Chapter 16: Audit Sampling

Question 1

What is 100% selection in audit sampling, and when is it appropriate?

Answer 1

100% selection involves examining all items in a population. It is appropriate when:
1. The population consists of a small number of large-value items.
2. There is a significant risk that cannot be reduced by other means.
3. 100% examination is cost-effective due to repetitive calculations or automated processes.
4. The population is not homogeneous (items do not share common characteristics).

Question 2

What is specific item selection, and what types of items are typically selected?

Answer 2

Specific item selection (or judgmental selection) involves choosing specific items for examination based on auditor judgment. Relevant items include:
1. All items over a certain amount (to verify a large portion of the total amount).
2. Key items with certain characteristics (e.g., high risk, unusual, or error-prone items).
3. Items to obtain information about the nature of the entity or transactions.

Question 3

What is audit sampling, and what is its objective?

Answer 3

Audit sampling is the application of audit procedures to less than 100% of items within a population, with all items having a chance of selection. Objective: To provide a basis for conclusions about the entire population. Used in Tests of Controls and Tests of Details.

Question 4

What is sampling risk, and what are its two types?

Answer 4

Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion if the entire population were tested. Two types:
1. Risk of under-reliance (Incorrect Rejection): Auditor concludes controls are less effective or material misstatement exists when they do not.
2. Risk of over-reliance (Incorrect Acceptance): Auditor concludes controls are more effective or material misstatement does not exist when it does.

Question 5

What is non-sampling risk, and how can it be reduced?

Answer 5

Non-sampling risk is the risk that the auditor’s conclusion is wrong for reasons other than sampling (e.g., inappropriate procedures, misinterpretation of evidence). Reduction: Proper planning, supervision, and review.

Question 6

What is stratification in audit sampling, and how does it reduce sampling risk?

Answer 6

Stratification involves subdividing a population into segments with similar characteristics (e.g., by monetary value or risk). Reduction of sampling risk: By focusing on high-value or high-risk segments, the auditor can select a more representative sample.

Question 7

What are the steps involved in audit sampling?

Answer 7

1. Sample Design:
   - Determine purpose and population.
   - Define deviations or misstatements.
   - Assess tolerable and expected rates of deviation/misstatement.
   - Choose sampling approach (statistical or non-statistical).
   - Determine sample size and select items.
2. Perform Audit Procedures on the sample.
3. Project Rate of Deviation/Misstatement.
4. Evaluate Results.

Question 8

What is the difference between tolerable rate of deviation and tolerable misstatement?

Answer 8

Tolerable Rate of Deviation: A percentage set by the auditor for controls, ensuring the actual deviation rate does not exceed this threshold. Tolerable Misstatement: An amount set by the auditor for financial statements, ensuring the actual misstatement does not exceed this amount.

Question 9

What are the advantages and disadvantages of statistical sampling?

Answer 9

Advantages:
1. Based on scientific techniques.
2. Sample size calculated accurately and objectively.
3. Free from bias and easily defensible.
Disadvantages:
1. Lacks human judgment.
2. Requires investment, training, and technical expertise.
3. May result in larger sample sizes.

Question 10

What factors influence sample size in tests of controls and tests of details?

Answer 10

Tests of Controls:
1. Tolerable rate of deviation (decrease → smaller sample).
2. Expected rate of deviation (increase → larger sample).
3. Desired level of assurance (increase → larger sample).
Tests of Details:
1. Tolerable misstatement (decrease → larger sample).
2. Expected misstatement (increase → larger sample).
3. Stratification (decrease → smaller sample).

Question 11

What are the methods of sample selection in audit sampling?

Answer 11

1. Systematic Selection: Selecting every nth item after a random start.
2. Random Selection: All items have an equal chance of selection.
3. Haphazard Selection: Arbitrary selection without a structured technique.
4. Block Selection: Selecting a complete block of adjacent items (e.g., all invoices for a specific month).

Question 12

What is an anomalous error, and how should it be treated?

Answer 12

Anomalous Error: A deviation or misstatement caused by a one-off event (e.g., error by a temporary employee). Treatment: Exclude from projection but include in the list of identified misstatements.

Question 13

How is projected misstatement calculated in tests of details?

Answer 13

Formula: Projected Misstatement = (Misstatement in Sample / Sample Size) * Population

Question 14

How are sampling results evaluated in tests of controls and tests of details?

Answer 14

Tests of Controls:
- If projected deviation rate < tolerable rate → controls are effective.
- If projected deviation rate > tolerable rate → increase control risk.
Tests of Details:
- If projected misstatement < tolerable misstatement → no further work needed.
- If projected misstatement > tolerable misstatement → request management to investigate and adjust.

Question 15

What is the difference between tolerable misstatement and performance materiality?

Answer 15

Tolerable Misstatement: The maximum misstatement the auditor can accept in a population.
Performance Materiality: A lower threshold set by the auditor to reduce the risk of aggregate misstatements exceeding materiality.