A5 Auditing Sampling PT 1

Question 1

What is the difference between non-statistical sampling and statistical sampling?

Answer 1

Statistical Sampling = 1. Uses laws of probability for selection and evaluation of a sample and 2. Allows for quantification of audit risk and sufficiency of audit evidence

Non-statistical sampling = 1. Does not utilize statistical models in calculations and 2. Auditors use their judgement to determine sample sizes to evaluate the selection samples.

Question 2

When are 6 professional judgement necessary in the use of statistical or non-statistical sampling by an auditor?

Answer 2

The auditor must use professional judgement to:

1. Define the population and sampling unit
2. Select the appropriate sampling method
3. Evaluate whether the audit evidence is appropriate.
4. Evaluate the nature of deviations or errors
5. Consider sampling risk.
6. Evaluate sample results and project to the population.

Question 3

Define Sampling Risk?

Answer 3

SR is the risk that the sample is not representative of the population, so the auditor’s conclusion will be incorrect.

(Sampling risk is the risk that the auditor’s conclusion based on a sample is different from the conclusion that would have been reached if the tests had been applied to all items in the population.)

Question 4

Define the 2 aspects of sampling risk for TEST OF CONTROLS

Answer 4

Risk of assessing control risk too low: Deciding the control is more effective / reliable than it really is; affects AUDIT EFFECTIVENESS

Risk of assessing control risk too high: Deciding the control is less effective / reliable than it really is; affects AUDIT EFFICIENCY

Question 5

Identify two aspects of sampling risk that the auditor would be concerned with when performing substantive testing.

Answer 5

RISK OF INCORRECT ACCEPTANCE: Deciding from the sample that the balance is correct when it is really MM; affects AUDIT EFFECTIVENESS.

RISK OF INCORRECT REJECTION: Deciding from the sample that the balance is MM when it is really correct; affects AUDIT EFFICIENCY.

Question 6

What is the relationship btw sampling and reliability (confidence level)?

Answer 6

Sampling Risk + Confidence Level = 100%

Question 7

What is attribute sampling?

Answer 7

Attribute sampling is a statistical sampling method used to estimate a rate of occurrence (exception) of a specific characteristic (Attribute).

It is used in TOC

Question 8

Define:

1. Tolerable deviation rate (for attribute sampling) and

2. Tolerable misstatement (for variable sampling)

Answer 8

Tolerable deviation rate: The max rate (%) of deviation form a control procedure that the auditor is willing to accept while still relying on the control.

Tolerable Misstatement: The largest amount of misstatement the auditor believes can exist in a balance of class of transactions without causing the F/S to be MM.

Question 9

What 3 factors affect sample size for an attribute sample application?

Answer 9

The following factors affect sampling size in the attribute application:

1. Risk of assessing CR too low (inverse relationship)
2. Tolerable Deviation Rate (Inverse Relationship)
3. Expected Deviation Rate (Direct Relationship)

Question 10

What rates are compared in drawing a conclusion about an attribute sampling application?

Answer 10

The auditor compares the upper deviation rate to the tolerable deviation rate in drawing conclusions about an attribute sampling application.

If the UDR exceeds the auditor’s TDR, the auditor will not rely on the control. (The UDR is the sample deviation rate plus an allowance for sampling risk)

Question 11

What 5 factors affect sample size for a VARIABLE $ sampling application?

Answer 11

1. Standard Deviation or population variability (Direct Relationship)
2. Expected size and frequency of misstatement (Direct relationship)
3. ASSESSED level of risk (Direct Relationship)
4. Tolerable Misstatement (Inverse Relationship)
5. ACCEPTED level of risk (Inverse Relationship)

Question 12

Describe variable sampling?

Answer 12

Variable sampling is a statistical sampling method used to estimate the numerical amount of a population.

VS may be used to substantiate management’s assertion in the F/S by determining whether amounts are reasonable. Often, this is accomplished by developing independent estimates of FS amounts.

Variable sampling is used primarily in substantive testing.

Question 13

what amounts are compared in drawing a conclusion about variable sampling application?

Answer 13

The auditor compares the client’s book value to the calculated range in the variable sampling application. If the recorded book value is within the acceptable range, the BV is considered fairly stated.

(The calculated range is the point estimate, as determined from the sample plus/minus an allowance for sampling risk)

Question 14

What is discovery sampling (Stop-or-go)?

Answer 14

Discovery sampling is a type of attribute sampling used when the expected deviation rate is zero or near zero.

It is used when the auditor is looking for a very critical characteristic (e.g. fraud)

Question 15

what are the sampling plans commonly used for variable estimation?

Answer 15

1. Mean-per-unit estimation: the sample means is multiplied by the number of items in the population to estimate population value?
2. Ratio Estimation: The ratio between book value and audited value (from a sample) is used to estimate population value.
3. Difference Estimation: The difference btw BV and Audited Value (from a sample) is used to estimate population value.

Question 16

Define Probability-Proportional-To-Size Sampling

Answer 16

PPS Sampling is a hybrid sampling technique that uses attributes sampling theory to express a conclusion in the dollar amounts instead of as a rate of occurrence.

The sampling unit is defined as an individual dollar in a population, which creates the effect of stratified sampling (The unit’s chance of being selected increases as its amount increases)

Question 17

What are the 2 Advantages of PPS Sampling?

Answer 17

1. Automatic Stratification

2. Efficient (Smaller Samples)

Question 18

What are the Disadvantages of PPS Sampling?

Answer 18

May require special consideration for negative, zero, and understatement balance.

Question 19

How is the sampling interval determined in a PPS sampling application?

Answer 19

Sampling interval = Tolerable misstatement / Reliable factor (divide / )

(The reliability factor comes from a table and is based on the risk incorrect acceptance)

Question 20

Auditor draws conclusion to RELY ON CONTROL when?

Answer 20

UDR Less than or equal too TDR

UDR < TDR

Question 21

Auditor draws conclusion to NOT RELY ON CONTROL when?

Answer 21

UDR greater than TDR

UDR > TDR

Question 22

Variable Sampling (Substantive Testing) Define:

1. Tolerable Misstatement
2. Expected Misstatement
3. Projected Misstatement

Answer 22

1. TM = Max monetary misstatement in an acct bal or class of transaction that the auditor is willing to accept.
2. EM = The auditor’s estimate of misstatement (before sampling)
3. Projected Misstatement = The auditor’s estimated misstatement based on the sample.

Question 23

How is the sample size determined in a PPS sampling application?

Answer 23

Sample Size = Recorded amount of the population / sampling interval