Audit Sampling Flashcards
Define “Type 2 Error.”
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.)
Define “nonsampling risk.”
Any mistake by the auditor other than sampling risk that is not a direct consequence of using a sampling approach.
Define “sampling.”
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.
List the two general approaches to audit sampling.
Statistical and non-statistical.
List the two types of statistical sampling.
- Attributes sampling (regarding internal controls)
- Variables sampling (regarding substantive tests)
Define “sampling risk.”
The risk that the sample may not be truly representative of the population.
Define “Type 1 Error.”
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.)
List the 3 factors, as indicated by AICPA tables, that determine sample size for an attributes sampling application.
- Expected error rate (related to the variation in population);
- Tolerable error rate (related to precision); and
- Risk of over-reliance (Type II error rate).
List the 8 steps in attributes sampling plan.
- Identify Sampling Objective
- Define what Constitutes an Occurrence
- Identify Relevant Population
- Determine Sampling Method
- Determine Sample Size
- Select the Sample
- Evaluate Results
- Document Sampling Procedures.
List the two sampling approaches acceptable for statistical sampling applications.
Random and Systematic
Define “random sampling.”
Sampling methodology where each item in the population has the same probability of being selected.
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 two sampling approaches normally associated with judgmental (nonstatistical) sampling applications.
Block and Haphazard
Define “block sampling.”
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.
List the 2 factors that directly relate to sample size.
- Expected error rate
- Population size - not explicitly considered in attributes sampling
List the 3 factors that are inversely related to sample size.
- Tolerable error rate
- Risk of over-reliance - Type II error
- Risk of under-reliance
What is the formula for the observed deviation rate for the sample?
(# errors in the sample)/sample size
What is the purpose of stratification?
To reduce the overall variability within a population.
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 3 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)
List the 2 items that are directly related to sample size in variables sampling.
- Estimated population standard deviation
- Population size - considered explicitly in variables sampling
List the 3 types of classical variables sampling techniques.
- Difference estimation
- Ratio estimation
- Mean-per-unit estimation
List the 8 basic steps in variables sampling.
- Identify sampling objectives
- Identify relevant population
- Select specific sampling technique
- Calculate the sample size
- Determine selection method
- Conduct the sample
- Evaluate sample and project to population
- Document the sampling procedures
List the two parameters of a normal distribution.
Mean and variance
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
Projected misstatement for accounts having a book value less than the sample interval.
The projected misstatement is based on the “tainting percentage “ applied to the sample interval.
Projected misstatement for accounts having a book value greater than or equal to the sample interval.
The projected misstatement is the “actual “ misstatement identified.
Formula for calculating “sampling interval “ for PPS sampling.
Sampling interval = tolerable misstatement (net of expected misstatements)/reliability factor; or alternatively Sample interval = Population book value/sample size
Formula for calculating sample size for PPS sampling
n = (“Reliability Factor” x Book Value) / (Tolerable Misstatements, net of expected misstatements)
What is the primary disadvantage of PPS sampling?
PPS sampling does not work very well in dealing with understatements or zero (unrecorded) balances.
What is the primary advantage of PPS sampling?
Efficiency—If there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than other sampling methods.
What is the relevant “sampling unit “ in PPS sampling?
An individual dollar associated with the financial statement element involved.
