Chapter 17 Audit Sampling Flashcards
When auditor use 100% selection for testing?
> 100% selection:
Auditor may select 100% of the population in the following cases:
1) When the population consists of a small number of large-value items.
2) When there is a significant risk which can not be reduced by other means.
3) 100% selection is cost-effective due to the repetitive nature or procedure performed by an information system.
4) When the population is not homogenous.
How specific items for selection is used by auditor?
1) Selecting items higher than a specific amount.
2) Key items with certain characteristics. e.g. risky areas
3) Items for certain information. e.g. about the nature of the entity
what is sampling?
It is the application of procedures to less than 100% of the population in such a way that each sampling unit has an equal chance of selection. The objective of sampling is to draw conclusion on the entire population.
Auditor perform sampling on test of details and test of control.
Explain Sampling risk. and how to reduce it.
The risk that auditor’s conclusion based on the sample might be different if the entire population was selected. This happens when the sample is not representative of the population.
It can be reduced by increasing sample size and stratification.
What is stratification?
In stratification, the population is sub-divided into different segments based on monetary values or other particulars i.e. area or age, with same characteristics, and the sample is selected from each segment.
Explain non-sampling risk and how to reduce it.
The risk that auditor’s conclusion might be wrong b/c of reasons other than sampling risk.
i.e. inappropriate procedures, misinterpretation of evidence.
It can be reduced by proper planning, supervision, and review.
Provide examples of sampling and non sampling risk.
Sampling risk:
> Risk of under reliance/rejection of right:
1) Internal controls are not effective when actually are effective
2) There is a material misstatement when actually not.
It affects efficiency of audit.
> Risk of over-reliance/ Acceptance of wrong:
1) The internal controls are effective when actually not.
2) There is no misstatement when actually there is.
It affects the effectiveness of the audit.
Non-sampling risk:
Risk that:
> Not adequate planning was made
> Not enough procedures were performed
> Sufficient and appropriate Evidence was not obtained.
> A required procedure was not performed.
What are the steps in performing audit procedures on sampling?
1) Sample design
2) Performing audit procedures on sample
3) Projection of rate of deviation and misstatements of sample.
4) Evaluating results of sample.
Define Tolerable rate of deviation and tolerable misstatement.
> Tolerable rate of deviation:
It is the rate of deviation set by the auditor in respect of which the auditor obtains assurance that the actual rate of deviation in the population does not exceed the rate set by the auditor.
> Tolerable misstatement:
It is the amount of misstatement set by the auditor in respect of which the auditor obtains assurance that actual misstatement in the population does not exceed the amount set by the auditor.
Explain statistical and non statistical Sampling approach.
> Statistical Sampling:
It involves a random selection of items and the application of probability theory to evaluate the results of the sample and the determination of sampling risk.
> Non-statistical sampling:
It does not involve the characteristics of statistical sampling, it involves the auditor’s professional judgment.
Explain the steps involved in designing a sample.
1) Determine the purpose and population of the sample:
Purpose: Test of controls, Test of details, Test for understatement or overstatement.
2) Define Deviation and misstatement:
e.g.
> If there is a timing difference - No misstatement.
> If the auditor wants to check the accuracy of debtors - posting the balance to the wrong account is not a misstatement b/c total will be correct.
> If documentation relating to any item is missing - it is misstatement.
3) Determine tolerable rate of deviation and tolerable misstatement
4) Make an assessment of expected rate of deviation and expected misstatement:
It is the professional judgement and depends on the auditor’s understanding of entity and past experience and knowledge.
5) Determine sampling approach:
it is auditor’s judgement to determine whether to use statistical or non statistical sampling approach.
6)
Identify factors which affects sample size for:
1) Test of controls
2) Test of details
1) Test of details:
> Tolerable misstatement
> Expected misstatement
> Desired level of assurance
> Other substantive procedures
> Population size
> Stratification
2) Test of controls:
> Tolerable rate of deviation
> Expected rate of deviation
> Desired level of assurance
> Extend to which auditor plans to rely on controls.
> Population size
Describe different methods for sample selection.
1) Systematic selection:
In this method, a sample is selected and the population is divided by the sample. This gives a sampling interval. Then randomly select an item from the first sampling interval. And then select every nth term.
2) Random selection:
Random numbers are used to select items for testing.
3) Haphazard selection:
Auditor select items on an arbitrary basis without any structured technique.
4) Block selection:
A complete block of items of adjacent items.
Describe the procedures performed on sample.
1) Audit procedures are not applicable to the selected item:
e.g. If a cheque is cancelled, auditor shall perform procedures on its replacement item.
2) Auditor is unable to perform procedures on a selected item:
e.g. If a cheque/document is missing, this shall be treated as misstatement(in case of test of details) or deviation(in case of test of controls)
Describe the types of misstatement/deviation in the sample.
1) Anomalus:
The auditor shall obtain a high level of certainty that it does not affect the remaining misstatement/deviation in the population.
This shall not be included in the projection but still be included in the list of identified misstatements.
2) Sharing common features:
The auditor shall select all such items in the population and revise the nature, timing, and extent of procedures and also include the risk of fraud if it appears intentional.
