audit Sample W

Question 1

List the two types of statistical sampling.

Answer 1

Attributes sampling (regarding internal controls)
Variables sampling (regarding substantive tests).

Question 2

Define “nonsampling risk.”

Answer 2

Any mistake by the auditor other than sampling risk that is not a direct consequence of using a sampling approach.

Question 3

List the two general approaches to audit sampling.

Answer 3

Statistical

Nonstatistical.

Question 4

Define “Type 2 Error.”

Answer 4

The risk of over-reliance on controls (that is, the risk of assessing control risk too low); or incorrect acceptance of the fairness of an account balance. (The AICPA considers this an error related to effectiveness.)

Question 5

Define “sampling.”

Answer 5

Application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.

Question 6

Define “Type 1 Error.”

Answer 6

The risk of under-reliance on controls (that is, the risk of assessing control risk too high); or incorrect rejection of the fairness of an account balance. (The AICPA considers this an error related to efficiency.)

Question 7

Define “sampling risk.”

Answer 7

The risk that the sample may not be truly representative of the population.

Question 8

Define “random sampling.”

Answer 8

Sampling methodology where each item in the population has the same probability of being selected.

Question 9

List the eight steps in attributes sampling plan.

Answer 9

Identify Sampling Objective
Define what Constitutes an Occurrence
Identify Relevant Population
Determine Sampling Method
Determine Sample Size
Select the Sample
Evaluate Results
Document Sampling Procedures.

Question 10

List the factors that are inversely related to sample size.

Answer 10

Tolerable error rate
Risk of over-reliance - Type II error
Risk of under-reliance.

Question 11

List the two sampling approaches normally associated with judgmental (nonstatistical) sampling applications.

Answer 11

Block

Haphazard.

Question 12

Define “block sampling.”

Answer 12

Sampling methodology where a group of contiguous items are selected; (e.g., selecting all transaction for the month of June).

Question 13

Define “systematic sampling.”

Answer 13

Sampling methodology whereby every nth item in the population is chosen as part of the sample (usually with a random starting point).

Question 14

What is the formula for the observed deviation rate for the sample?

Answer 14

(# errors in the sample)/sample size

Question 15

Define “haphazard sampling.”

Answer 15

Sampling methodology where items are selected arbitrarily with no conscious biases.

Question 16

List the two sampling approaches acceptable for statistical sampling applications.

Answer 16

Random

Systematic.

Question 17

List the factors that directly relate to sample size.

Answer 17

Expected error rate

Population size - not explicitly considered in attributes sampling.

Question 18

List the three factors, as indicated by AICPA tables, that determine sample size for an attributes sampling application.

Answer 18

Expected error rate (related to the variation in population);
Tolerable error rate (related to precision); and
Risk of over-reliance (Type II error rate)

Question 19

List the eight basic steps in variables sampling.

Answer 19

Identify sampling objectives
Identify relevant population
Select specific sampling technique
Calculate the sample size
Determine selection method
Conduct the sample
Evaluate sample and project to population
Document the sampling procedures.

Question 20

What is the formula to obtain the sample size for Probability Proportionate to Size (PPS) sampling?

Answer 20

n = reliability factor (from PPS tables) x Book Value / tolerable error

Question 21

List the items that are inversely related to sample size in variables sampling.

Answer 21

Allowance for sampling risk
Risk of incorrect acceptance (Type II error).
Risk of incorrect rejection (Type I error).

Question 22

List the items that are inversely related to sample size in variables sampling.

Answer 22

Allowance for sampling risk
Risk of incorrect acceptance (Type II error).
Risk of incorrect rejection (Type I error).

Question 23

List the two parameters of a normal distribution.

Answer 23

Mean

Variance.

Question 24

List the various types of classical variables sampling techniques

Answer 24

Difference estimation
Ratio estimation
Mean-per-unit estimation

Question 25

What is the purpose of stratification?

Answer 25

To reduce the overall variability within a population.

Question 26

What is the basic sample size formula?

Answer 26

Sample Size = (Estimated population standard deviation x coefficient of reliability x population size / allowance for sampling risk) squared

Question 27

List the items that are directly related to sample size in variables sampling.

Answer 27

Estimated population standard deviation

Population size - considered explicitly in variables sampling.

Question 28

What is the relevant “sampling unit “ in PPS sampling?

Answer 28

An individual dollar associated with the financial statement element involved.

Question 29

Projected misstatement for accounts having a book value greater than or equal to the sample interval

Answer 29

The projected misstatement is the “actual “ misstatement identified.

Question 30

Formula for calculating “sampling interval “ for PPS sampling

Answer 30

Sampling interval = tolerable misstatement (net of expected misstatements)/reliability factor; or alternatively
Sample interval = Population book value/sample size

Question 31

What is the primary disadvantage of PPS sampling?

Answer 31

PPS sampling does not work very well in dealing with understatements or zero (unrecorded) balances.

Question 32

What is the primary advantage of PPS sampling?

Answer 32

Efficiency—If there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than other sampling methods.

Question 33

Formula for calculating sample size for PPS sampling

Answer 33

n = “Reliability factor” × Book value/
Tolerable misstatement
(net of expected misstatements)

Question 34

Projected misstatement for accounts having a book value less than the sample interval

Answer 34

The projected misstatement is based on the “tainting percentage “ applied to the sample interval.