Audit 5 (Audit sampling only so far) Flashcards
What is the objective of audit sampling?
To obtain sufficient, appropriate audit evidence
Sampling risk
the risk that the sample is not representative of the population
-the auditor’s conclusion will be different than the one they would have reached had they looked at 100% of the population
Rules of Audit Sampling
- Always assume the population is normally distributed (bell-shaped)
- Samples must be unrestricted and randomly selected (equally likely change of selection and NO bias)
- If the sample is big enough and random it will be representative of the population
- Standard deviation is a measure of variability
Statistical sampling
Results are evaluated quantitatively
-calculate sample size for desired degree of reliability
Non-statistical sampling
Auditors use JUDGMENT to determine sample size and evaluate the results
Does statistical sampling eliminate the need for judgment?
NO! They are trying to trick you. Judgment is still required to set many of the parameters and to evaluate overall results
Attribute sampling
this is for testing internal controls
-usually asking a yes or no question
**Trick to remember this is the T’s:
aTTribuTe sampling = TesTing inTernal conTrols
Variables sampling
this is used for substantive testing of account balances
**Trick to remember this is the V:
Variables sampling = substantiVe testing
Audit risk
the uncertainty inherent in applying audit procedures
Risk of incorrect acceptance
BETA risk
- leads to an ineffective audit
- this is really bad
Risk of incorrect rejection
ALPHA risk
- leads to an inefficient audit
- this is just annoying and a waste of time
Risk of assessing control risk too low
Beta risk
- Overreliance
- Ineffective
Risk of assessing control risk too high
Alpha risk
- Underreliance
- Inefficient
Confidence level
the opposite of risk of incorrect acceptance/ risk of assessing control risk too low
Non-sampling risk
all aspects of audit risk that isn’t sampling risk
- use inappropriate evidence
- improperly evaluate the results
Tolerable deviation rate
the maximum rate of deviation from a prescribed procedure that the auditor will tolerate without modifying reliance on IC
Deviation rate
the auditor’s best estimate of the deviation rate in the population selected
What relationships do the following have with sample size?
- Risk of assessing control risk too low
- Tolerable deviation
- Expected deviation
- Population size
- Risk of assessing too low = inverse
- Tolerable deviation = inverse
- Expected deviation = direct
- Population = usually none
Upper deviation rate
= sample deviation rate + allowance for sampling risk
Conclusion about internal controls tested
- If UDR < or = TDR then you can RELY
- If UDR > TDR then you CANNOT rely
Tolerable misstatement
the maximum monetary misstatement in the related account balance or class of transactions that the auditor is willing to accept
Stratification
Breaking the population down into relatively homogeneous groups
- good when there’s high variability
- results in reduced sample size
Mean-per-unit estimation
estimate = average sample value x # of items in population
book value not required
Ratio estimate
ratio of audited vales to book values
(audited value / book value ) x total book value
(efficient when calculated audit amounts are approximately proportional to client’s book amounts)
Difference estimation
uses the avg. difference between audited values and book values
((book value - audited value) / selection) x population = adjustment to book value
Probability-proportional-to-size sampling (PPS)
sampling unit = $1
- automatically emphasizes larger $ items
- smaller sample size
- doesn’t work for zero balances, negative balances, and understated balances
PPS Sample size
Sample size = recorded amount of population / sampling interval
(sampling interval = tolerable misstatement / reliability factor)
calculation of tainting % for PPS
(recorded amt - audit amt) / recorded amt
Significant deficiency in internal control
= BAD
-merits attention of those charged with governance
Material weakness in internal control
= WORSE (than significant deficiency)
-reasonable possibility that a material misstatement will not be prevented or detected (and corrected)
