Audit Sampling

Question 1

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

Answer 1

Audit Sampling

Question 2

Based on formulas

Helps find an appropriate audit sample

Helps evaluate evidence obtained

Helps evaluate results and quantify Sampling Risk

Answer 2

Audit Sampling

Question 3

Based on human decision

Equally acceptable as Statistical Sampling

Answer 3

Audit Sampling

Question 4

Variables sampling

Probability proportionate to size sampling

Answer 4

Audit Sampling

Question 5

Attribute Sampling

Answer 5

Audit Sampling

Question 6

Risk that your sample isn’t representative of population

Can happen even if audit is done properly

Answer 6

Audit Sampling

Question 7

A risk of Control Testing - Auditor works to make Control Risk lower

More substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiency

Audit ends up being effective (correct result)- but you do more work

Answer 7

Audit Sampling

Question 8

A risk of Control Testing - Complement to Confidence Level
Inverse relationship to Sample Size

Higher accepted risk of assessing Control Risk too low = Smaller Sample

Lower accepted risk of assessing Control Risk too low = Larger Sample

Answer 8

Audit Sampling

Question 9

Leads to higher Detection Risk - Fewer substantive tests

Sample understates Control Risk

This 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

Answer 9

Audit Sampling

Question 10

A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated

Hurts audit effectiveness

Wrong conclusion reached

Efficient- but not effective

Answer 10

Audit Sampling

Question 11

A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated

Hurts audit efficiency

Wrong recommendations given

Effective- but not efficient

Answer 11

Audit Sampling

Question 12

Risk of human (auditor) missing an error

Also called exception- error or deviation.

Answer 12

Audit Sampling

Question 13

Sampling Risk deals with the chance that your audit sample is flawed

Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed

Answer 13

Audit Sampling

Question 14

Looking at Control Procedures - Were invoices approved when paid?

Errors are stated in terms of %- not dollar amounts

For 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.

Answer 14

Audit Sampling

Question 15

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

Answer 15

Audit Sampling

Question 16

Error rate in population that you are willing to accept/tolerate

Inverse relationship to Sample Size

Higher Tolerable Rate = Smaller Sample
Lower Tolerable Rate = Larger Sample

If you’re willing to accept a higher probability that errors exist- there is less pressure on the sample

Answer 16

Audit Sampling

Question 17

What Error Rate are you expecting? - Judgment call- based on experience

Direct relationship to Sample Size

More errors = Larger Sample

Less errors = Smaller Sample

Answer 17

Audit Sampling

Question 18

Attribute in the sample gives information about the entire audit population

Used to estimate Internal Control error rate

Answer 18

Audit Sampling

Question 19

Used to determine initial level of Control Risk

Answer 19

Audit Sampling

Question 20

Risk of Assessing Control Risk too low

Gives you the Sampling Risk

Answer 20

Audit Sampling

Question 21

Attribute sampling is only useful when there is documented evidence (an audit trail) to test

Use when the existence of an error needs to be verified or debunked

Answer 21

Audit Sampling

Question 22

Testing for a dollar amount

Value in sample gives information about value in entire population.

Answer 22

Audit Sampling

Question 23

Mean Per Unit = Sample Average x Number in Population

Stratification - Decreases effect of variance in population and reduces sample size

Answer 23

Audit Sampling

Question 24

A form of Variable Sampling

Does NOT use Standard Deviation

Auditor focuses on a dollar amount

Larger or more valuable items get picked more often as part of the sample

Answer 24

Audit Sampling

Question 25

Misstatement found in sample - have to project it to remainder of population

Answer 25

Audit Sampling

Question 26

PPS:

Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design

Classic Variables Sampling:

Easy to expand sample size- Selecting zero and negative balances easy

Answer 26

Audit Sampling

Question 27

Tolerable rate for error - Inverse relationship with sample size

Risk of assessing Control Risk too low - Inverse relationship with sample size

Expected population error rate - Direct relationship with sample size

Population size does NOT affect the sample size - as population is larger- sample size doesn’t grow.

Answer 27

Audit Sampling

Question 28

SER + ASR < TER

SER = Sample Error Rate

ASR = Allowance for Sampling Risk

TER = Tolerable Error Rate

Answer 28

Audit Sampling

Question 29

The amount that you add to the Sampling Error Rate to get some cushion for your sample.

As high as you think the population error rate could go based on experience.

Answer 29

Audit Sampling

Question 30

The amount of error rate that you can accept - If population error rate is less than TER- then accept the Control as effective

If population error rate is more than TER- do more testing to get SER lower or conclude control isn’t effective. Do more substantive testing

Answer 30

Audit Sampling

Question 31

Determine Test Objective - for example- have sales shipments been billed?

Define Population and Deviation - take a sample of shipping document- trace forward to see if billed

Determine Sample Size based on tolerable rate for error- risk of assessing Control Risk too low- and expected population error rate.

Select Sampling Technique

Answer 31

Audit Sampling

Question 32

Perform the Sampling Plan

Evaluate Results

Document Results

Answer 32

Audit Sampling

Question 33

Every certain # of a population is selected

Population needs to be randomly ordered

Primary advantage is that population doesn’t require pre-numbering

Answer 33

Audit Sampling

Systematic Sampling

Question 34

Also called Stop or Go sampling

Each audit step determines the next step

Answer 34

Audit Sampling

Sequential Sampling

Question 35

Audit is testing an area that is so crucial that zero population errors can be tolerated

Any phony employees on payroll?

Answer 35

Audit Sampling

Discovery Sampling

Question 36

Easy to implement- but is the worst method of sampling.

Answer 36

Audit Sampling

Block Sampling