Audit Sampling Flashcards
What is Audit Sampling?
Taking part of a population- subjecting it to audit procedures- projecting results to a population
What are the characteristics of Statistical Sampling?
Based on formulas
Helps find an appropriate audit sample
Helps evaluate evidence obtained
Helps evaluate results and quantify Sampling Risk
What are the characteristics of Non-Statistical Sampling?
Based on human decision
Equally acceptable as Statistical Sampling
What are the characteristics of Substantive Tests?
Variables sampling
Probability proportionate to size sampling
What type of sampling are Control Tests?
Attribute Sampling
What is Sampling Risk?
Risk that your sample isn’t representative of population
Can happen even if audit is done properly
What is the risk of assessing Control Risk too high?
A risk of Control Testing - Auditor works to make Control Risk lower
More substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiency
Audit ends up being effective (correct result)- but you do more work
What is the risk of assessing Control Risk too low?
A risk of Control Testing - Complement to Confidence Level
Inverse relationship to Sample Size
Higher accepted risk of assessing Control Risk too low = Smaller Sample
Lower accepted risk of assessing Control Risk too low = Larger Sample
What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?
Leads to higher Detection Risk - Fewer substantive tests
Sample understates Control Risk
This error leads to over-reliance on internal control- under-testing- and overall audit ineffectiveness.
Does NOT necessarily mean that the Financial Statements are materially misstated - it does mean that if there is one- you are less likely to find it
What is the risk of Incorrect Acceptance?
A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated
Hurts audit effectiveness
Wrong conclusion reached
Efficient- but not effective
What is the risk of Incorrect Rejection?
A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated
Hurts audit efficiency
Wrong recommendations given
Effective- but not efficient
What is Non-Sampling Risk?
Risk of human (auditor) missing an error
Also called exception- error or deviation.
How does Sampling Risk compare to Non-Sampling Risk?
Sampling Risk deals with the chance that your audit sample is flawed
Can occur if sample is selected on a random basis - using a statistical or non-statistical sampling approach
Can occur if sample was not selected correctly
Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed
What is Attribute Sampling?
Looking at Control Procedures - Were invoices approved when paid?
Errors are stated in terms of %- not dollar amounts
For example- 5 invoices out of 100 were not properly paid. Error rate is 5%
Hint: If you see Error Rate on the Exam- they are referring to Attribute Sampling.
How do you determine if Control Procedures are operating properly or not operating properly?
Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors
What is the Tolerable Rate?
Error rate in population that you are willing to accept/tolerate
Inverse relationship to Sample Size
Higher Tolerable Rate = Smaller Sample
Lower Tolerable Rate = Larger Sample
If you’re willing to accept a higher probability that errors exist- there is less pressure on the sample
What is the Expected Population Error Rate?
What Error Rate are you expecting? - Judgment call- based on experience
Direct relationship to Sample Size
More errors = Larger Sample
Less errors = Smaller Sample
What is the basic premise of Attribute Sampling?
Attribute in the sample gives information about the entire audit population
Used to estimate Internal Control error rate
For what is the Expected Population Deviation (error) Rate used?
Used to determine initial level of Control Risk
What is the Allowable Risk of Over-reliance?
Risk of Assessing Control Risk too low
Gives you the Sampling Risk
When is Attribute sampling used?
Attribute sampling is only useful when there is documented evidence (an audit trail) to test
Use when the existence of an error needs to be verified or debunked
What is Classic Variable Sampling?
Testing for a dollar amount
Value in sample gives information about value in entire population.
What functions are used in conjunction with Classic Variable Sampling?
Mean Per Unit = Sample Average x Number in Population
Stratification - Decreases effect of variance in population and reduces sample size
What are the characteristics of Probability Proportionate to Size (PPS) sampling?
A form of Variable Sampling
Does NOT use Standard Deviation
Auditor focuses on a dollar amount
Larger or more valuable items get picked more often as part of the sample
What is Projected Misstatement?
Misstatement found in sample - have to project it to remainder of population
How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?
PPS:
Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design
Classic Variables Sampling:
Easy to expand sample size- Selecting zero and negative balances easy
What factors affect sample size?
Tolerable rate for error - Inverse relationship with sample size
Risk of assessing Control Risk too low - Inverse relationship with sample size
Expected population error rate - Direct relationship with sample size
Population size does NOT affect the sample size - as population is larger- sample size doesn’t grow.
What is the formula for Audit Sampling?
SER + ASR < TER
SER = Sample Error Rate
ASR = Allowance for Sampling Risk
TER = Tolerable Error Rate
What is Allowance for Sampling Risk?
The amount that you add to the Sampling Error Rate to get some cushion for your sample.
As high as you think the population error rate could go based on experience.
What is the Tolerable Error Rate?
The amount of error rate that you can accept - If population error rate is less than TER- then accept the Control as effective
If population error rate is more than TER- do more testing to get SER lower or conclude control isn’t effective. Do more substantive testing
What are the steps to develop a sampling plan?
Determine Test Objective - for example- have sales shipments been billed?
Define Population and Deviation - take a sample of shipping document- trace forward to see if billed
Determine Sample Size based on tolerable rate for error- risk of assessing Control Risk too low- and expected population error rate.
Select Sampling Technique
After a Sampling Plan is developed- what are the steps in sampling?
Perform the Sampling Plan
Evaluate Results
Document Results
What is Systematic Sampling?
Every certain # of a population is selected
Population needs to be randomly ordered
Primary advantage is that population doesn’t require pre-numbering
What is Sequential Sampling?
Also called Stop or Go sampling
Each audit step determines the next step
What is Discovery Sampling?
Audit is testing an area that is so crucial that zero population errors can be tolerated
Any phony employees on payroll?
How does Block Sampling compare to other sampling methods?
Easy to implement- but is the worst method of sampling.
What are procedures that do NOT involve sampling?
The following procedures do NOT involve sampling:
- Inquiry and observation
- Analytical procedures
- Procedures applied to every item in a population - i.e. some audit plans include the audit of all “large” accounts and a portion of the small accounts. In such situations, only the “small” accounts would be subject to sampling
- Tests of controls where application is NOT documented - i.e. procedures that depend on segregation of duties or that otherwise provide no documentary evidence
- Procedures from which the auditor does not intend to extend a conclusion to the remaining items in the account - i.e. tracing several transactions through accounting system to obtain understanding (this is a walk through)
- Untested balances
What is “Block” sampling?
What are the advantages and disadvantages of this type of sampling?
Block sampling is a sample consisting of contiguous units - i.e. an auditor selects three blocks of ten vouchers for examination
Advantage: Ease of sample unit selection
Disadvantage: Sample may NOT be representative of the overall population; because of this, use of this method is generally the lease desirable
What statistical sampling plan does NOT use a fixed sample size for test of controls?
Sequential sampling does not use a fixed sample size for tests of controls
Sequential sampling is also called “stop-or-go” - sample is selected in several steps, with the need to perform each step conditional on the results of the previous steps
What type of sampling may be more appropriate if certain forms are NOT consecutively numbered?
In this case, systematic sampling may be more appropriate
Systematic sampling is used when every nth (population size divided by sample size) item is selected after a random start
The disadvantage of this type of sampling is that the items in the population may occur in a systematic pattern, thus destroying the sample re
What is the primary objective of using stratification as a sampling method in auditing?
To decrease the effect of variance (or variability) in the total population
Stratification is used when you have an account balance (i.e. accounts receivables) where their is a big variation of individual items (i.e. individual customer balances) within the total population.
An auditor would stratify the population by dividing it up into “sub” populations (i.e. customer balances > $20,000 in one population and other balances in another); then select samples from the sub- populations vs. from the entire population. The auditor could do other audit procedures over one sub-population (i.e. confirm customer accounts) and select samples from another
Ideally, an auditor would be able to obtain a smaller sample size by sampling from the sub-populations vs. from the entire population
Question:
If an auditor is concerned that a population may contain exceptions, the determination of a sample size sufficient to include at least one such exception is a characteristic of which type of sampling?
In this case, this is an example of Discovery sampling
Discovery sample sizes and related discovery sampling tables are constructed to measure the probability of at least one error occurring in a sample if the error rate in the population exceeds the tolerable rate
Question:
In regards to statistical sampling in test of controls, what factors are correct?
- Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate
For example, a recorded disbursement that does NOT show evidence of required approval might nevertheless be a transaction that is properly authorized and recorded
- The population size has little or NO effect on determining sample size, except for very small population
What are the types of variations in Classical Variables Sampling?
Variations of classical variables sampling are:
- Mean-per-unit estimation
- Difference estimation
- Ratio estimation
- The regression approach
- Difference and ratio estimation
- Stratification
What are the advantages of PPS Sampling in comparison to Classical Variables Sampling?
The advantages of PPS sampling are:
- Generally easier to use
- Size to sample not based on variation of audited amounts
- Automatically results in a stratified sample
- Individually significant items are automatically identified
- Usually results in a smaller sample size if no misstatements are expected
- Can be easily designed and sample selection can begin before the complete population is available
What are the advantages of Classical Variables Sampling in comparison to PPS Sampling?
The advantages of Classical Variables sampling are:
- May result in a smaller sample size if there are many differences between audited and book values
- Easier to expand sample size if that becomes necessary
- Selection of zero balances does not require special sample design considerations
- Inclusion of negative balances does not require special sample design considerations
