A8 Sampling Risk II

Question 1

Variable Sampling

Answer 1

AKA substantive test sampling that’s used for sampling estimations. Highlights Tolerable misstatements = Dollar Errors

Question 2

Tolerable Misstatement

Answer 2

The maximum monetary misstatement in the related account balance or class of transactions the auditor is willing to accept.

Question 3

Attribute Sampling

Answer 3

Highlights Tolerable deviations = Internal Control Errors

Question 4

Stratification

Answer 4

Involves separating items into relatively homogenous groups and treating each group as a separate population. Used when the population has highly variable amounts and results in a reduced sample size.

Question 5

Classical Variables Sampling

Answer 5

Samples that measures sampling risk by using variation of the underlying characteristics of interest. 3 ways to achieve this is through Mean Per Unit estimation, Ratio Estimation, & difference estimation.

Question 5

Mean Per Unit Estimation (MPU)

Answer 5

Uses the average Value of the items in the sample to estimate the true population value.

Question 6

Ratio Estimation

Answer 6

Uses the ratio of the audited values of items to book their book values to project the true population value. Only effective when the auditor expects large numbers of overstatements & understatements.

Question 7

Difference Estimation

Answer 7

Uses the average difference between the audited values of items & their book values to project the actual population value. Only effective when the auditor expects large numbers of overstatements & understatements.

Question 8

Probability Proportional to Size (PPS)

Answer 8

AKA dollar unit sampling or PPS is a technique where the sampling unit is defined as an individual dollar in a population. Once a dollar is selected the entire account containing that dollar is audited.

Question 9

Advantage & Disadvantage of PPS

Answer 9

Automatically emphasizes larger items and if no errors are expected it generally requires a smaller sample size.

Disadvantage is that zero, negative, & understated balances require special design considerations.

Question 10

Dual Purpose Samples

Answer 10

Considered when the auditor may use the same sample to perform both tests of controls & test of details. The sample size should be the larger of samples.

Question 11

Acceptable Detection Risk

Answer 11

As acceptable level of detection risk decreases, an auditor may postpone the planned timing of substantive tests should increase which also causes the auditor to change the nature of substantive tests from less effective to more effective procedures.

Question 12

Risk Of Material Misstatement

Answer 12

RMM exist when there’s reasonable possibility of a misstatement occurring & if it does happen, there’s reasonable possibility of it being material.

RMM = IR x CR (these are assessed to identify where MM can occur)

Question 13

Movements in Detection Risk

Answer 13

Inversely related to the risk of material misstatement.

Increase in RMM = Decrease in Allowable risk

Increase in DR = Decrease in SAP
Decrease in DR = Increase in SAP

Question 14

Inherent Risk

Answer 14

The susceptibility that an error or omission will occur in a financial statement due to a factor other than a failure control. Basically its the likelihood of the numbers are wrong/disclosures are incorrect.

Exist independently of the audit which means it cannot be controlled or changed by the auditor.

Question 15

Control Risk

Answer 15

The risk that the RMM that could occur in a assertion with MD&A will NOT be prevented or detected on a timely basis. A decrease in CR = Lower SAP sample size

Exist independently of the audit which means it cannot be controlled or changed by the auditor.

Question 16

Audit Risk

Answer 16

The risk that the auditor may unknowingly fail to appropriately modify the opinion on the FS that are materially misstated.

Inverse relationship between AR & Materiality. Because the risk of a very large misstatement may be low but the risk of a small misstatement may be high.

Question 17

Material Misstatement

Answer 17

An omission or misstatement of information that makes it probable the judgement of a reasonable person relying on the information would be changed by omission misstatement.

Question 18

Factual Misstatement

Answer 18

There is no doubt but a client makes a simple error such as missing a zero or transpose a number.

Question 19

Judgmental Misstatements

Answer 19

These are differences arising from mgmt judgement.

Question 20

Projected Misstatements

Answer 20

The auditors best estimate of misstatements in populations, which involves the projection of misstatements identified in audit samples to the entire population that samples are drawn.

Question 21

Audit Risk Model

Answer 21

AR (low) = RMM (assessed by the auditor) x DR (controlled by the auditor)

Question 22

Detection Risk

Answer 22

The risk that the auditor will not detect a material misstatement that exists in a relevant assertion.