AUDITING QUIZ 1 Flashcards
AUDITING QUIZ 1
Type 1 risk
Risk of incorrect rejection (Type I)
In a test of internal controls, it is the risk that the sample supports a conclusion that the control is not operating effectively when, in fact, it is operating effectively. It is also known as the risk of underreliance.
In substantive testing, it is the risk that the sample indicates that the recorded balance is materially misstated when, in fact, it is not. (Efficiency issue)
Audit Sampling
The selection and evaluation of less than 100 percent of the items in a population of audit relevance selected in such a way that the auditor expects the sample to be representative of the population and thus likely to provide a reasonable basis for conclusions about the population.
Type 2 risk
Risk of incorrect acceptance (Type II)
In a test of internal controls, it is the risk that the sample supports a conclusion that the control is operating effectively when, in fact, it is not operating effectively. It is also known as the risk of overreliance.
In substantive testing, it is the risk that a sample supports the recorded balance when it is, in fact materially misstated. (Effectiveness issue)
Sampling Risk
The possibility that the sample drawn is not representative of the population. There are two types of sampling risk.
Which of the two risks relates primarily to audit efficiency and which relates primarily to audit effectiveness?
Risk of incorrect rejection (Type 1)
Risk of incorrect acceptance (Type 2)
Type 1: efficiency
Type 2: effectiveness
Three Important Factors in Determining Sample Size
confidence level
tolerable error
expected error
In which situation would an auditor likely examine all transactions instead of using sampling?
A) When the population consists of many small transactions
B) When the auditor has a tight deadline
C) When the population consists of a few large transactions
D) When the auditor is using attribute sampling
C) When the population consists of a few large transactions
what type of controls can auditors test all of, and what type can they not?
The auditor may test the general controls over the system and any program changes, but test only a few transactions processed by the IT system.
non statistical sampling
the auditor does not use statistical techniques to determine sample size, select the sample items, or measure sampling risk.
Statistical sampling
uses the laws of probability to compute sample size and evaluate results. The auditor is able to use the most efficient sample size and quantify sampling risk.
Attribute Sampling
Used to estimate the proportion of a population that possess a specified characteristic. The most common use of attribute sampling is for tests of controls.
Monetary-Unit Sampling
uses attribute sampling theory to estimate the dollar amount of misstatement for a class of transactions or an account balance.
Classical Variables Sampling
gives you the option of numerically stratifying the records in a population before drawing a sample
4 steps in attribute sampling
Plan
Preform
Evaluate
Document
tolerable deviation rate
the maximum deviation rate from a prescribed control that the auditor is willing to accept and still consider the control effective
Highly important tolerable rate
3-5%
Moderately important tolerable rate
6-10%
expected population deviation rate
the rate the auditor expects to exist in the population
Random-Number Selection
Every item in the population has the same probability of being selected as every other sampling unit in the population.
Systematic Selection
The auditor determines the sampling interval by dividing the population by the sample size. A starting number is randomly selected in the first interval and then every nth item is selected.
haphazard sample selection
sampling units are selected without any bias, that is to say, without a special reason for including or omitting items from the sample.
extrapolated misstatement
estimate of the likely misstatement in a population based on a sample of that population
Monetary-Unit Sampling
uses attribute-sampling theory to express a monetary conclusion rather than a rate of occurrence. It is commonly used by auditors to test accounts such as accounts receivable, loans receivable, investment securities, and inventory.
A way for auditors to check financial records by focusing on larger amounts. Instead of picking random transactions, it selects them based on their dollar value. Bigger amounts have a higher chance of being checked, so the audit is more likely to catch important mistakes. Itβs useful for finding errors or fraud in financial statements.
For example, in a situation where the upper misstatement limit of $150,621 is greater than the tolerable misstatement of $125,000, so the auditor concludes that the accounts receivable balance is materially misstated.
When faced with this situation, the auditor may:
Increase the sample size.
Perform other substantive procedures.
Request the entity adjust the accounts receivable balance.
If management refuses to adjust the account balance, the auditor would consider issuing a qualified or an adverse opinion.
The sampling unit for nonstatistical sampling is normally a
customer account
individual transaction
line item on a transaction
When using nonstatistical sampling, the following items must be considered:
Identifying individually significant items
Determining the sample size
Selecting sample items
Calculating the sample results
Why do auditors test Individually Significant Items
The items to be tested individually are items that may contain potential misstatements that individually exceed the tolerable misstatement. These items are tested 100% because the auditor is not willing to accept any sampling risk.
ratio projection
apply the misstatement ratio in the sample to the population
Using ratio projection method:
Assume the auditor finds $1,500 in misstatements in a sample of $15,000. The misstatement ratio is:
If the population total is $200,000, the extrapolated misstatement would be:
Misstatement ratio = misstatements found/sample amount
$1,500/$15,000 = 10%
Extrapolated misstatement = misstatement percent x population total = 200,000 x 10% = $20,000
difference projection
This method projects the average misstatement of each item in the sample to all items in the population.
Using difference projection method:
Assume misstatements in a sample of 100 items total $300 (for an average misstatement of $3), and the population contains 10,000 items. The extrapolated misstatement would be
3Γ10,000=$30,000
What is the formula for the following:
Misstatement ratio
Extrapolated misstatement
Sample Size
Misstatement ratio = misstatements found/sample amount
Extrapolated misstatement = misstatement percent x population
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