A7 Sampling I Flashcards
Sampling
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.
Types of Sampling
Statistical & Nonstatistical Sampling
Statistical Sampling
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
Nonstatistical Sampling
Involves the auditor using their judgement to select samples & evaluate the results.
Regression Analysis
Helps identify trends. Used for estimation of relationships between a dependent variable and one or more independent variables.
Cluster Analysis
Also helps identify trends & patterns. Explores naturally occurring groups within a data set known as clusters.
Incorrect Rejection
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.
Incorrect Acceptance
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.
Professional Judgement
Allows the auditor to determine the tolerable rate of deviation, the likely rate of deviation, and allowable risk assessing control risk too low.
Nonsampling Risks
Includes inappropriate audit procedures, audit evidence, & failure to recognize misstatements.
Attribute Sampling
Used to test controls that relate to authorization, validity, completeness, accuracy, & appropriate classification.
Substantive Test
Words such as account balance, amount, valuation, presentation & disclosure are more likely related to substantive tests.
Actual Deviation Rate
Actual Deviation Rate in Population > Maximum deviation Rate based on sample. This means that Control risk is understated
Stratification
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.
Ratio Estimation
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.
Increase in Tolerable Misstatement
Increase in TM = a decrease in sample size
Increase in Assessed Level of CR
Increase in assessed level of CR = Increase in sample size
Probability Proportional to Sample Size
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.
Sampling Risk
The possibility that the sample is not representative of the population which causes the auditor to reach a different conclusion.
Low CR
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
High CR
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
Tolerable Deviation Rate
Maximum rate of deviation from a procedure the auditor will tolerate without modifying planned reliance on a control.
Deviation Rate
The auditor’s best estimate of the deviation rate in the population it was selected from/
Sample Size
High risk = Low Sample Size
Tolerable DR
High Tolerable DR = Low Sample Size
Expected Deviation Rate
High Expected Deviation Rate = Increased Sample Size
