AUD 3.8 & 3.9 - Sampling Flashcards
The risk that the sample is not representative of the population and the auditors conclusion will be different from the conclusion had the auditor examined 100 percent of the population:
Sampling risk
Variability = uncertainty which also = what?
A larger sample size
Audit sampling methods can be either:
Statistical or nonstatistical
Auditors specify the sampling risk they are willing to accept and then calculate the sample size that provides that degree of reliability. Results are evaluated quantitatively.
Statistical sampling
The sample size is not determined mathematically. Auditors use their judgement in determining the sample size and sample results are evaluated using auditors judgment
Nonstatistical sampling
Advantages of statistical sampling:
Measure the sufficiency of the audit evidence
Objective basis or quantitatively evaluating sample results
Design an efficient sample
Quantify sampling risk to limit risk to an acceptable level
This should be used in statistical sampling to give all items in the population an equal change to be included in the sample being audited:
Random sample selection
Three types of sampling used:
Attribute sampling
Variables sampling and PPS sampling
This sampling is used for testing internal controls:
Attribute sampling
This sampling is used in substantive testing of account balances
Variables sampling or PPS sampling
This sampling usually deals with yes or no question rather than dollar values:
Attribute sampling
What are two sampling risks in substantive testing?
Risk of incorrect acceptance
Risk of incorrect rejection
Two sampling risks in test of controls:
Risk of assessing control risk too low
Risk of assessing control risk too high
The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated
Risk of incorrect acceptance
Risk that the sample supports the conclusion that the recorded account balance is magically misstated when in fact it is not materially misstated:
Risk of incorrect rejection
Risk that the assessed level of control risk based on the ample is less than the true risk based on the actual operating effectiveness of the control
Risk of assessing control risk too low
Risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control
Risk of assessing control risk too high
Which two sampling risks deal with a lack of efficiency in the audit?
Risk of incorrect rejection
Risk of assessing control risk too high
Which two sampling risks deal with a lack of effectiveness in the audit?
Risk of incorrect acceptance
Risk of assessing control risk too low
The risk of being ineffective + the confidence level of the auditor should equal what?
100%
For variable sampling (substantive tests of details), I the recorded value of the population is OK and the sample indicates the population is OK, the decision was:
Correct
For variable sampling (substantive tests of details), I the recorded value of the population is OK and the sample indicates the population is NOT OK, the decision was:
Incorrect
Risk of incorrect rejection
Not efficient
For variable sampling (substantive tests of details), I the recorded value of the population is NOT OK and the sample indicates the population is NOT OK, the decision was:
Correct
For variable sampling (substantive tests of details), I the recorded value of the population is NOT OK and the sample indicates the population is OK, the decision was:
Incorrect
Risk of incorrect acceptance
Not effective
For attribute sampling (tests of controls), the true operation of the control is OK and the sample indicates the control’s operation is OK, the decision was:
Correct
For attribute sampling (tests of controls), the true operation of the control is OK and the sample indicates the control’s operation is NOT OK, the decision was:
Incorrect
Risk of assessing control risk too high
Not efficient
For attribute sampling (tests of controls), the true operation of the control is NOT OK and the sample indicates the control’s operation is OK, the decision was:
Incorrect
Risk of assessing control risk too low
Not effective
For attribute sampling (tests of controls), the true operation of the control is NOT OK and the sample indicates the control’s operation is NOT OK, the decision was:
Correct
All aspects of audit risk that are not due to sampling. This risk is always present. Examples of this risk are selecting audit procedures that are not appropriate to achieve specific objectives and failure by the auditor to recognize misstatements in documents examined:
Nonsampling risk
A sampling method used to estimate the rate (percentage) of occurrence (exception) of a specific characteristic (attribute)
Attribute sampling
The maximum rate of deviation from a prescribed procedure that auditor will tolerate without modifying planned reliance on internal controls
Tolerable deviation rate
The auditors best estimate of the deviation rate in the population from which it was selected
Deviation ratae
When planning a particular audit sample for tests of controls, the auditor applies professional judgement in considering:
The tolerable deviation rate
Allowable risk of assessing control risk too low
Assume that the tolerable rate for a population is 5% and the sample consists of 60 items, if no deviations are found in the sample of 60, the auditor may conclude:
There is an acceptably low sampling risk that the true deviation rate in the population exceeds the tolerable rate of 5% because the sample deviation rate is much less than the tolerable rate
Assume that the tolerable rate for a population is 5% and the sample consists of 60 items, if the sample includes 2 or more deviations (2/60 = 3.33%) in the sample of 60, the auditor may conclude:
That there is an unacceptable high sampling risk that the rate of deviations in the population exceeds the tolerable rate of 5% because the sample deviation rate is close to the tolerable rate
In assuming the auditor wants to determine the percentage of sales order that are missing credit approval as the attribute sampling application for test of controls, the auditor must perform the following steps:
Define the objective of the test
Define the population
Define the sampling unit
Define the attributes of interest
Determine the sample size
Select the sample
Evaluate the results
Form a conclusion about the internal control tested
The auditor must specify the following factors when determining the sample size in attribute sampling:
Risk of assessing control risk too lo
Tolerable deviation rate
Expected deviation rate
Population size
The risk of assessing control risk too low and sample size has what relationship?
Inverse
If the auditor wants to assume less risk, use a larger sample size
If the auditor wants to assume more risk, use a smaller sample size
The tolerable deviation rate and sample size has what relationship?
Inverse
If the auditor accepts less deviation rate, increase the sample size
If the auditor accepts more deviation rate, decrease the sample size
Expected deviation rate and sample size has what relationship?
Direct
If the auditor expects less deviations, use a smaller sample size
If the auditor expects more deviations, use a larger sample size
What are two types of sampling techniques used in attribute sampling when selecting a sample size?
Random sampling
Systematic selection (selecting every nth item)
What type of sampling technique when selecting samples is not acceptable when using attribute sampling?
Block (cluster) sampling
What is a disadvantage to systematic sampling?
Results may be skewed if errors occur in a systematic pattern / bills are paid in the same order each month
The upper deviation rate formula is:
Sample deviation rate + allowance for sampling risk
Assume the auditor finds one sales order that is missing the proper credit approval in a sample of 100 sales order, calculate the sample deviation rate:
1/100 = 1%
Assume the auditor finds one sales order that is missing the proper credit approval in a sample of 100 sales order and the upper deviation rate was 4.7, what is the allowance for sampling risk?
1/100 = 1% (deviation rate)
4.7% (upper deviation rate) - 1% = 3.7% is the allowance for sampling risk
Assume the auditor finds one sales order that is missing the proper credit approval in a sample of 100 sales order and accepts a 5% risk of assessing control risk too low, and the upper deviation rate was 4.7, and the allowance for sampling risk is 3.7%, what is the auditors conclusion?
The auditor is 95% sure the deviation rate does not exceed 4.7%
If the upper deviation rate is less than or equal to the auditors tolerable deviation rate, the auditor can..
The auditor may rely on the control
If the upper deviation rate exceeds the auditors tolerable deviation rate, the auditor can..
Can not rely on the control and either select and test other internal controls or modify the NET of the substantive tests to reflect a reduced reliance on controls
A special type of attribute sampling appropriate when the auditor believes that the population deviation rate is zero or near zero. It is used when the auditor is looking for a very critical characteristic (Fraud):
Discovery sampling
Designed to avoid oversampling for attributed by allowing the auditor to stop an audit test before complete in all steps. Used when few errors are expected
Stop and go sampling (sequential sampling)
Assume the upper deviation rate has been determined to be 4.7% and the tolerable rate is 3%, would the auditor rely on the control? What is the tolerable rate is 6%?
If 3% - No because 3% < 4.7%
If 6% - Yes because 6% > 4.7%
A statistical sampling method used to estimate the numerical measurement of a population such as a dollar value. Used primarily for substantive testing.
Variable sampling
He maximum monetary misstatement in the related account balance or class of transactions that the auditor is willing to accept
Tolerable misstatement
When planning a sample for a substantive test of details the auditor should consider:
Preliminary estimates of materiality levels
Tolerable misstatement
Allowable risk of incorrect acceptance
A technique used when a population has highly variable recorded amounts so that they may be separated into relatively homogeneous groups:
Stratification
If the total projected misstatement is less than the tolerable misstatement for the account balance or class of transactions, the auditor should…
Consider the risk that such a result might be obtained even through the true monetary misstatement for the population exceeds tolerable misstatement
Three commonly used classical variables sampling plans:
Mean-per-unit estimation
Ratio estimation
Difference estimation
A sampling plan that uses the average value of the items in the sample to estimate the true population value
Mean-per-unit estimation
(Does not require the book value of the population to estimate the true population value)
A sampling plan that uses the ratio of the audited values of items to their book values to project the true population value:
Ratio estimation
To use this sampling plan, for it to be highly effective, the audited and book amounts must be proportionate
Ratio estimation
A sampling plan that uses the average difference between the audited values of items and their book values to project the actual population value. Used when items are not proportionate.
Difference estimation
This sampling plan is very sensitive to the variability of the population. Auditors normally stratify the population into relatively similar groups o reduce the sample size.
Mean-per-unit estimation
These sampling plans usually require smaller sample sizes however they are only effective when the auditor expects large numbers of over/under statements
Ratio and difference estimation
The auditor uses the following parameters in conjunction with tables or formulas to determine the sample size for variables sampling:
Tolerable misstatement
Expected misstatement
Audit risk
Risk of incorrect acceptance & risk of incorrect rejection
Tolerable misstatements and sample size have what relationship?
Inverse
The higher the tolerable misstatement, the lower the sample size
Expected misstatement and sample size have what relationship?
Direct
As expected misstatements increase, the sample size increases
Standard deviation and sample size have what relationship? (Variable sampling)
Direct
As the std. deviation increases, sample size increases
Assessed level of risk and sample size have what relationship? (Variable sampling)
Direct
As risk increases, the sample size increases
Acceptable level of risk and sample size have what relationship?
Inverse
As acceptable level of risk increases, the sample size decreases
Assume a population of 5,000 accounts with a total value of $4,500,000. Auditor selects a sample of 200 accounts with a book value of $184,200. The audited value of these accounts is $175,000 with an average value of $875 per account. Determine the point estimate using mean-per-unit estimation:
$875 X 5,000 accounts = $4,375,000 point estimate
Assume a population of 5,000 accounts with a total value of $4,500,000. Auditor selects a sample of 200 accounts with a book value of $184,200. The audited value of these accounts is $175,000 with an average value of $875 per account. Determine the point estimate using ratio estimation:
($175,000 (book) / $184,200 (audited)) X $4,500,000 = $4,275,000 point estimate
Assume a population of 5,000 accounts with a total value of $4,500,000. Auditor selects a sample of 200 accounts with a book value of $184,200. The audited value of these accounts is $175,000 with an average value of $875 per account. Determine the point estimate using difference estimation:
((184,200 - 175,000) / 200) X 5,000 = 230,000 projected error
4,500,000 - 230,000 = 4,270,000 point estimate
If the book value falls within the acceptable range (the point estimate +/- the allowance for sampling risk), the auditor would
Accept the clients book value as fairly stated
A technique in which 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
PPS sampling
Advantages of PPS sampling
Automatically emphasizes larger items by stratifying the sample
If no errors are expected, generally requires a smaller sample
Disadvantages of PPS sampling
Zero balances, negative balances, an understated balances generally require special design consideration
How is the sampling interval for PPS sampling determined?
Tolerable misstatement / reliability factor
How is the sample size determined for PPS sampling?
Recorded amount of population / sampling interval
Sampling interval = tolerable misstatement / reliability factor
