Chapter 14 -- Evidence Sampling Flashcards
Section 14.1: Sampling Fundamentals
What causes underliance?
- The auditor’s sample did not represent the population, even though the auditor thought it would.
- The sample deviation rate was more than the tolerable rate.
- The actual deviation rate was less than the tolerable rate.
Section 14.1: Sampling Fundamentals
What are the components of attribute samples in test of controls?
A “POET” has many attributes
* Population Size
* Overrliance risk
* Expected population deviation rate
* Tolerable population deviation rate
Section 14.1: Sampling Fundamentals
What are the components of variable samples in test of controls?
The amount of “REST” varies
* Risk of material misstatement
* Expected deviation of material misstatement
* Sample risk
* Tolerable misstatement
Section 14.1: Sampling Fundamentals
How is the sample size of a substantive test determined?
“Look at the TREES”
Tolerable Misstatement
Risks of Material Misstatement
Evidence
Expected Misstatement
Stratification of population (if relevant)
Section 14.1: Sampling Fundamentals
What is block sampling?
- Block sampling randomly selects groups of items as sampling units instead of individual units.
- An advantage of block sampling is that is avoids the use of random numbers to identify the population
Section 14.1: Sampling Fundamentals
What is systematic sampling?
- Systematic sampling is based on a certain number.
- The items should be arranged randomly
- The value of the number selected is computed based on the population and the number of sampling units.
Section 14:1: Sampling Fundamentals
What is a sampling risk?
- A sampling risk is the risk that if the auditor’s procedures used is based on the sample alone, it will be different than if the auditor applied the same procedure to the entire population.
- Sample size is inversely related to level of acceptable sampling risk.
Section 14.1: Sampling Fundamentals
What is nonsampling risk?
- Nonsampling risk occurs when the auditor forms an incorrect conclusion for any reason that does not relate to a sampling risk.
- Nonsampling risk can happen when the auditor fails to recognize misstatements.
- The misstatements can be reduced by proper planning and controls, as well as following the firm’s quality control standards.
Section 14.1: Sampling Fundamentals
What are examples of nonsampling risks?
- The auditor uses inappropriate audit procedures.
- The auditor misinterprets audit evidence.
- The auditor fails to recognize a misstatement or deviation.
Section 14.1: Sampling Fundamentals
What is the correaltion between acceptable levels of incorrect acceptance, desired assurance and tolerable misstatement?
As incorrect acceptance is lower, desired assurance is higher and tolerable misstatement is lower.
A smaller sample size is used to find misstatements.
Section 14.1: Sampling Fundamentals
What is Unrestricted Random Sampling?
Unrestricted random sampling is when each item in the population has an equal or nonzero chance of being selected.
Section 14.1: Sampling Fundamentals
What is the difference between unrestricted random sampling with replacement and without replacement?
- Unrestricted random sampling with replacement is when an item is used more than once in a sample.
- Unrestricted random sampling without a replacement will cause the item to be removed from the population after it has been selected.
Section 14.1: Sampling Fundamentals
What is an auditor required to do when using sampling for substantive test of details?
- Project the sample misstatement results to the population.
- Determine the tolerable misstatement
- Select a sample
Section 14.1: Sampling Fundamentals
What is Stratum?
- A stratum is a variance within a subpopulation.
- A stratum allows the auditor to have a smaller sample and have the precision stay at the same level.
Section 14.1: Sampling Fundamentals
What causes the sample size to increase?
The sample size increases when:
* The expected misstatements increases
* The population variability increases
* The assessed level of risk increases
Section 14.1: Sampling Fundamentals
What causes the sample size to decrease?
The sample size will decrease when:
* The tolerable misstatement increases
* The acceptable level of risk increases
Section 14.2: Statistical Attribute Sampling in Tests of Controls
What is true deviation rate?
The true deviation rate is the actual rate of deviations in the population.
Section 14.2: Statistical Attribute Sampling in Tests of Controls
What is the difference between attribute and variable sampling?
- Attribute sampling: Deviation Rates
- Variable Sampling: Quantities or Dollar amounts
Section 14.2: Statistical Attribute Sampling in Tests of Controls
What causes and incorrect acceptance (effectiveness) when testing controls?
Auditor’s sample deviation rate < the tolerable misstatement
True deviation rate > the tolerable misstatement.
Section 14.2: Statistical Attribute Sampling in Tests of Controls
What should an auditor consider when assessing the tolerable rate of deviations for a test of controls?
- The auditor should consider that deviations from a specific control may increase the risk of misstatement, but it may not result in a misstatement.
- Deviations from a specific control at a given rate ordinarily result in misstatements at the financial statement level at a lower rate.
Section 14.2: Statistical Attribute Sampling in Tests of Controls
What causes an incorrect rejection (efficiency) in attribute sampling test of controls?
Auditor’s sample deviation rate > the tolerable misstatement
True deviation rate < the tolerable misstatement
Section 14.2: Statistical Attribute Sampling in Tests of Controls
What are the steps to determine Population Rate?
Step 1: Determine the number of sample population.
Step 2: Calculate the sample error rate
Step 3: Calcuate the upper deviation rate
Step 4: Determine if control is effective
Step 5: Calculate the Allowance for Sampling Risk (Precision)
Section 14.2: Statistical Attribute Sampling in Tests of Controls
When is the planned reliance ineffective?
The sample deviation rate > expected population deviation rate
The upper deviation rate > tolerable deviation rate
Section 14.2: Statistical Attribute Sampling in Tests of Controls
How is the size for an attribute sample determined for a test of controls in attribute sampling?
- Desired Assurance that the actual population rate does not exceed the tolerable population deviation rate.
- Tolerable population deviation rate
- Expected population deviation rate
- Population size
Section 14.2: Statistical Attribute Sampling in Tests of Controls
What is the Allowance for Risk Sampling (Precision) Calculation?
Upper Deviation Rate
(Sample Error)
Section 14.2: Statistical Attribute Sampling in Tests of Controls
When is the allowance control effective after calculating the Allowance for Sampling Risk?
The allowance is effective when the Upper Deviation Rate < Allowance for Sampling Risk
Section 14.2: Statistical Attribute Sampling in Tests of Controls
What is the result when the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate?
The auditor will reduce the planned reliance on the prescribed control.
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is Mean-per-Unit Sampling?
- The mean-per-unit method projects the sample average of the total population.
- The mean-per-unit method is used it the underlying documents that support the account balance are not available
- It determines the estimated population amount by averaging the audit amount of sample items and multiplies the average by the number of items in the population
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What are the four factors are considered in determining the sample size for mean-per-unit estimation?
- Population Size
- Estimate of Population Variation (Standard Deviation)
- Risk of Incorrect Rejection
- Tolerable Misstatement
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is dual-purpose testing?
- Duel purpose testing uses both attribute and variable testing.
- It is used when a deviation from a control is acceptable.
- It may require substantive testing
- The sample size is larger of the two samples.
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What are the steps to calculate Mean-Per-Unit?
Step 1: Calculate the Point Estimate (Extending the Average)
Step 2: Calculate the Estimating the Population Misstatement
Step 3: Calculate the Margin of Error
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calculation to determine the Point Estimate?
Number of items in a population
x Average Amount Based on Sample
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calculate for the Population Misstatement?
Point Estimate
(Client Established Amount)
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calculate to determine the Margin of Error?
Number of Items in Population
x Average Deviation Amount
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is Ratio Estimation?
- Ratio estimation sampling is only effective when the dollar amount of the differences between the audit and book value is expected to be proportional to the book value.
- Ratio estimation requires smaller samples sizes
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What are the steps to determine the ratio estimate when using
- Step 1: Calculate the difference between the sample’s true audited value and the book value
- Step 2: Calculate the Proportion of the Sample Misstatement
- Step 3: Calculate the Estimated Population Misstatement
- Step 4: Calculate the estimated year-end balance
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calcualtion to determine the Estimated Population Misstatement?
Total Recorded Value
x Proportion of Sample Estimate
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calculation to determine Proportion of the Sample Misstatement?
The difference between the sample’s true audited value and the book value / Recorded Value of the Sample
Section 14.3: Classical Variables Sampling (Mean-per-Unit)
What is the calculation to determine the estimated year-end balance?
Total Recorded Value
+ Estimated Population Misstatement
Section 14.4: Monetary-Unit Sampling (MUS)
What is the sampling based on in monetary-unit sampling?
- Monetary-unit sampling is based on the dollar unit ($), not the invoice.
- The population is effectively stratisfied because monetary-unit sampling increases the probability of selecting large items.
- Monetary-unit sampling is based on the Poisson distribution.
Section 14.4: Monetary-Unit Sampling (MUS)
How is the risk of incorrect acceptance determined when using monetary-unit sampling?
- In monetary-unit sampling, the auditor can measure can control risks associated with observing less than 100% of the population.
- The auditor can then measure the risk of accepting the recorded amount as fair, even though it may be materially misstated.
Section 14.4: Monetary-Unit Sampling (MUS)
How is the projected misstatement calculated when the recorded amount is greater than the sampling internval in Monetary-Unit Sampling?
If the recorded amount is greater than the sampling interval, then the projected misstatement will be the recorded amount of the item.
