Audit Sampling

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 formulas

Helps find an appropriate audit sample

Helps evaluate evidence obtained

Helps evaluate results and quantify Sampling Risk

Question 3

What are the characteristics of Non-Statistical Sampling?

Answer 3

Based on human decision

Equally acceptable as Statistical Sampling

Question 4

What are the characteristics of Substantive Tests?

Answer 4

Variables sampling

Probability 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 population

Can 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 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

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 Size

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

Lower 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 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

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 stated

Hurts audit effectiveness

Wrong conclusion reached

Efficient- 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 stated

Hurts audit efficiency

Wrong recommendations given

Effective- but not efficient

Question 12

What is Non-Sampling Risk?

Answer 12

Risk of human (auditor) missing an error

Also 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 flawed

Non-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 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.

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/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

Question 17

What is the Expected Population Error Rate?

Answer 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

Question 18

What is the basic premise of Attribute Sampling?

Answer 18

Attribute in the sample gives information about the entire audit population

Used to estimate Internal Control error rate

Question 19

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

Answer 19

Used to determine initial level of Control Risk

Question 20

What is the Allowable Risk of Over-reliance?

Answer 20

Risk of Assessing Control Risk too low

Gives you the Sampling Risk

Question 21

When is Attribute sampling used?

Answer 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

Question 22

What is Classic Variable Sampling?

Answer 22

Testing for a dollar amount

Value in sample gives information about value in entire population.

Question 23

What functions are used in conjunction with Classic Variable Sampling?

Answer 23

Mean Per Unit = Sample Average x Number in Population

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

Question 24

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

Answer 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

Question 25

What is Projected Misstatement?

Answer 25

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

Question 26

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

Answer 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

Question 27

What factors affect sample size?

Answer 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.

Question 28

What is the formula for Audit Sampling?

Answer 28

SER + ASR < TER

SER = Sample Error Rate

ASR = Allowance for Sampling Risk

TER = Tolerable Error Rate

Question 29

What is Allowance for Sampling Risk?

Answer 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.

Question 30

What is the Tolerable Error Rate?

Answer 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

Question 31

What are the steps to develop a sampling plan?

Answer 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

Question 32

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

Answer 32

Perform the Sampling Plan

Evaluate Results

Document Results

Question 33

What is Systematic Sampling?

Answer 33

Every certain # of a population is selected

Population needs to be randomly ordered

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

Question 34

What is Sequential Sampling?

Answer 34

Also called Stop or Go sampling

Each audit step determines the next step

Question 35

What is Discovery Sampling?

Answer 35

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

Any phony employees on payroll?

Question 36

How does Block Sampling compare to other sampling methods?

Answer 36

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

Question 37

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. What is the likely cause of this?

Answer 37

If the deviation rate in the sample is higher than the tolerable rate, the auditor may assess a high level of control risk. However, if the deviation rate in the population does not exceed the tolerable rate, the auditor will have assessed the level of control risk for the sample as greater than the true operating effectiveness of the control.

Question 38

What is the major reason that the difference and ratio estimation methods would be expected to produce audit efficiency?

Answer 38

Difference and ratio estimation methods measure the difference between audit and book values or the ratio of audit to book values. As these differences should not be great, the population of these differences will have little variance. In statistical sampling the less variation in a population, the smaller the required sample to provide an estimate of the population. In other words, difference and ratio estimation methods are more efficient because the differences between audit and book values are expected to vary less than the actual items in the population.

Question 39

What is necessary to audit balances in an on-line EDP system in an environment of destructive updating?

Answer 39

Destructive updating in an online computer system is destructive of transaction files. Accordingly, auditing of the balances in accounts where transactions are periodically destroyed requires a well-documented audit trail for the auditor.

Question 40

How does the auditor determine the balances to be tested and when sampling plan can be established?

Answer 40

Establish tolerable misstatement—the maximum difference, taking materiality into account
Determine allowable risk of incorrect acceptance or sampling risk—the maximum allowable risk of that the auditor will accept an amount that is materially incorrect
Determine the expected amount of misstatement or expected deviation—the amount by which the auditor expects the actual balance to differ from the reported amount based on the assessed level of control risk
Calculate the sample size
Select and test the sample
Calculate the upper deviation limit—the estimated difference between the actual amount and the reported amount based on the sample
Reach conclusions and document results
If precision ≤ tolerable misstatement—opinion may require modification
If precision > tolerable misstatement—opinion will not require modification

Question 41

What is Controlled Reprocessing?

Answer 41

Controlled reprocessing does not ordinarily continuously test controls within a computer system. Controlled reprocessing, a variation of parallel simulation, processes actual client data through a copy of the client’s application program.

Question 42

What are some Techniques used for continuous (or concurrent) testing that are able to identify and capture audit data as transactions occur? (Advanced computer systems, particularly those utilizing EDI, sometimes do not retain permanent audit trails, thus requiring capture of audit data as transactions are processed.)

Answer 42

1) Embedded audit modules and audit hooks—Embedded audit modules are programmed routines incorporated into an application program that are designed to perform an audit function such as a calculation, or a logging activity. Because embedded audit modules require that the auditor be involved in systems design of the application to be monitored, this approach is often not practical. An audit hook is an exit point in an application program that allows an auditor to subsequently add an audit module (or particular instructions) by activating the hook to transfer control to an audit module.
(2) Systems control audit review files (SCARF)—A SCARF is a log, usually created by an embedded audit module, used to collect information for subsequent review and analysis. The auditor determines the appropriate criteria for review and the SCARF selects that type of transaction, dollar limit, or other characteristic.
(3) Extended records—This technique attaches additional audit data which would not otherwise be saved to regular historic records and thereby helps to provide a more complete audit trail. The extended record information may subsequently be analyzed.
(4) Transaction tagging—Tagging is a technique in which an identifier providing a transaction with a special designation is added to the transaction record. The tag is often used to allow logging of transactions or snapshot activities.