A7 Sampling I

Question 1

Sampling

Answer 1

Allows auditors to efficiently gather evidence and make conclusions about the entire population. It also helps identify high risk areas & provides a basis for an opinion to be formed.

Question 2

Types of Sampling

Answer 2

Statistical & Nonstatistical Sampling

Question 3

Statistical Sampling

Answer 3

Involves the use of probability (mathematical & quantitative analysis) theory to select a representative sample & then evaluate the results. Can include random, stratified, or systematic sampling

Question 4

Nonstatistical Sampling

Answer 4

Involves the auditor using their judgement to select samples & evaluate the results.

Question 5

Regression Analysis

Answer 5

Helps identify trends. Used for estimation of relationships between a dependent variable and one or more independent variables.

Question 6

Cluster Analysis

Answer 6

Also helps identify trends & patterns. Explores naturally occurring groups within a data set known as clusters.

Question 7

Incorrect Rejection

Answer 7

Leads to an inefficient audit. Erroneously concluding that an account balance is materially misstated. Meaning the account is correctly stated but the auditor rejects it.

Question 8

Incorrect Acceptance

Answer 8

Leads to an ineffective audit. Auditor concludes that the account was fairly presented when in fact it was not. Meaning the account is incorrectly stated but the auditor accepts it.

Question 9

Professional Judgement

Answer 9

Allows the auditor to determine the tolerable rate of deviation, the likely rate of deviation, and allowable risk assessing control risk too low.

Question 10

Nonsampling Risks

Answer 10

Includes inappropriate audit procedures, audit evidence, & failure to recognize misstatements.

Question 11

Attribute Sampling

Answer 11

Used to test controls that relate to authorization, validity, completeness, accuracy, & appropriate classification.

Question 12

Substantive Test

Answer 12

Words such as account balance, amount, valuation, presentation & disclosure are more likely related to substantive tests.

Question 13

Actual Deviation Rate

Answer 13

Actual Deviation Rate in Population > Maximum deviation Rate based on sample. This means that Control risk is understated

Question 14

Stratification

Answer 14

Often used when the population has highly variable recorded amounts. Involves grouping the population into similar groups. The goal is to ensure selection of items for which potential misstatements may individually equal or exceed tolerable misstatements.

Question 15

Ratio Estimation

Answer 15

Most effective when the calculated audit amounts are approximately proportional to client’s book amounts. Its most effective if there is a correlation between book values and audit amounts.

Question 16

Increase in Tolerable Misstatement

Answer 16

Increase in TM = a decrease in sample size

Question 17

Increase in Assessed Level of CR

Answer 17

Increase in assessed level of CR = Increase in sample size

Question 18

Probability Proportional to Sample Size

Answer 18

Used for substantive testing. AKA dollar unit sampling/dollar balance testing, is a sampling method designed to estimate overstatement errors. Inputs include Tolerable Misstatement, risk of incorrect acceptance, & recorded amount of population being sampled.

Question 19

Sampling Risk

Answer 19

The possibility that the sample is not representative of the population which causes the auditor to reach a different conclusion.

Question 20

Low CR

Answer 20

Sampling risk where if CR is too low or less than the true risk based on actual operating effectiveness of the control. Leads to an inefficient audit

Question 21

High CR

Answer 21

Sampling risk where if CR is too high or more than the true risk based on actual operating effectiveness of the control. Leads to an inefficient audit

Question 22

Tolerable Deviation Rate

Answer 22

Maximum rate of deviation from a procedure the auditor will tolerate without modifying planned reliance on a control.

Question 23

Deviation Rate

Answer 23

The auditor’s best estimate of the deviation rate in the population it was selected from/

Question 24

Sample Size

Answer 24

High risk = Low Sample Size

Question 25

Tolerable DR

Answer 25

High Tolerable DR = Low Sample Size

Question 26

Expected Deviation Rate

Answer 26

High Expected Deviation Rate = Increased Sample Size