Audit Sampling Flashcards
Primary Risk in sampling
may draw a conclusion from a sample that is different fro the conclusion you would have draw if you had the entire population.
The purpose of variable estimation sampling?
The purpose of variable estimation sampling, which PPS is an example of, is to MEASURE AMOUNTS, which can be COMPARED to client data to identify OVERSTATEMENTS. PPS increases the proportion of LARGER, NOT SMALLER items in the sample. PPS is used in SUBSTANTIVE TESTING, NOT TESTS of CONTROLS, and would NOT be used to determine if a control was being applied. Since items are chosen based on the RELATIONSHIP of their BALANCES to an INTERVAL, zero and negative balances are not a focus.
Which audit tests would a CPA most likely use attribute sampling?
Attribute sampling is used to determine whether a population has a PARTICULAR attribute, such as a particular type of error, and whether the frequency is at a tolerable rate. Identifying entries posted to incorrect accounts involves determining whether or not the transactions, entries posted, have a PARTICULAR ATTRIBUTE, being posted to appropriate accounts, calling for attribute sampling. Tests involving the AMOUNT of an expense, the REASONABLENESS of an expense, or ACCOUNT BALANCES would employ VARIABLE ESTIMATION SAMPLING since the auditor would be trying to evaluate the APPROPRIATENESS of an amount.
Probability-Proportional-to-Size (PPS) sample
Under PPS sampling, an interval is determined by DIVIDING the total value of the population BY the SAMPLE SIZE. When an item is selected from an interval that has a value LOWER than the interval amount, any error is measured as a PERCENTAGE of the item’s value and that PERCENTAGE is applied to the interval, resulting in a LAGER ERROR measurement. When the item has a value that is EQUAL to or GREATER than the interval amount, any error identified is assumed to be the projected misstatement without adjustment. With an interval of $10,000 and a sample item with a GREATER recorded amount of $12,000, and a audited amount of $11,000, a $1,000 error would be considered the projected misstatement.
Variables sampling is?
Variables sampling is the method used to estimate an AMOUNT, such as the VALUE of a population, on the basis of the value of the population. It would be used to estimate the VALUE of INVENTORY for comparison to the recorded amount.
Stop-or-go sampling is?
Stop-or-go sampling is a technique of attribute sampling that is used when the error rate is expected to be low. It allows the auditor to conclude a test and draw conclusions before all items in the sample have been tested if the error rate in items tested is at an acceptably low level.
Non-sampling risk is?
Non-sampling risk is the risk that an auditor will DRAW an INCORRECT CONCLUSION (HUMAN ERROR) from an audit procedure due to a FLAW in the procedure or the auditor’s INTERPRETATION of the results, which would include selecting an INAPPROPRIATE audit procedure.
Sampling risk is?
Sampling risk is the risk that there is a FLAW with the sample, causing the auditor to draw the wrong conclusion. This is often associated with a NON-REPRESENTATIVE SAMPLE, which would cause the auditor to conclude that I/C’s are MORE or LESS EFFECTIVE than they actually are or concluding that a MISSTATED balance is FAIRLY stated or that a FAIRLY stated balance is MISSTATED.
Incorrect Acceptance is?
When an auditor concludes that an error or deviation rate in a population IS acceptable based on a sample even though it is NOT TRUE of the population, it represents a sampling error that results in INCORRECT ACCEPTANCE. Assessing control risk too low or too high would affect the nature of the test, the selection of the sample, and the sample size. It would not, however, affect the evaluation of the error.
Incorrect Rejection is?
Incorrect rejection indicates that the exception or error rate in the sample EXCEEDS the tolerable error even though the actual error in the population IS at an ACCEPTABLE level.
With 8 deviations out of a population of 150 and sampling risk of 1%?
With 8 deviations out of a population of 150, the deviation rate is 5.333%. Adjusted for a sampling risk of 1%, the auditor would conclude that there may be as many as 6.333% deviations in the population. Since the tolerable rate of 6% is exceeded, the auditor will modify the planned assessed level of control risk. The tolerable rate is NOT adjusted for sampling risk.
Tolerable Deviation Rate
Tolerable deviation rate – refers to the percentage of time a control can be violated but still lead the auditor to believe it is operating efficiently. Tolerable deviation rate has an INVERSE effect on sample size: if the auditor is willing to tolerate a LARGER number of deviations, a SMALLER sample will be able to satisfy them that the true deviation rate is within these time limits.
Expected Deviation Rate
Expected deviation rate refers to the percentage of time the auditor expects the control to have been violated. The true deviation rate MUST be LOWER than the tolerable deviation rate in order for the auditor to rely on a control. The expected deviation rate has a DIRECT AFFECT on sample size: the closer the expected rate gets to the tolerable limits, the LARGER the sample size the auditor will need to provide precise enough results to be comfortable.
Allowable risk of assessing the risk of material misstatement
Allowable risk of assessing risk of material misstatement to low refers to the risk the auditor is taking that the sample will cause them to RELY on the control when the TRUE deviation rate of the population was high enough that they should not have relied. The allowable risk of assessing the risk of material misstatement to low has an inverse effect on sample size: if the auditor is willing to accept a LARGE risk of drawing the wrong conclusion, they can reduce the size of the sample.
