Audit Sampling Flashcards
Confidence Level
The sample’s confidence level refers to the reliability the auditor places on the sample results. Confidence levels of 90 percent to 99 percent are common. A 95 percent confidence level means the auditor assumes the risk that five out of 100 samples will not reflect the true values in the population. The auditor’s assessment of the control environment contributes to the level of risk the auditor is willing to assume. At a 95 percent confidence level, 5 percent the complement of the confidence level reflects the auditor’s risk of “assessing control risk too low.”
Expected Deviation Rate
The expected deviation rate represents the auditor’s best estimate of the actual failure rate of a control in a population. The rate usually is based on client inquiries, changes in personnel, process observations, prior year test results, or even the results of a preliminary sample.
Tolerable Rate
The tolerable rate defines the maximum rate of noncompliance the internal auditor will “tolerate” and still rely on the prescribed control. Many auditors will coordinate with their audit client before establishing a tolerable level. Client control objectives help determine the nature and frequency of deviations that can occur and still allow reliance on the control.
Population
The population contains all items to be considered for testing. Each must have an unbiased chance of selection to ensure the final sample is representative of the population. For large populations containing thousands of items, population size will cause little impact on total sample size and is often irrelevant for audit sample planning.
Define “block sampling.” (least desirable)
Sampling methodology where a group of contiguous items are selected; (e.g., selecting all transaction for the month of June).
Define “haphazard sampling.”
Sampling methodology where items are selected arbitrarily with no conscious biases.
Define “systematic sampling.”
Sampling methodology whereby every nth item in the population is chosen as part of the sample (usually with a random starting point).
List the eight steps in attributes sampling plan.
1-Define what Constitutes an Occurrence, 2-Identify Relevant Population, 3-Determine Sampling Method, 4-Determine Sample Size, 5-Select the Sample, 6- Evaluate Results, 7- Document Sampling Procedures.
List the two sampling approaches acceptable for statistical sampling applications
Random ans Systematic
Define “random sampling.”
Sampling methodology where each item in the population has the same probability of being selected.
List the three factors, as indicated by AICPA tables, that determine sample size for an attributes sampling application.
1-Expected error rate (related to the variation in population)
2-Tolerable error rate (related to precision) and
3-Risk of over-reliance (Type II error rate).
List the factors that directly relate to sample size.
Expected error rate, Population size - not explicitly considered in attributes sampling.
What is the formula for the observed deviation rate for the sample?
(# errors in the sample)/sample size
List the factors that are inversely related to sample size.
Tolerable error rate, Risk of over-reliance - Type II error, Risk of under-reliance.
List the two sampling approaches normally associated with judgmental (nonstatistical) sampling applications.
Block, haphazard
List the items that are directly related to sample size in variables sampling
Estimated population standard deviation, Population size - considered explicitly in variables sampling.
What is the basic sample size formula?
Sample Size = (Estimated population standard deviation x coefficient of reliability x population size / allowance for sampling risk) squared
List the items that are inversely related to sample size in variables sampling.
Allowance for sampling risk. Risk of incorrect acceptance (Type II error). Risk of incorrect rejection (Type I error)
What is the purpose of stratification?
To reduce the overall variability within a population.
What is the formula to obtain the sample size for Probability Proportionate to Size (PPS) sampling?
n = reliability factor (from PPS tables) x Book Value / tolerable error
List the two parameters of a normal distribution.
Mean, Variance
Statistical Sampling helps the auditor to;
1-Design an efficient sample
2-Measure the sufficiency of the evidential matter obtained
3- Evaluate the sample results
* The auditor can objectively quantify sampling risk to limit it to a level considered acceptable
What is audit risk
The risk that a material misstatement will occur and the risk that it will not be detected by the auditor. It consists of; 1-Inherent risk 2-control risk 3-Detection risk
Audit Risk Model?
AR=IR X CR X DR (AP X TD)
What is nonsampling risk
“All aspects of audit risk that are not due to sampling”
Examples of nonsampling (human) risk?
a) the failure to accept adequate audit procedures
b) the failure to recognize misstatements in documents examined
c) misinterpreting the results of audit tests
What is sampling risk?
The risk that the auditors conclusions (based on the sample) might be different from the conclusions that would be reached if the tests were applied to the entire population.
What is test of Controls sampling risk?
Risk of assessing control risk too high or too low
What is substantive testing risk?
Risk of incorrect acceptance or incorrect rejection.
Test of Controls…
are designed to asses the operation of a control to asses its effectiveness in preventing or detecting material misstatements in the financial statement assertion.
Substantive tests…
are used to obtain evidence about the validity and propriety of the accounting treatment of transactions and account balances.
Attributes sampling tests what?
Internal controls
Variables sampling tests what?
(used in substantive testing) reaches a conclusion in dollar amounts
What are the two types of variable sampling?
1-Probability_Proportional-to-Size (PPS) sampling
2-Classical variables sampling techniques
What are the 8 steps of ATTRIBUTES Sampling?
1-Determine the OBJECTIVES of the test 2-Define the DEVIATION CONDITIONS 3-Define the POPULATION 4- Determine the METHOD of SELECTING THE POPULATION 5-Determine the SAMPLE SIZE 6-PERFORM the sampling plan 7-EVALUATE sample results 8-DOCUMENT the sampling procedure
What are the 8 steps of VARIABLES Sampling?
1-Determine the OBJECTIVES of the test 2-Define the POPULATION 3-Select an audit sampling TECHNIQUE 4- Determine the SAMPLE SIZE 5-Determine the METHOD of selecting the sample 6-PERFORM the sampling plan 7-EVALUATE sample results 8-DOCUMENT the sampling procedure
What are the attributes sampling methods?
1-Random number sampling
2-Systematic sampling
3-Haphazard sampling
4-Block sampling (least desirable)
Increases in the risk of assessing control risk too low does what to the sample size
Decreases sample size (Inversely Proportional)
Increases in the tolerable rate does what to the sample size
Decreases sample size (Inversely Proportional)
Increases in the expected deviation rate does what to the sample size
Increases sample size (Directly Proportional)
Increases in the Population size does what to the sample size
Nothing (slightly increases)
Define the “upper” deviation limit.
Sample deviation rate + allowance for sampling risk
What sampling results support the use of the controls tested?
If upper deviation limit<= tolerable rate; its a GO!
How does an auditor draw conclusion on sample results?
If the UPPER DEVIATION LIMIT is greater than the TOLERABLE DEVIATION RATE, then the scope of tests must be increased.
What are the VARIABLES SAMPLING relationship to SAMPLE SIZE?
a) Risk of Incorrect Acceptance Increases - Sample Size Decreases (Inversely)
b) Risk of Incorrect Rejection Increases - - Sample Size Decreases (Inversely)
c) Tolerable Misstatement Increases - - Sample Size Decreases (Inversely)
d) Population Increases - Sample Size Increases (Direct)
e) Variation (Std Deviation) Increases - Sample Size Increases (Direct)
For VS; what is the projected misstatement when the logical unit is LESS than the sampling interval?
(BV-AV)/BV * Sampling Interval
For VS; what is the projected misstatement when the logical unit is GREATER than the sampling interval?
Projected Misstatement = Actual Misstatement
What is the primary objective of stratification?
To decrease the effect of variance in the total population and thereby reduce the sample size.
What is the CLASSICAL sample size equation?
Sample Size (n) = Populations Size (N) * Estimated Population Std Deviation (SD) * Std Normal Deviation for the acceptable risk of incorrect rejection (Ur) / Planned Allowance for Sampling Risk (A) [ N*SD*Ur / A ]
What are the advantages of PPS sampling?
1-easier to use
2-sample size not based on variation of audited amounts
3- automatically results in a stratified sample
4-Individually significant items are automatically identified
5-usually results in a smaller sample size (if no misstatements are expected)
6-Can be easily designed and sample selection can begin before the completed population is available
What are the advantages of classical sampling?
1-May result in smaller sample size if there are many differences between audited and book values
2-Easy to expand sample size
3-Selection of zero or negative balances does not require special consideration
