Audit Sampling Flashcards
What is Sampling?
The examination of less than 100% of a population and using the results as a basis for drawing a general conclusion on the entire population.
When would an auditor apply sampling in the engagement?
Internal Control - auditor will perform tests of controls on a sample basis to determine operatiing effectiveness of controls s/he plans to rely on
Substantive testing - auditor will perform tests of details of transactions, accounts and disclosures on a sample basis to obtain sufficient appropriate audit evidence to support management assertions
Samping Techniques vs. Sampling Methodolgoies
Sampling Techniques - Different ways which the adutior can employ his/her skills to effect a desired result, i.e. test of controls to determine operating effectiveness of the control s/he plans to rely on and test of details to obtain sufficient appropriate audit evidence. (Ways you can move the lightblub when changing it. Putting it on the ground, holding the burnt blub between teeth, tossing the blub into trash before or after putting in the new blub)
- Attribute (fixed sample-size)
- Stop-or-go (sequential)
- Discovery
- Stop-or-go (sequential)
- Classical variables
- Mean Per Unit
- Difference Estimation
- Ratio Estimation
- Probability Proportional to Size Sampling (DUS)
Sampling Methodologies - Prescribed procedures to specifically ensure that all items in a population have an equal opportunity to be selected. Has nothing to do with testing of controls or details (I.e. changing a blub requires unscrewing the burnt blub and screwing in a new blub - always the same process. techniques are how you execute the task from the time the old blub is removed to the time the new blub is screwed in)
- Random-Number
- Systemic
- Block
When is sampling not appropriate in testing a control to be relied on and why?
Risk assessment procedures, Inquiry or Observation, used in gaining an understanding of the I/C structure (RIIO)
Because:
Inquiry = done only once instead of testing each item in the sample
Sample observations = can rarely be done randomly throughout the year in order to represent the entire year, i.e. might be engaged *after* the fiscal year ending
When is sampling appropriate in testing a control to be relied on and why?
When there are tests involving Reperformance or Inspection (RIIO)
Because there is an identifiable population of documents or records for the auditor to select a sample from.
What information does attribute sampling provide in testing a control?
Provides information on the presence or absence of an attribute specific to the control.
What is sampling risk and what can lead to it?
Risk of drawing a conclusion from the sample that is different from the conclusion you would have drawn if you had examined the entire population
Selecting a sample that is not representative of the population (bad sample) can lead to sampling risk
Sampling Risk vs. Nonsampling Risk
Sampling Risk is the result of bad sample that leads to incorrect conclusion
Nonsampling Risk is result of human error
Define nonsampling risk and what can cause it?
Auditor reaches an erroneous conclusion for reasons not related to sampling risk (nothing to do with selecting a bad sample)
Caused by
- Using inappropriate audit procedures
- Misinterpreting audit evidence can cause auditor to reach the wrong conclusion
- Overlooking misstatements or deviations
What are the reasons related to sampling risk for testing a control or details?
Test of Controls = over- or under-relying on a control by assessing the Control Risk (RMM) too low or too high
Testing of Details = incorrectly accepting or rejecting the sample by under- or over-estimating misstatements
What are the effects of sampling risk on a test of control?
IINEFFICIENT by assessing the Control Risk (RMM) too HIGH and UNDER RELY on the control
INEFFECTIVE by assessing the Control Risk (RMM) too LOW and OVER RELY on the control
What causes the auditor to under or over rely on a control?
UNDER = when auditor incorrectly assumes the true deviation rate will be HIGHER than tolerable deviation rate
OVER = when auditor incorrectly assumes true deviation rate will be LOWER than tolerable deviation rate
NOTE: Tolerable deviaiton rate is set by the auditor.
What is statistical sampling?
Auditor quantifies the level of sampling risk (inefficiencies and ineffective risks) that is acceptable by using judgment then plugging into probability formulas to compute a sample size that is representative of the level of risk set by the auditor.
Enables the auditor to control sampling risk based on judgment and translate these risks into quantities or “statistics” then plug into probability formulas to get a sample size that achieves that speciified level of risk.
The sample size (probability formulas) is specific to the level of sampling risk set by the auditor (judgment and statistic).
NOTE: Statistic = represents PAST events (this is why auditor uses judgment)
Probability = represents predicting on likelihood of FUTURE events
In what areas of the engagement can the auditor apply statistical sampling?
Internal Control phase and Substantive Testing phase
What is non-statisical sampling?
aka Judgmental sampling
Where the auditor determine the sample size based solely on how comfortable tha their conclusions are correct. No probability/statistical analysis involved.
Tendency to overstimate sample size in order to feel “confident” with their conclusions, which can mean an effective, but inefficient audit
