Ch 9 - Sampling Flashcards
The application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class
Audit sampling
2 reasons to use samples:
- it’s not possible to test every item (limited manpower & time)
- it’s not economically desirable to test every item (less efficient & higher costs)
T/F: sampling is becoming less important to the industry over time.
True; due to increases in computing power and automation
When a test of controls or a substantive test is restricted to a sample, the auditor’s conclusions may be different from the conclusions he would reach if the test were applied in the same way to all items in the account balance or class of transactions
Sampling risk (PCAOB definition)
T/F: The auditor did something wrong if there is a high sampling risk
False; the auditor did everything right, but sometimes you just get unlucky and get a sample that doesn’t accurately represent the population
T/F: Sampling Risk can NEVER be minimized to zero
True; always testing less than 100% of the population so it can’t be zero
T/F: A smaller sample size means a smaller sample risk
False; larger sample size = less sample risk
Includes all the aspects of audit risk that are not due to sampling
Non-sampling risk
Incorrectly defining the population, selecting inappropriate audit tests/methods, human errors in mathematical calculation, tracing when you should have vouched are all examples of…
Non-sampling risk
Sampling that reaches a conclusion about a population in terms of a rate of occurrence is:
Attributes sampling
The auditors’ primary objective in selecting a sample of items from an audit population is to obtain:
A representative sample
Discovery sampling is particularly effective when:
The auditors are looking for critical deviations that are not expected to be frequent in number.
Which of the following is an element of sampling risk?
Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement
This year the audit plan, as compared to the prior year, includes a lower risk of assessing control risk too low. Other factors held constant, which of the following is most likely to be correct relating to the planned risk of incorrect acceptance for substantive procedures?
Higher than prior year
NOTE: Decreasing the planned risk of assessing control risk too low would be expected to allow a higher planned assessed risk of incorrect acceptance (thereby allowing a decrease in the scope of substantive audit procedures)
In which of the following circumstances is it least likely that tests of controls will be performed?
The expected deviation rate exceeds the tolerable deviation rate
NOTE: because in such a situation testing is only likely to reveal to the auditors that the system is not operating effectively as they expected
The use of mathematical/statistical theory to determine appropriate sample sizes and evaluate the sample results.
Statistical Sampling
The use of experience and professional judgement to determine appropriate sample sizes and evaluate the sample results (inherently subjective)
Non-Statistical Sampling
T/F: Only statistical sampling is allowed by the AICPA and PCAOB standards
False; BOTH statistical and non-statistical sampling are allowed
Advantages and Disadvantage of statistical sampling:
Advantages:
- objective
- easy to explain/replicate
- easy to defend in court/regulators (concrete)
- smaller sample sizes –> more efficient
Disadvantages:
- difficult to complete
Advantage and Disadvantages of non-statistical sampling:
Advantage:
- easier to complete
Disadvantages:
- subjective
- hard to explain/replicate
- hard to defend in court or to regulators
- larger sampling size –> less efficient
T/F: Larger auditing firms prefer Statistical Sampling
True; because they value objectivity and defensibility
A set of Statistical Sampling methods used when testing Internal Controls for Operating Effectiveness
Attributes Sampling
When doing attributes sampling, the deviation rate also means…
the failure rate
The unknown failure rate of a control in the entire population of control instances.
Population Deviation Rate
The failure rate of a control in our sample.
Sample Deviation Rate
The failure rate in the population that’s acceptable given our Planned Assessed Level of Control Risk.
Tolerable Deviation Rate
The width of the Confidence Interval we build around our Sample Deviation Rate.
Allowance for Sampling Risk
If the achieved upper deviation rate < tolerable deviation rate…
Means it’s good/acceptable; the control is Operating Effectively for our given Planned Assessed Level of Control Risk.
What’s the likelihood the Population Deviation Rate is outside our Confidence Interval (specifically to the right of it); relates to the confidence level
Risk of Assessing Control Risk Too Low
The uppermost part of our Confidence Interval. This is as bad as we think the Population Deviation Rate is likely to be.
Achieved Upper Deviation Rate
T/F: If the Achieved Upper Deviation Rate is equal to or greater than the Tolerable Deviation Rate, we conclude the control is NOT Operating Effectively for our given Planned Assessed Level of Control Risk.
True; needs to be less than the tolerable deviation rate
T/F: We focus on whether the Sample Deviation Rate is less than the Tolerable Deviation Rate.
False; We do NOT
What’s a common internal control in financial reporting?
credit sales to customers over certain amounts require special approval.
What is given from the AICPA?
Planned Assessed Level of Control Risk (PALCR) and Tolerable Deviation Rate
Do we know what the Population Deviation Rate is?
No, we estimate it by:
1) using the sample deviation rate from PY
2) run a small pilot sample
Each row is for a given…
Expected Population Deviation Rate
Each column is for a given…
Tolerable Deviation Rate
T/F: Each Risk of Assessing Control Risk Too Low is on the same table as Expected Population Deviation Rate and Tolerable Deviation Rate
False; it’s on a completely different table
T/F: In the Sample Size table, the 1st number in the table is the Sample Size.
True
T/F: In the Sample Size table, the 2nd number in parentheses is the number of Deviations / Failures you can find and still accept the control as Operating Effectively.
True
T/F: “Eyeballing” is a type of random sampling method
False; it is a Haphazard Selection method & not part of statistical sampling methods
For most control testing we will use Haphazard Sample selection.
False; we use Random Sampling
What is the Sample Deviation Rate calculation?
Sample Deviation Rate = (actual/found) Deviations in Sample / Sample Size (given in table)
T/F: In the Sample Evaluation table, each row is for a given Sample Size.
True
T/F: Not every sample size is listed, so always round your sample size up!
False; round it down!
T/F: In the Sample Evaluation table, each column is for a number of actual Deviations found.
True; (0-10 deviations)
T/F: In the Sample Evaluation table, the number reported in the table is your Achieved Upper Deviation Rate.
True
A set of Statistical Sampling methods used when performing Substantive Procedures to test balances/accounts for material misstatements.
Variables Sampling
T/F: Attributes Sampling deals in %s and failure rates
True
Variables Sampling deals in ___ AND ________________.
$ AND misstatement amounts.
2 subcategories of Variables Sampling:
1) Classical Variables Sampling
2) Probability Proportional to Size (PPS) Variables Sampling
The actual / unknown misstatement amount in the full population.
Population Misstatement
Similar to the Expected Population Deviation Rate in Attributes Sampling; estimated by 1) PY audits 2) pilot sample
Expected Misstatement
The Misstatement amount in an account based on our sample results; ex: how misstated A/R is in total based on our sample
Projected Misstatement
What’s the likelihood the Population Misstatement is outside our Confidence Interval (specifically to the right of it); relates to the confidence level; similar to Risk of Assessing Control Risk Too Low in Attributes Sampling
Risk of Incorrect Acceptance
The width of the Confidence Interval we build around our Projected Misstatement
Basic Precision + Incremental Allowance
The uppermost part of our Confidence Interval. This is as bad as we think the Population Misstatement is likely to be; similar to the Achieved Upper Deviation Rate in Attributes Sampling
Upper Limit on Misstatement
This is the materiality level for the account
Tolerable Misstatement
T/F: If the Upper Limit on Misstatement is < Tolerable Misstatement, then the account/balance is materially misstated.
False; It is NOT materially misstated; you want the Upper Limit Misstatement to be < TM
T/F: We do NOT focus on whether the Projected Misstatement is less than the Tolerable Misstatement.
True
Sample size for PPS Variables Sampling calculation:
Sample Size (n) = (BV * reliability factor) / (TM - (EM x Expansion Factor))
** don’t need to memorize
PPS Variables Sampling selection method:
Monetary Unit Sampling (a form of Systematic Sampling)
When we create a listing of items and select every Nth item
Systematic Sampling
The increment between each Nth item is referred to as the…
Sampling Interval
When the Nth item selected is a dollar amount rather than an account.
Monetary Unit Sample
Sampling Interval formula:
Book Value / Sample Size (n)
Use the sampling interval to…
To choose 1st acc that beginning and ending balances are between the sampling interval. Multiply the sampling interval by 2, 3, 4, 5, 6 & so on until you have as many accounts as the sample size (n)
Systematic/Monetary Unit Sampling automatically results in a…
Stratified Sample
Sample where certain accounts are treated differently, usually sampled at a higher or 100% rate
Stratified Sample
Stratified Samples as more efficient because…
They focus more of our attention on the riskiest accounts (higher sampling rate is normally applied to the largest/riskiest accounts/transactions)
T/F: any account the size of the Sampling Interval or Larger will be selected at a 100% rate
True
T/F: Smaller accounts have a likelihood of being selected into the sample in proportion to their size
True
T/F: PPS Variables Sampling is NOT biased towards selecting larger accounts into the sample
False; it is biased toward larger accounts
T/F: PPS Variables Sampling is very good at detecting understatements.
False; good at detecting overstatements (because it’s biased toward larger accounts and balances which have more potential to be overstated than understated)
T/F: PPS Variables Sampling is used exclusively to look for overstatements.
True (We will only count overstatements)
T/F: if an account is twice the size of the Sampling Interval or larger, the standards tell us to select it as often as it gets hit.
True (ex: if it takes up 4 intervals then copy it into your sample 4 times)
Sampling Taint calculation for overstatements:
(BV - Audit Value) / BV
Misstatement for individual account calculation:
Sampling taint % * sampling interval
You don’t have to find the sampling taint if…
If the account balance is equal to or greater than the sampling interval.
Basic Precision calculation:
Basic Precision = Reliability Factor x Sampling Interval
Is found by using the “0” errors row and the appropriate Risk of Incorrect Acceptance
Reliability factor for Basic Precision
2 parts for building the Confidence Interval:
1) Basic Precision
2) Incremental Allowance
Upper Limit on Misstatement calculation:
Upper Limit on Misstatement = Projected Misstatement + Basic Precision + Incremental Allowance
T/F: If Upper Limit is >= Tolerable Misstatement, then Reject the account
True
T/F: Auditors have the right (and often do) reject an account as Materially Misstated even if the Upper Limit on Misstatement is technically below but VERY close to the Tolerable Misstatement
True
T/F: The PCAOB requires statistical sampling
False
