table
Sample Selection using PPS
A random number between 1 and the sampling interval (inclusive) is selected. This number is the random start, and it will also determine the first item selected. Systematic selection is then used to select the remainder of the sample. The recorded amounts of the logical units (e.g., account balances) throughout the population are added and individual dollars are selected based on the interval. Once a dollar in an account is selected, that entire account
will be audited.
Evaluation of Sample Results
(1) . If no errors are found in the sample, the error projection is zero and the allowance for sampling risk would not exceed the auditor’s tolerable error.
(2) . If, on the other hand, errors are found in an account the errors need to be projected to the interval
