A5-Sampling and Communications Flashcards
What is the difference between nonstatistical and statistical sampling?
“Statistical sampling:
~ Uses laws of probability for selection and evaluation of a sample.
~ Allows for quantification of audit risk and sufficiency of audit evidence.
Nonstatistical sampling:
~ Does not utilize statistical models in calculations.
~ Auditors use their judgment to determine sample sizes to evaluate the selected samples.”
When is professional judgment necessary in the use of statistical or nonstatistical sampling by an auditor?
“The auditor must use professional judgment to:
~ Define the population and sampling unit.
~ Select the appropriate sampling method.
~ Evaluate whether the audit evidence is appropriate.
~ Evaluate the nature of deviations or errors.
~ Consider sampling risk.
~ Evaluate sample results and project to the population.”
Define sampling risk.
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.
Define the two aspects of sampling risk for tests of controls.
“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.”
Identify two aspects of sampling risk that the auditor would be concerned with when performing substantive testing.
“Risk of incorrect acceptance:
Deciding from the sample that the balance is correct when it is really materially misstated; affects audit effectiveness.
Risk of incorrect rejection:
Deciding from the sample that the balance is materially misstated when it is really correct; affects audit efficiency.”
What is the relationship between sampling risk and reliability (confidence level)?
Sampling Risk + Confidence Level = 100%
What is attribute sampling?
Attribute sampling is a statistical sampling method used to estimate a rate of occurrence in a sample. It is used in tests of controls.
Define tolerable deviation rate (for attribute sampling) and tolerable misstatement (for variables sampling).
“Tolerable deviation rate: The maximum rate (%) of deviation from 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 or class of transactions without causing the financial statements to be materially misstated.”
What factors affect sample size for an attribute sampling application?
“The following factors affect sample size in an attribute sampling application:
~ Risk of assessing control risk too low (inverse relationship)
~ Tolerable deviation rate (inverse relationship)
~ Expected deviation rate (direct relationship)”
What rates are compared in drawing a conclusion about an attribute sampling application?
The auditor compares the upper deviation rate to the tolerable deviation rate in drawing conclusions about an attribute sampling application. If the upper deviation rate exceeds the auditor’s tolerable deviation rate, the auditor will not rely on the control. (The upper deviation rate is the sample deviation rate plus an allowance for sampling risk.)
What factors affect sample size for a variables sampling application?
“The following factors affect sample size in a variables sampling application:
~ Standard deviation or population variability (direct relationship)
~ Expected size and frequency of misstatements (direct relationship)
~ Assessed level of risk (direct relationship)
~ Tolerable misstatement (inverse relationship)
~ Acceptable level of risk (inverse relationship)”
Define variables sampling.
Variables sampling is a statistical sampling method used to estimate the numerical amount of a population. It may be used to substantiate management’s assertions in the financial statements by determining whether amounts are reasonable. Often, this is accomplished by developing independent estimates of financial statement amounts. Variable sampling is used primary in substantive testing.
What amounts are compared in drawing a conclusion about a variables sampling application?
The auditor compares the client’s book value to the calculated range in a variables sampling application. If the recorded book value is within the acceptable range, the book value is considered fairly stated. (The calculated range is the point estimate, as determined from the sample, plus/minus an allowance for sampling risk.)
What is discovery sampling?
Discovery sampling is a type of attribute sampling used when the expected deviation rate is zero or near zero.
What are the sampling plans commonly used for variables estimation?
”~ Mean-per-unit estimation: The sample mean is multiplied by the number of items in the population to estimate population value.
~ Ratio estimation: The ratio between book value and audited value (from a sample) is used to estimate population value.
~ Difference estimation: The difference between book value and audited value (from a sample) is used to estimate population value.”
Define Probability-Proportional-to-Size (PPS) sampling.
Probability-Proportional-to-Size (PPS) sampling is a hybrid sampling technique that uses attribute sampling theory to express a conclusion in dollar amounts rather than 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).
What are the advantages and disadvantages of using PPS sampling?
“Advantages: Automated stratification and Efficient (smaller sample)
Disadvantages: May require special considerations for negative, zero, and understated balances.”
How is the sampling interval determined in a PPS sampling application?
“Sampling interval = Total misstatement / Reliability factor
(The reliability factor comes from a table and is based on the risk of incorrect acceptance.)”
What are the three primary purposes for obtaining written representations from management?
”~ To confirm representations explicitly or implicitly given to the auditor.
~ To indicate and document the continuing appropriateness of such representations.
~ To reduce the possibility of misunderstanding concerning matters that are the subject of the representations.”
What general types of items are included in a management representation letter, and who should sign it?
"A management representation letter generally includes information related to: ~ The financial statements ~ The completeness of information ~ Fraud ~ Related party transactions ~ Recognition, measurement, and disclosure ~ Subsequent events ~ Issues specific to a particular entity
The management representation letter should be signed by the CEO, CFO, and any other members of management who are responsible for and knowledgeable about the items contained in the letter.”
List the items that an auditor is required to communicate to those charged with governance.
“The auditor is required to communicate with those charged with governance regarding:
~ The auditor’s responsibility under GAAS.
~ The planned scope and timing of the audit.
~ Significant audit findings, including:
~ Significant accounting policies.
~ Management judgments and accounting estimates.
~ The auditor’s judgment about the quality of the entity’s accounting principles.
~ Difficulties encountered in performing the audit; disagreements with management.
~ Uncorrected misstatements.
~ Management issues discussed prior to retention.
~ Audit adjustments.
~ Consultation (by management) with other accountants.
~ Other items required by AICPA standards or the Sarbanes-Oxley Act.
Note: The communication can be oral or written, but must be documented in the audit documentation (working papers).”
What are the functions of the audit committee?
“The audit committee typically:
1. Selects and appoints the independent auditor and sets the audit fee.
2. Reviews the nature and details of the audit engagement.
3. Reviews the quality of the auditor’s work.
4. Reviews the scope of the audit.
5. Determines that any recommendations made by the auditor are given proper attention.
6. Maintains lines of communication between the auditor and the board of directors.
7. Helps solve any disagreements related to the accounting treatment of material items in the financial statements.
8. Evaluates the internal control of the company with the help of the independent auditor.
9. Makes reports to the board of directors and the stockholders when necessary.
10. Assures that the auditor is independent of the company.
Note: The audit committee has additional responsibilities under Sarbanes-Oxley.”
What is a control deficiency?
A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect/correct misstatements on a timely basis.
What is a significant deficiency?
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those charged with governance (responsible for oversight of the company’s financial reporting).
