Audit 5 (Audit sampling only so far)

Question 1

What is the objective of audit sampling?

Answer 1

To obtain sufficient, appropriate audit evidence

Question 2

Sampling risk

Answer 2

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

Question 3

Rules of Audit Sampling

Answer 3

1. Always assume the population is normally distributed (bell-shaped)
2. Samples must be unrestricted and randomly selected (equally likely change of selection and NO bias)
3. If the sample is big enough and random it will be representative of the population
4. Standard deviation is a measure of variability

Question 4

Statistical sampling

Answer 4

Results are evaluated quantitatively

-calculate sample size for desired degree of reliability

Question 5

Non-statistical sampling

Answer 5

Auditors use JUDGMENT to determine sample size and evaluate the results

Question 6

Does statistical sampling eliminate the need for judgment?

Answer 6

NO! They are trying to trick you. Judgment is still required to set many of the parameters and to evaluate overall results

Question 7

Attribute sampling

Answer 7

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

Question 8

Variables sampling

Answer 8

this is used for substantive testing of account balances

**Trick to remember this is the V:
Variables sampling = substantiVe testing

Question 9

Audit risk

Answer 9

the uncertainty inherent in applying audit procedures

Question 10

Risk of incorrect acceptance

Answer 10

BETA risk

• leads to an ineffective audit
• this is really bad

Question 11

Risk of incorrect rejection

Answer 11

ALPHA risk

• leads to an inefficient audit
• this is just annoying and a waste of time

Question 12

Risk of assessing control risk too low

Answer 12

Beta risk

• Overreliance
• Ineffective

Question 13

Risk of assessing control risk too high

Answer 13

Alpha risk

• Underreliance
• Inefficient

Question 14

Confidence level

Answer 14

the opposite of risk of incorrect acceptance/ risk of assessing control risk too low

Question 15

Non-sampling risk

Answer 15

all aspects of audit risk that isn’t sampling risk

1. use inappropriate evidence
2. improperly evaluate the results

Question 16

Tolerable deviation rate

Answer 16

the maximum rate of deviation from a prescribed procedure that the auditor will tolerate without modifying reliance on IC

Question 17

Deviation rate

Answer 17

the auditor’s best estimate of the deviation rate in the population selected

Question 18

What relationships do the following have with sample size?

• Risk of assessing control risk too low
• Tolerable deviation
• Expected deviation
• Population size

Answer 18

• Risk of assessing too low = inverse
• Tolerable deviation = inverse
• Expected deviation = direct
• Population = usually none

Question 19

Upper deviation rate

Answer 19

= sample deviation rate + allowance for sampling risk

Question 20

Conclusion about internal controls tested

Answer 20

• If UDR < or = TDR then you can RELY

- If UDR > TDR then you CANNOT rely

Question 21

Tolerable misstatement

Answer 21

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

Question 22

Stratification

Answer 22

Breaking the population down into relatively homogeneous groups

• good when there’s high variability
• results in reduced sample size

Question 23

Mean-per-unit estimation

Answer 23

estimate = average sample value x # of items in population

book value not required

Question 24

Ratio estimate

Answer 24

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)

Question 25

Difference estimation

Answer 25

uses the avg. difference between audited values and book values
((book value - audited value) / selection) x population = adjustment to book value

Question 26

Probability-proportional-to-size sampling (PPS)

Answer 26

sampling unit = $1

• automatically emphasizes larger $ items
• smaller sample size
• doesn’t work for zero balances, negative balances, and understated balances

Question 27

PPS Sample size

Answer 27

Sample size = recorded amount of population / sampling interval
(sampling interval = tolerable misstatement / reliability factor)

Question 28

calculation of tainting % for PPS

Answer 28

(recorded amt - audit amt) / recorded amt

Question 29

Significant deficiency in internal control

Answer 29

= BAD

-merits attention of those charged with governance

Question 30

Material weakness in internal control

Answer 30

= WORSE (than significant deficiency)

-reasonable possibility that a material misstatement will not be prevented or detected (and corrected)