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AUDITING THEORY > AT - AUDIT SAMPLING > Flashcards

AT - AUDIT SAMPLING Flashcards

1
Q

What is audit sampling?

A

Audit sampling is the application of audit procedures to less than 100% of the items within an account balance or class of transactions such that all sampling units have a chance of selection.

Audit sampling is performed on the assumption that the SAMPLE SELECTED IS REPRESENTATIVE OF THE POPULATION.

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2
Q

What is sampling risk? What are its types?

A

Sampling risk refers to the possibility that the auditor’s conclusion based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedures.

Sampling risk exists because the sample selected may not be truly representative of the population. It has two types:

  1. Alpha risk
  2. Beta risk
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3
Q

Explain Alpha and Beta risk.

A

ALPHA RISK

a. ) in ToC: auditor concludes that internal control is not reliable when in fact it is effective and can be relied upon (RISK OF UNDER-RELIANCE)
b. ) in Substantive testing: auditor concludes that material misstatement exists in an account/transaction when in fact such misstatement does not exist (RISK OF INCORRECT REJECTION)

BETA RISK

a. ) in ToC: auditor concludes that internal control is reliable when in fact it is not (RISK OF OVER-RELIANCE)
b. ) in Substantive testing: auditor concludes that no material misstatement exists when in fact such misstatement exists (RISK OF INCORRECT ACCEPTANCE)

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4
Q

What is non-sampling risk?

A

Non-sampling risk is the risk that the auditor may draw incorrect conclusions about the account balance or class of transactions because of HUMAN ERRORS such as:

a. Application of inappropriate audit procedures
b. Failure to recognize errors
c. Misinterpretation

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5
Q

What are the general sampling approaches used by the auditor to gather SAE?

A
  1. Statistical Sampling

2. Non-statistical Sampling

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6
Q

What is statistical sampling?

A

Statistical sampling is a sampling approach that:

a. uses random based selection of sample
b. uses the LAW OF PROBABILITY to measure sampling risk and evaluate the results thereof.

It has two types:

a. Attribute Sampling
b. Variable Sampling

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7
Q

What is non-statistical sampling?

A

Non-statistical sampling is a sampling approach that purely USES AUDITOR’S JUDGMENT in estimating sampling risks, determining sample size, and evaluation of the results thereof.

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8
Q

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

A

Their ONLY DIFFERENCE is that STATISTICAL SAMPLING ALLOWS AUDITOR TO MEASURE OR QUANTIFY THE SAMPLING RISKS BY USING A MATHEMATICAL FORMULA. Thus statistical sampling helps in:

a. designing an efficient sample
b. measuring the sufficiency of evidence obtained
c. objectively evaluating the sample results

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9
Q

What is attribute sampling?

A

It is a statistical sampling plan used to ESTIMATE THE FREQUENCY OF OCCURRENCE OF A CERTAIN CHARACTERISTIC IN A POPULATION (OCCURRENCE RATE)

It is generally USED IN TEST OF CONTROLS TO ESTIMATE THE RATE OF DEVIATIONS from prescribed internal control policies or procedures.

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10
Q

What is variable sampling?

A

It is a statistical sampling plan used to ESTIMATE A NUMERICAL MEASUREMENT OF A POPULATION such as peso value.

It is generally USED IN SUBSTANTIVE TESTS TO ESTIMATE THE AMOUNT OF MISSTATEMENTS in the FS.

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11
Q

What are the basic steps in audit sampling?

A
  1. Define the OBJECTIVE
  2. Determine the PROCEDURE
  3. Determine the SAMPLE SIZE
  4. Select the SAMPLE
  5. Apply the PROCEDURE
  6. Evaluate the RESULTS.
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12
Q

What are the considerations in determining the sample size?

A
  1. Acceptable sampling risk
  2. Tolerable deviation rate
  3. Expected deviation rate
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13
Q

What is acceptable sampling risk?

A

It is the sampling risk the auditor is willing to accept, given the size of the sample.

There is an INVERSE RELATIONSHIP between the acceptable sampling risk and sample size. The smaller the sampling risk, the larger the sample size has to be.

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14
Q

What is tolerable deviation rate?

A

It is the MAXIMUM RATE OF DEVIATIONS the auditor is willing to accept without modifying the planned degree of reliance on the internal control.

Tolerable deviation rate has an INVERSE RELATIONSHIP with the sample size. A decrease in tolerable deviation rate will cause the sample size to increase.

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15
Q

What is expected deviation rate?

A

Expected deviation rate is the rate of deviations the AUDITOR EXPECTS TO FIND IN THE POPULATION BEFORE THE TESTING BEGINS. It can be developed based on prior years results or by examination of a few items in the population.

The expected deviation rate has a DIRECT EFFECT ON THE SAMPLE SIZE. The larger the expected deviation rate, the larger the sample size has to be.

Expected deviation rate MUST NOT EXCEED tolerable deviation rate. If so, auditor generally either omits the testing of control procedures and will assess control risk at a high level, or perform alternative procedures.

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16
Q

What are the three principal methods of selecting samples?

A
  1. Random number selection
  2. Systematic selection
  3. Haphazard selection
17
Q

What is random number selection?

A

The auditor selects samples by matching random numbers with the population. An advantage of this is that EACH ITEM IN THE POPULATION HAS AN EQUAL OPPORTUNITY TO BE SELECTED.

18
Q

What is systematic selection?

A

This method involves DETERMINING A CONSTANT SAMPLING INTERVAL AND THEN SELECTS THE SAMPLE BASED ON THE SIZE OF THAT SAMPLE.

19
Q

What is haphazard selection?

A

Using this method, the sample is selected without following an organized/structured technique. It is useful for non-statistical sampling, and is NOT used for statistical sampling.

20
Q

In sampling, how are voided documents treated?

A

If a voided/cancelled document has been properly voided, the document should be simply replaced with another sample item.

21
Q

In sampling, how are missing documents treated?

A

If the auditor encounters a missing document and is unable to determine whether the control has been properly performed, he should treat it as a DEVIATION for the purpose of evaluating the sample results.

22
Q

What are the steps in the evaluation of results of sampling?

A
  1. Determine the sample deviation rate
  2. Compare the sample deviation rate with tolerable deviation rate
  3. Draw overall conclusion about the population
    a. If sample deviation rate EXCEEDS tolerable deviation rate

It means that sample results DO NOT SUPPORT THE AUDITOR’S PLANNED DEGREE OF RELIANCE ON INTERNAL CONTROL and CONTROL RISK WILL BE ASSESSED AT A HIGH LEVEL and more ST will be performed.

b. If sample deviation rate is LESS THAN tolerable deviation rate

The auditor should first consider the ALLOWANCE FOR SAMPLING RISK. AS THE SAMPLE DEVIATION RATE APPROACHES THE TOLERABLE DEVIATION RATE, THE ALLOWANCE FOR SAMPLING RISK DECREASES.

23
Q

What is sequential sampling?

A

Sequential sampling is used as an alternative form of testing controls when the auditor expects very few deviations within the population. This sampling DOES NOT USE A FIXED SAMPLE SIZE. It is sometimes called STOP-OR-GO SAMPLING, because the auditor makes a decision whether to continue or stop the sampling plan

24
Q

What is discovery sampling?

A

Discovery sampling is most appropriate WHEN NO DEVIATION ARE EXPECTED, and a SINGLE DEVIATION IS A CAUSE FOR CONCERN. It is normally used when auditor suspects that an irregularity might have been committed. Under this method, the auditor DETERMINES A SAMPLE SIZE ENOUGH TO DISCOVER AT LEAST ONE DEVIATION to confirm whether an irregularity has occured.

25
Q

What is tolerable misstatement?

A

It is the maximum amount of misstatement the auditor will permit in the population and still be willing to conclude the balance as fairly stated. It has an INVERSE RELATIONSHIP with sample size.

A smaller measure of tolerable misstatement will cause sample size to increase

26
Q

What is expected misstatement?

A

It is the amount of misstatement the auditor believes to exist in the population. It has a DIRECT RELATIONSHIP with the sample size.

An increase in the amount of misstatement will cause sample size to increase.

27
Q

What is stratified sampling?

A

It involves dividing or stratifying the population into meaningful groups in order to decrease the effect of variance within the population. It allows the auditor to GIVE MORE EMPHASIS ON ITEMS WITH HIGH MONETARY VALUE.

28
Q

What is value weighted selection?

A

It is a sampling method in which the probability of an item to be selected is directly proportional to the monetary value of such item.

29
Q

Differentiate ratio and difference estimation.

A

Ratio estimation

Amt of misstatements x (Pop size / Sample size)

Population and Sample size is in terms of monetary amount

Difference estimation

Amt of misstatements x (Pop size / Sample size)

Population and Sample size is in terms of another quantifiable characteristic, such as the number of customers or some other value. See p357.

30
Q

An error that arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of errors in the population

a. tolerable error
b. non-sampling error
c. sampling error
d. anomalous error

A

d. anomalous error

31
Q

Non-sampling errors occur when audit tests do not uncover existing exceptions in the

a. Population
b. Planning stage
c. Sample
d. FS

A

c. Sample

32
Q

Which of the following is the risk that audit tests will not uncover existing exceptions in a sample?

a. sampling risk
b. nonsampling risk
c. audit risk
d. detection risk

A

b. nonsampling risk

33
Q

T or F

Audit procedures on the sample item will not vary as a result of either using statistical or nonstatistical sampling

A

True.

34
Q

The tolerable rate of deviations for tests of controls is generally

a. lower than the expected rate of deviation
b. higher than the expected rate of deviation
c. identical to the expected rate of deviation
d. unrelated to the expected rate of deviation

A

b. higher than the expected rate of deviation

35
Q

Which of the following factors is generally not considered in determining sample size for test of controls?

a. population size
b. tolerable rate
c. risk of assessing control risk too low
d. expected population deviation rate

A

a. population size

36
Q

T or F

The population size has little or no effect on determining sample size except for very small populations

A

True.

37
Q

Which of the following statistical selection techniques is least desirable for use by an auditor?

a. Systematic selection
b. Block selection
c. Stratified selection
d. Sequential selection

A

B. Block selection

38
Q

Value weighted sampling is most appropriate when the auditor

a. anticipates understatement errors
b. expects no errors
c. anticipates overstatement errors
d. has assess control risk at high level

A

c. anticipates overstatement errors

39
Q

The use of ratio estimation sampling technique is most effective when

a. calculated audit amounts are approximately proportional to the client’s book amounts
b. a relatively small number of differences exist in the population
c. estimating populations whose records consist of quantities but not book values
d. large overstatement differences and large understatement differences exist in the population

A

a. calculated audit amounts are approximately proportional to the client’s book amounts

AUDITING THEORY (17 decks)

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