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AUD > Audit Sampling > Flashcards

Audit Sampling Flashcards

1
Q

What is Audit Sampling?

A

Taking part of a population- subjecting it to audit procedures- projecting results to a population

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2
Q

What are the characteristics of Statistical Sampling?

A

Based on formulas

Helps find an appropriate audit sample

Helps evaluate evidence obtained

Helps evaluate results and quantify Sampling Risk

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3
Q

What are the characteristics of Non-Statistical Sampling?

A

Based on human decision

Equally acceptable as Statistical Sampling

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4
Q

What are the characteristics of Substantive Tests?

A

Variables sampling

Probability proportionate to size sampling

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5
Q

What type of sampling are Control Tests?

A

Attribute Sampling

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6
Q

What is Sampling Risk?

A

Risk that your sample isn’t representative of population

Can happen even if audit is done properly

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7
Q

What is the risk of assessing Control Risk too high?

A

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

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8
Q

What is the risk of assessing Control Risk too low?

A

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

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9
Q

What are the risks if the auditor concludes controls are operating effectively based on the sample and Control Risk is set too low?

A

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

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10
Q

What is the risk of Incorrect Acceptance?

A

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

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11
Q

What is the risk of Incorrect Rejection?

A

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

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12
Q

What is Non-Sampling Risk?

A

Risk of human (auditor) missing an error

Also called exception- error or deviation.

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13
Q

How does Sampling Risk compare to Non-Sampling Risk?

A

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

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14
Q

What is Attribute Sampling?

A

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.

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15
Q

How do you determine if Control Procedures are operating properly or not operating properly?

A

Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors

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16
Q

What is the Tolerable Rate?

A

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

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17
Q

What is the Expected Population Error Rate?

A

What Error Rate are you expecting? - Judgment call- based on experience

Direct relationship to Sample Size

More errors = Larger Sample

Less errors = Smaller Sample

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18
Q

What is the basic premise of Attribute Sampling?

A

Attribute in the sample gives information about the entire audit population

Used to estimate Internal Control error rate

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19
Q

For what is the Expected Population Deviation (error) Rate used?

A

Used to determine initial level of Control Risk

20
Q

What is the Allowable Risk of Over-reliance?

A

Risk of Assessing Control Risk too low

Gives you the Sampling Risk

21
Q

When is Attribute sampling used?

A

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

22
Q

What is Classic Variable Sampling?

A

Testing for a dollar amount

Value in sample gives information about value in entire population.

23
Q

What functions are used in conjunction with Classic Variable Sampling?

A

Mean Per Unit = Sample Average x Number in Population

Stratification - Decreases effect of variance in population and reduces sample size

24
Q

What are the characteristics of Probability Proportionate to Size (PPS) sampling?

A

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

25
Q

What is Projected Misstatement?

A

Misstatement found in sample - have to project it to remainder of population

26
Q

How does Probability Proportionate to Size (PPS) sampling compare to Classic Variables sampling?

A

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

27
Q

What factors affect sample size?

A

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.

28
Q

What is the formula for Audit Sampling?

A

SER + ASR < TER

SER = Sample Error Rate

ASR = Allowance for Sampling Risk

TER = Tolerable Error Rate

29
Q

What is Allowance for Sampling Risk?

A

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.

30
Q

What is the Tolerable Error Rate?

A

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

31
Q

What are the steps to develop a sampling plan?

A

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

32
Q

After a Sampling Plan is developed- what are the steps in sampling?

A

Perform the Sampling Plan

Evaluate Results

Document Results

33
Q

What is Systematic Sampling?

A

Every certain # of a population is selected

Population needs to be randomly ordered

Primary advantage is that population doesn’t require pre-numbering

34
Q

What is Sequential Sampling?

A

Also called Stop or Go sampling

Each audit step determines the next step

35
Q

What is Discovery Sampling?

A

Audit is testing an area that is so crucial that zero population errors can be tolerated

Any phony employees on payroll?

36
Q

How does Block Sampling compare to other sampling methods?

A

Easy to implement- but is the worst method of sampling.

37
Q

What are procedures that do NOT involve sampling?

A

The following procedures do NOT involve sampling:

  1. Inquiry and observation
  2. Analytical procedures
  3. 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
  4. Tests of controls where application is NOT documented - i.e. procedures that depend on segregation of duties or that otherwise provide no documentary evidence
  5. 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)
  6. Untested balances
38
Q

What is “Block” sampling?

What are the advantages and disadvantages of this type of sampling?

A

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

39
Q

What statistical sampling plan does NOT use a fixed sample size for test of controls?

A

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

40
Q

What type of sampling may be more appropriate if certain forms are NOT consecutively numbered?

A

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

41
Q

What is the primary objective of using stratification as a sampling method in auditing?

A

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

42
Q

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?

A

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

43
Q

Question:

In regards to statistical sampling in test of controls, what factors are correct?

A
  1. 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

  1. The population size has little or NO effect on determining sample size, except for very small population
44
Q

What are the types of variations in Classical Variables Sampling?

A

Variations of classical variables sampling are:

  1. Mean-per-unit estimation
  2. Difference estimation
  3. Ratio estimation
  4. The regression approach
  5. Difference and ratio estimation
  6. Stratification
45
Q

What are the advantages of PPS Sampling in comparison to Classical Variables Sampling?

A

The advantages of PPS sampling are:

  1. Generally easier to use
  2. Size to sample not based on variation of audited amounts
  3. Automatically results in a stratified sample
  4. Individually significant items are automatically identified
  5. Usually results in a smaller sample size if no misstatements are expected
  6. Can be easily designed and sample selection can begin before the complete population is available
46
Q

What are the advantages of Classical Variables Sampling in comparison to PPS Sampling?

A

The advantages of Classical Variables sampling are:

  1. May result in a smaller sample size if there are many differences between audited and book values
  2. Easier to expand sample size if that becomes necessary
  3. Selection of zero balances does not require special sample design considerations
  4. Inclusion of negative balances does not require special sample design considerations

AUD (9 decks)

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