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AUD > Audit Sampling > Flashcards

Audit Sampling Flashcards

1
Q

What is Audit Sampling?

A

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

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2
Q

What are the characteristics of Statistical Sampling?

A
  • Based on formulas
  • Helps find an appropriate audit sample
  • Helps evaluate evidence obtained
  • Helps evaluate results and quantify Sampling Risk
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3
Q

What are the characteristics of Non-Statistical Sampling?

A

Based on human decision

Equally acceptable as Statistical Sampling

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4
Q

What type of sampling are Substantive Tests?

A

Variables sampling

Probability proportionate to size sampling

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5
Q

What type of sampling are Control Tests?

A

Attribute Sampling

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6
Q

What is Sampling Risk?

A

Risk that your sample isn’t representative of population

Can happen even if audit is done properly

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7
Q

What is the risk of assessing Control Risk too high?

A

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

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8
Q

What is the risk of assessing Control Risk too low?

A

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
Ineffective
Auditor concern

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9
Q

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

A

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

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10
Q

What is the risk of Incorrect Acceptance?

A

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

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11
Q

What is the risk of Incorrect Rejection?

A

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

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12
Q

What is Non-Sampling Risk?

A
  • Risk of human (auditor) missing an error
  • Also called exception- error or deviation.
  • It is all audit risk not due to sampling; always present and cannot be measured
  • Can only reduce risk by adequate planning & supervision
  • Example: use inappropriate audit evidence
  • Example: improperly evaluating the results
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13
Q

How does Sampling Risk compare to Non-Sampling Risk?

A

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

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14
Q

What is Attribute Sampling?

A

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.

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15
Q

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

A

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

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16
Q

What is the Tolerable Rate?

A

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

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17
Q

What is the Expected Population Error Rate?

A

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

Direct relationship to Sample Size

More errors = Larger Sample

Less errors = Smaller Sample

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18
Q

What is the basic premise of Attribute Sampling?

A

Attribute in the sample gives information about the entire audit population

Used to estimate Internal Control error rate

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19
Q

For what is the Expected Population Deviation (error) Rate used?

A

Used to determine initial level of Control Risk

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20
Q

What is the Allowable Risk of Over-reliance?

A

Risk of Assessing Control Risk too low

Gives you the Sampling Risk

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21
Q

When is Attribute sampling used?

A

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

22
Q

What is Classic Variable Sampling?

A

Testing for a dollar amount

Value in sample gives information about value in entire population.

23
Q

What is stratification?

A

Decreases effect of variance in population
Reduces sample size
Sampling into homogeneous groups
Each group is it’s own sample

24
Q

What are the characteristics of Probability Proportionate to Size (PPS) sampling?

A

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

25
Q

What is Projected Misstatement?

A

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

26
Q

How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?

A

PPS: Easier to use- Results in a stratified (homogeneous) 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

27
Q

What factors affect sample size for attribute sampling?

A

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.

28
Q

What is the formula for Audit Sampling?

A

Sample deviation rate + Allowance for sampling risk = Upper deviation rate

if UDR < = TDR, then rely
if UDR > TDR, then do not rely

29
Q

What is Allowance for Sampling Risk?

A

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.

30
Q

What is the Tolerable Error Rate?

A

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

31
Q

What are the steps to develop a sampling plan?

A

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

32
Q

After a Sampling Plan is developed- what are the steps in sampling?

A

Perform the Sampling Plan

Evaluate Results

Document Results

33
Q

What is Systematic Sampling?

A

Every certain nth item of a population is selected
Population needs to be randomly ordered
Primary advantage is that population doesn’t require pre-numbering

34
Q

What is Sequential Sampling?

A

Also called Stop or Go sampling
Each audit step determines the next step
Used to avoid oversampling by allowing an auditor to stop an audit test before completing all steps

35
Q

What is Discovery Sampling?

A

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

Used for detecting fraud/critical items (Any phony employees on payroll?)

36
Q

What is confidence?

A

Confidence level (reliability) is stated as a percentage - auditor is 95% confident that the sample is representative of the population. It is the inverse of the risk that the auditor can accept (5%).

37
Q

What effects do population size and sample size have sampling risks in substantive testing?

A

Population OK and Sample OK - Correct decision
Population Not OK and Sample Not OK - Correct decision
Population Not OK and Sample OK - Risk of Incorrect Acceptance; Incorrect decision; Not effective
Population OK and Sample Not OK - Risk of Incorrect Rejection ; Incorrect decision; Not efficient

38
Q

What effects do population size and sample size have testing of controls?

A

Operation of Control OK and Sample OK - Correct decision
Operation of Control Not OK and Sample Not OK - Correct decision
Operation of Control Not OK and Sample OK - Risk of assessing control risk too low; Incorrect decision; Not effective
Operation of Control OK and Sample Not OK - Risk of assessing control risk too high; Incorrect decision; Not efficient

39
Q

What is random selection?

A

Each item in the population has an equal opportunity to be in the sample

40
Q

What is block (cluster) sampling?

A

Groups of adjacent items are selected. It is NOT ACCEPTABLE

41
Q

What are the estimates of materiality in attribute vs. variable sampling?

A

Variable - tolerable misstatements

Attribute - tolerable deviations/errors

42
Q

What is mean per unit?

A

Mean Per Unit = Sample Average x Number in Population

43
Q

What is ratio estimation?

A

(True population value/book value) x total BV

44
Q

What is difference estimation?

A

(BV - true value)/sample size X population size

45
Q

What factors affect sample size for variable sampling?

A

Sample size will increase as the following increase (direct relationship):

1) Expected misstatement
2) Standard deviation/Variability
3) Assessed level of risk

Sample size will decrease as the following increase (indirect relationship):

1) Tolerable misstatement
2) Acceptable level of risk

46
Q

How is the point estimate calculated?

A

Total book value - projected error rate (calculated by difference estimation) = point estimate

47
Q

How is sampling interval calculated for PPS?

A

Tolerable misstatement/Reliability factor (from a table)

48
Q

How is a sample size for PPS calculated?

A

Recorded amount (book value) of the population/Sampling interval

49
Q

What are dual purpose tests?

A

Using the same sample to perform test of controls and test of details.

Used when there is an acceptable low risk that the deviation rate > tolerable rate

Sample size has to be larger

50
Q

How is projected error calculated under PPS sampling?

A

(Recorded amount - audit amount)/Recorded amount X sample interval = projected error

If (recorded amount - audit amount) > sample size, then use actual difference instead of calculating projected error

AUD (9 decks)

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