Audit Sampling

Question 1

What is a nonsampling Risk

Answer 1

Human Error

Question 2

Define Sampling Risk

Answer 2

Bad Sample, sample is not representative of population. Risk of drawing wrong conclusion

Question 3

Two types of Sampling Risks

Answer 3

Type 1 - Efficiency Error

Type 2 - Less Effective

Question 4

Sampling Risk - Efficiency Error

Answer 4

Population is okay but based on the sample you don’t rely

Underrely on Internal Controls = Assess RMM /\ (Attribute)

Incorrectly reject an account balance for substantive testing purposes (Variable)

Question 5

Sampling Risk - Less Effective

Answer 5

Population is bad but based on sample everything looks correct

Overrely on internal controls = Assess RMM \/ (Attribute)

Incorrectly Accept an account balance for substantive testing purposes (Variable)

Question 6

Audit Sampling will be used when

Answer 6

Two times;
During I/C phase of audit, auditor will perform Tests of Controls

During Substantive Testing Phase, auditor will perform Tests of Details on transactions, accounts and disclosures

Question 7

Audit Sampling - Attribute

Answer 7

Rely on I/C

ARCC & RIIO

Question 8

Audit Sampling - Variable

Answer 8

Sub Testing of $$

U-PERCV & ICORRIIA

Question 9

Three types of Attribute sampling

Answer 9

Attribute Sampling, or fixed sample size

Stop-or-go Sampling, or Sequential Sampling

Discovery Sampling

Question 10

Evaluating results of a sample

Answer 10

1) Calculate sample deviation rate (# of deviations found divided by sample size)
2) Determine allowance for sampling risk (provided)
3) Add two figures together to get Maximum Deviation Rate
4) Compare Max Dev rate to Tolerable Dev Rate
5) If Max Rate is higher auditor will modify original reliance on controls b/c it is not operating effectively
6) If Max Rate is lower, auditor will accept results as valid basis for relying on control

Question 11

If Allowance for Sampling Risk (Precision) goes down what happens to sample size

Answer 11

more accurate

Sample Size goes up

Question 12

Steps to develop Attribute Sampling Plan

Answer 12

1) Determine audit objective, what control are we testing for?
2) Determine tolerable rate
3) Determine reliability or level of confidence
4) Determine expected population deviation rate
5) Determine method for selecting the sample
6) Calculate sample size
7) Select and test sample
8) Calculate sample deviation rate
# of deviations divided by sample size
9) Reach conclusions and document the results

Question 13

Attribute Sampling methodologies

Answer 13

Random-Number Sampling
Systemic Sampling
Haphazard Sampling
Block Sampling

Question 14

Variable Sampling

Answer 14

Looking at $, focuses on misstatements

Question 15

Variable Sampling Two Risks

Answer 15

Incorrect Acceptance - Audit Ineffective

Incorrect Rejection - Audit inefficient

Question 16

What is the most efficient sample when doing classical variable sampling

Answer 16

Stratified Sampling

Question 17

How to do Stratified Sampling

Answer 17

1) Divide population into groups of similar characteristics
2) Groups may be based on quantitative factors, i.e. expensive items vs inexpensive
3) Groups may be based on other factors like higher likelihood of error
4) Sample is drawn from each group

Question 18

3 approaches to classical variable sampling

Answer 18

Mean-per-unit estimation
Difference estimation
ration estimation

Question 19

How to determine appropriate sample size

Answer 19

3 different key factors (TEA)
Tolerable deviation rate
Expected Deviation Rate
Allowable Risk of Assessing RMM too low

Question 20

Advantages of Probability Proportional to size over Classical variables sampling

Answer 20

Standard Deviation not needed
Stratifies sample automatically
Smaller Sample usually results if fewer errors expected
Start sampling w/o entire population available

Question 21

Disadvantages of Probability Proportional to size over Classical Variables sampling

Answer 21

Large Sample results if many errors expected
Zero and negative balances require special handling
**Not useful to detect understatement

Question 22

Calculations needed for PPS

Answer 22

Sampling Interval (SI) = Tolerable misstatement/reliability factor (from table) OR Population amount/Sample Size

Sample Size=Population amount/SI

Question 23

Determine Projected misstatement using PPS

Answer 23

1) Misstatement = Book Amount - Audited Amount
2) Tainting Factor (TF) = Misstatement/Book Amount
3) Projected Misstatement:
If SI>book amount then, PM=TF*SI
If SI < = Book amount then, PM = Misstatement from setp

Question 24

PPS vs Classical Variable, which is more conservative

Answer 24

PPS, it is more likely to reject an account balance

Best method for populations that are not believed to contain a large number of misstatem