Audit Sampling 1

Question 1

What is Audit Sampling?

Answer 1

Taking part of a population- subjecting it to audit procedures- projecting results to a population

Question 2

What are the characteristics of Statistical Sampling?

Answer 2

Based on formulasHelps find an appropriate audit sampleHelps evaluate evidence obtainedHelps evaluate results and quantify Sampling Risk

Question 3

What are the characteristics of Non-Statistical Sampling?

Answer 3

Based on human decisionEqually acceptable as Statistical Sampling

Question 4

What are the characteristics of Substantive Tests?

Answer 4

Variables samplingProbability proportionate to size sampling

Question 5

What type of sampling are Control Tests?

Answer 5

Attribute Sampling

Question 6

What is Sampling Risk?

Answer 6

Risk that your sample isn’t representative of populationCan happen even if audit is done properly

Question 7

What is the risk of assessing Control Risk too high?

Answer 7

A risk of Control Testing - Auditor works to make Control Risk lowerMore substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiencyAudit ends up being effective (correct result)- but you do more work

Question 8

What is the risk of assessing Control Risk too low?

Answer 8

A risk of Control Testing - Complement to Confidence Level Inverse relationship to Sample SizeHigher accepted risk of assessing Control Risk too low = Smaller SampleLower accepted risk of assessing Control Risk too low = Larger Sample

Question 9

What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?

Answer 9

Leads to higher Detection Risk - Fewer substantive testsSample understates Control RiskThis error leads to over-reliance on internal control- under-testing- and overall audit ineffectiveness.Does NOT necessarily mean that the Financial Statements are materially misstated - it does mean that if there is one- you are less likely to find it

Question 10

What is the risk of Incorrect Acceptance?

Answer 10

A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly statedHurts audit effectivenessWrong conclusion reachedEfficient- but not effective

Question 11

What is the risk of Incorrect Rejection?

Answer 11

A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly statedHurts audit efficiencyWrong recommendations givenEffective- but not efficient

Question 12

What is Non-Sampling Risk?

Answer 12

Risk of human (auditor) missing an errorAlso called exception- error or deviation.

Question 13

How does Sampling Risk compare to Non-Sampling Risk?

Answer 13

Sampling Risk deals with the chance that your audit sample is flawedNon-Sampling risk deals with the chance that your human decisions/conclusions are flawed

Question 14

What is Attribute Sampling?

Answer 14

Looking at Control Procedures - Were invoices approved when paid? Errors are stated in terms of %- not dollar amountsFor example- 5 invoices out of 100 were not properly paid. Error rate is 5%Hint: If you see Error Rate on the Exam- they are referring to Attribute Sampling.

Question 15

How do you determine if Control Procedures are operating properly or not operating properly?

Answer 15

Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors

Question 16

What is the Tolerable Rate?

Answer 16

Error rate in population that you are willing to accept/tolerateInverse relationship to Sample SizeHigher Tolerable Rate = Smaller SampleLower Tolerable Rate = Larger SampleIf you’re willing to accept a higher probability that errors exist- there is less pressure on the sample

Question 17

What is the Expected Population Error Rate?

Answer 17

What Error Rate are you expecting? - Judgment call- based on experienceDirect relationship to Sample SizeMore errors = Larger SampleLess errors = Smaller Sample

Question 18

What is the basic premise of Attribute Sampling?

Answer 18

Attribute in the sample gives information about the entire audit populationUsed to estimate Internal Control error rate