Audit Sampling

Question 1

Define “Type 2 Error.”

Answer 1

The risk of over-reliance on controls (that is, the risk of assessing control risk too low); or incorrect acceptance of the fairness of an account balance. (The AICPA considers this an error related to effectiveness.)

Question 2

List the two types of statistical sampling.

Answer 2

1. Attributes sampling (regarding internal controls) 2. Variables sampling (regarding substantive tests).

Question 3

Define “Type 1 Error.”

Answer 3

The risk of under-reliance on controls (that is, the risk of assessing control risk too high); or incorrect rejection of the fairness of an account balance. (The AICPA considers this an error related to efficiency.)

Question 4

List the two general approaches to audit sampling.

Answer 4

1. Statistical 2. Nonstatistical.

Question 5

Define “sampling risk.”

Answer 5

The risk that the sample may not be truly representative of the population.

Question 6

Define “nonsampling risk.”

Answer 6

Any mistake by the auditor other than sampling risk that is not a direct consequence of using a sampling approach.

Question 7

Define “sampling.”

Answer 7

Application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.

Question 8

List the factors that directly relate to sample size.

Answer 8

1. Expected error rate 2. Population size - not explicitly considered in attributes sampling.

Question 9

Define “block sampling.”

Answer 9

Sampling methodology where a group of contiguous items are selected; (e.g., selecting all transaction for the month of June).

Question 10

Define “random sampling.”

Answer 10

Sampling methodology where each item in the population has the same probability of being selected.

Question 11

List the three factors, as indicated by AICPA tables, that determine sample size for an attributes sampling application.

Answer 11

Expected error rate (related to the variation in population); Tolerable error rate (related to precision); and Risk of over-reliance (Type II error rate).

Question 12

Define “systematic sampling.”

Answer 12

Sampling methodology whereby every nth item in the population is chosen as part of the sample (usually with a random starting point).

Question 13

List the two sampling approaches acceptable for statistical sampling applications.

Answer 13

1. Random 2. Systematic.

Question 14

List the two sampling approaches normally associated with judgmental (nonstatistical) sampling applications.

Answer 14

1. Block 2. Haphazard.

Question 15

Define “haphazard sampling.”

Answer 15

Sampling methodology where items are selected arbitrarily with no conscious biases.

Question 16

List the eight steps in attributes sampling plan.

Answer 16

1. Identify Sampling Objective 2. Define what Constitutes an Occurrence 3. Identify Relevant Population 4. Determine Sampling Method 5. Determine Sample Size 6. Select the Sample 7. Evaluate Results 8. Document Sampling Procedures.

Question 17

List the factors that are inversely related to sample size.

Answer 17

1. Tolerable error rate 2. Risk of over-reliance - Type II error 3. Risk of under-reliance.

Question 18

What is the formula for the observed deviation rate for the sample?

Answer 18

(# errors in the sample)/sample size

Question 19

What is the basic sample size formula?

Answer 19

Sample Size = (Estimated population standard deviation x coefficient of reliability x population size / allowance for sampling risk) squared

Question 20

List the items that are inversely related to sample size in variables sampling.

Answer 20

1. Allowance for sampling risk 2. Risk of incorrect acceptance (Type II error). 3. Risk of incorrect rejection (Type I error).

Question 21

What is the formula to obtain the sample size for Probability Proportionate to Size (PPS) sampling?

Answer 21

n = reliability factor (from PPS tables) x Book Value / tolerable error

Question 22

List the various types of classical variables sampling techniques.

Answer 22

1. Difference estimation 2. Ratio estimation 3. Mean-per-unit estimation.

Question 23

What is the purpose of stratification?

Answer 23

To reduce the overall variability within a population.

Question 24

List the eight basic steps in variables sampling.

Answer 24

1. Identify sampling objectives 2. Identify relevant population 3. Select specific sampling technique 4. Calculate the sample size 5. Determine selection method 6. Conduct the sample 7. Evaluate sample and project to population 8. Document the sampling procedures.

Question 25

List the items that are directly related to sample size in variables sampling.

Answer 25

1. Estimated population standard deviation 2. Population size - considered explicitly in variables sampling.

Question 26

List the two parameters of a normal distribution.

Answer 26

1. Mean 2. Variance.