Audit 5 - Sampling and Communications Flashcards
What is audit sampling?
The testing of less that 100% of the items within an account balance or class of transactions in order to evaluate some characteristic of the balance or class
When is audit sampling especially useful?
When the auditor has no special knowledge about likely misstatements contained in account balances and transactions
Samples MUST be…
randomly selected – each item in a population must have an absolutely equal chance of being selected, CPA cannot use bias (no substitute)
What is sampling risk?
Risk that the sample is not representative of the population and that the auditor’s conclusion will be different from the conclusion had the auditor examined 100% of the population
Types of sampling include
Statistical and Nonstatistical sampling
In statistical sampling, auditors…
specify the risk they are willing to accept and then calculate the sample size that provides that degree of reliability. Results evaluated quantitively
In nonstatistical sampling, the sample size is…
not determined mathematically – auditors use their judgment in determining sample size. Results evaluated judgmentally
Professional judgment must be applied in both statistical/nonstatistical sampling to…
- define population and sampling unit
- select appropriate sampling method
- evaluate appropriateness of evidence
- evaluate the nature of deviations and errors
- consider sampling risk
- evaluate results obtained from sample/project results onto population
Professional judgment is not used in statistical ONLY when…
selecting samples
Statistical sampling – advantages
- measures the sufficiency of audit evidence obtained
- provides objective basis for quantitive evaluation of results
- design an efficient sample
- quantify sampling risk to limit risk to acceptable level
Uses of statistical sampling
May be used to estimate many different characteristics of populations – generally used as attribute sampling or numerical quantity
Sampling concepts generally do NOT apply to…
- Risk assessment procedures
- Tests of automated controls
- Analyses of security and access controls
- Some tests related to the operation of the control environment
Sampling risks in substantive testing (variables – $ amt)
- Risk of incorrect acceptance
2. Risk of incorrect rejection
Risk of incorrect acceptance (beta)
Risk that the sample supports the conclusion that the recorded account balance is NOT materially misstated when in fact is IS materially misstated
Risk of incorrect rejection (alpha)
Risk that the sample supports the conclusion that the recorded account balance IS materially misstated when in fact is is NOT materially misstated
Sampling risks in tests of controls (attributes – yes/no)
- Risk of assessing control risk too LOW
2. Risk of assessing control risk too HIGH
Risk of assessing control risk too LOW
Risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control – overrealiance – ineffective
Risk of assessing control risk too HIGH
Risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveless of the control – underreliance – inefficient
Efficiency is lost with
the risk of assessing control risk too HIGH and the risk of incorrect REJECTION
Effectiveness is lost with
the risk of assessing control risk too LOW and the risk of incorrect ACCEPTANCE
Nonsampling risk
includes all aspects of audit risk not due to sampling – is always present and cannot be measured. Can only reduce risk to very low level through adequate planning and supervision, and quality control of all firm practices
Attribute sampling is…
A statistical method used to estimate the rate of occurrence of a specific characteristic. Generally yes/no questions
Deviation rate is..
The auditor’s best estimate of the deviation rate in the population from which it was selected
If the estimated deviation rate is less than the tolerable rate for the population…
The auditor should consider the risk that such a result might be obtained even though the true deviation rate for the population exceeds to tolerable rate for the population
Steps for testing controls/attribute sampling
- Define objective of test
- Define the population
- Define the sampling unit
- Define the attributes of interest
- Determine the sample size
- Select the sample
- Evaluate the results
- Form conclusions
- Document sampling procedure
Attributes of interest
is only found in attribute sampling – deviations are situation where the control was not properly applied
To determine the sample size for tests of controls, the auditor must consider..
- Risk of assessing control risk too LOW
- Tolerable deviation rate
- Expected deviation rate
- Population size
The risk of assessing control risk too low and tolerable deviation rate have which type of relationship to sample size?
INVERSE
Expected deviation rate has which type of relationship with sample size?
DIRECT
Types of sample selection include…
Random selection, and systematic selection. Block sampling is NOT acceptable
Upper deviation rate = the sum of
Sample deviation rate + Allowance for sampling risk
The auditor may rely on the control if..
the UDR is LESS THAN or EQUAL TO the auditor’s TDR
The auditor would not rely on the control when…
the UDR is GREATER THAN the auditor’s TDR
Sampling documentation for tests of controls
The auditor must document each step in audit sampling – planning, rationale for parameters, performance of procedures, observed results, evaluation and interpretation of results
Variable sampling is…
A statistical sampling method used to estimate the numerical measurement of population, such as dollar value
Objective of variable sampling is..
To obtain evidence about the reasonableness of monetary amounts
Tolerable misstatement is..
The maximum monetary misstatement in the related account balance or class of transactions that the auditor is willing to accept
Stratification
Separation of items subject to sampling into relatively homogeneous groups. Commonly used when population has highly variable recorded amounts
Projected misstatement
projection of misstatement onto population upon completion of sampling procedures
If TPM > TM, the auditor should..
Consider the risk that such a result might be obtained even though the true monetary misstatement for the population exceeds tolerable misstatement