Audit Lecture 5 Flashcards
What is the difference between nonstatistical sampling and statistical sampling?
Statistical sampling:
- Uses laws of probability for selection and evaluation of a sample.
- Allows for quantification of audit risk and sufficiency of audit evidence.
Nonstatistical sampling:
- Does not utilize statistical models in calculations.
- Auditors use their judgement to determine sample sizes, and sample results are evaluated judgmentally.
When is professional judgment necessary in the use of statistical or nonstatistical sampling by an auditor?
The auditor must use professional judgment to:
- Define the population and sampling unit.
- Select the appropriate sampling method.
- Evaluate whether the audit evidence is appropriate.
- Evaluate te nature of deviations or errors.
- Consider sampling risk.
- Evaluate sample results and project to the population.
Define sampling risk.
Sampling risk is the risk that the auditor’s conclusion based on a sample is different from the conclusion that would have been reached if the tests had been applied to all items in the population.
Define the two aspects of sampling risk for tests of controls.
Risk of assessing control risk too low:
Deciding the control is more effective/reliable than it really is; affects audit effectiveness.
Risk of assessing control risk too high:
Deciding the control is less effective/reliable than it really is; affect audit efficiency.
Identify two aspects of sampling risk that the auditor should be concerned with when performing substantive testing.
Risk of incorrect acceptance:
Deciding from the sample that the balance is correct when it is really materially misstated; affects audit effectiveness.
Risk of incorrect rejection:
Deciding from the sample that the balance is materially misstated when it is really correct; affects audit efficiency.
What is the relationship between sampling risk and reliabilty (confidence level)?
Sampling risk + Confidence level = 100%
What is attribute sampling?
Attribute sampling is a statistical sampling method used to estimate a rate of occurrence in a sample. It is used in tests of controls.
Define tolerable deviation rate (for attribute sampling) and tolerable misstatement (for variable sampling).
- Tolerable deviation rate*: The maximum rate (%) of deviation from a control procedure that the auditor is willing to accept while still relying on the control.
- Tolerable misstatement*: The largest amount of misstatement the auditor believes can exist in a balance or class of transactions without causing the financial statements to be materially misstated.
What factors affect sample size for an attribute sampling application?
The following factors affect sample size in an attribute sampling application:
- Risk of assessing control risk too low (inverse relationship)
- Tolerable deviation rate (inverse relationship)
- Expected deviation rate (direct relationship)
What rates are compared in drawing a conclusion about an attribute sampling application?
The auditor compares the upper deviation rate to the tolerable deviation rate in drawing conclusions about an attribute sampling application. If the upper deviation rate exceeds the auditor’s tolerable deviation rate, the auditor will not rely on the control. (The upper deviation rate is the sample deviation rate plus an allowance for sampling risk.)
What factors affect sample size for a variables sampling application?
The following factors affect sample size in a variables sampling application:
- Standard deciation or population variability (direct relationship)
- Tolerable misstatement (inverse relationship)
- Acceptable level of risk (inverse relationship)
- Expected size and frequency of misstatements (direct relationship)
- Assessed level of risk (direct relationship)
Describe variables sampling.
Variables sampling is a statistical sampling method used to estimate the numerical amount of a population. Variable sampling is used primarily in substantive testing.
What is stratification and why would an auditor stratify a population?
Stratification separates the sample into relatively homogenous groups. Each group is treated as a separate population.
Stratification is typically used when a population has highly variable amounts. Stratification usually results in a smaller sample size.
What amounts are compared in drawing a conclusion about a variables sampling application?
The auditor compares the client’s book value to the calculated range in variables sampling application. If the recorded book value is with in the acceptable range, the book value is considered fairly stated. (The calculated range is the point estimate, as determined from the sample, plus/minus an allowance for sampling risk.)
What is discovery sampling?
Discovery sampling is a type of attribute sampling used when the expected deviation rate is zero or near zero. It is used when the auditor is looking for a very critical characteristic (e.g., fraud).
What are the sampling plans commonly used for variables estimation?
- Mean-per-unit estimation: The sample mean is multiplied by the number of items in the population to estimate population value.
- Ratio estimation: The ratio between book value and audited value (from a sample) is used to estimate population value.
- Difference estimation: The difference between book value and audited value (from a sample) is used to estimate population value.
Define Probability-Proportional-to-Size (PPS) sampling.
Probability-Proportional-to-Size (PPS) sampling is a hybrid sampling technique that uses attribute sampling theory to express a conclusion in dollar amounts rather than as a rate of occurrence. The sampling unit is defined as an individual dollar in a population, which creates the effect of stratified sampling (the unit’s chance of being selected increases as its amount increases).
What are the advantages and disadvantages of using PPS sampling?
Advantages:
- Automatic stratification
- Efficient (smaller sample)
Disadvantages:
- May require special considerations for negative, zero, and understated balances.
How is the sampling interval determined in a PPS sampling application?
Sampling interval =
Tolerable misstatement
Reliability factor
(The reliability factor comes from a table and is based on the risk of incorrect acceptance.)
How is the sample size determined in a PPS sampling application?
Sample size =
Recorded amount of the population
Sampling interval
What is a control deficiency?
A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect/correct misstatements on a timely basis.
What is a significant deficiency?
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention of those charges with governance (responsible for oversight of the company’s financial reporting).
What is a material weakness?
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected/corrected on a timely basis.
What is the auditor’s responsibility with respect to control deficiencies identified during a financial statement audit of a nonissuer?
- The auditor has a responsibility to evaluate control deficiencies identified during the audit to determine whether they represent significant deficiencies or material weaknesses.
- Significant deficiencies and material weaknesses should be communicated in writing to management and those charged with governance within 60 days of the report release date.
- The communication with management and those charged with governance should be restricted use.