CHAPTER 17 - Sampling Flashcards
what are different types of selecting items for testing?
1) 100% Selection
2) Specific item selection
3) Audit sampling
Describe the circumstances in which an auditor may decide to examine entire population of items that make up an account balance.
1) pooulation consist of small no of large balances, or
2) There is significant risk which can reduced by other means, or
3) 100% examination becomes cost effective due to repititive nature of calculation or other process performed automatically by an information system
4) population is not homogeneous (item sin population do not share common characteristics.
which items may be relevant for auditor while selecting specific items for examination ?
1) All items over a certain amount ( ton verify a large portion of total amount)
2) Key items showing certain characteristics (items with high risk)
3) Items to obtain information(about nature of entity)
What is Audit sampling?
Audit sampling is the application of audit procedures to less than 100% of items within a population selected in such a way that all sampling units have a chance of selection. Objective of sampling is to provide basis for conclusion about entire population.
auditor uses audit sampling in “TEST OF CONTROL AND TEST OF DETAILS”
What are the reason of detection risk ?
1) sampling risk
2) non-sampling risk
What is sampling risk?
sampling risk is the risk that auditor’s conclusion base on sampling might be different from the conclusion if entire population would have been tested. this will be happen if sample is not representative of population
Briefly explain the types of sampling risk?
1) Risk of under-reliance (affecting audit efficiency leading to increased work)
*Auditor thinks controls are less effective (in test of control)
*Auditor thinks material misstatements exists ( in test of details)
2) Risk of over-reliance (affecting audit effectiveness leading to incorrect opinion)
* Auditor thinks controls are more effective (in test of controls)
* Auditor thinks material misstatements doesn’t exists (in test of details)
How to reduce sampling risk?
by increase in sample size and stratification
what is stratified sampling?
It is called startification.
in stratification, population is sub-divided into different segments (which have same characteristics) and then sample is selected from each segment. population can be stratified by:
* monetary value (to focus on large value items)
* other particular characteristics (Reciables may be stratified by age)
what is non-sampling risk?
Non-sampling risk is risk hat auditor’s concllusion may be wrong for any reason other than sampling risk ( use of inappropriate procedures by auditor)
It should be zero
How to reduce non-sampling risk?
By proper planning,supervision and review
What steps involves in sampling ?
1) Sample design
2) Performing Audit procedures
3) Projecting rate of deviation/misstatement
4) Evaluating results of sampling
What are the steps of sample design ?
1) Determine purpose and population for sampling
2) Define what will be deviation or misstatement
3) Make assessment of tolerable Rate of deviation or tolerable misstatement.
4) Make assessment of expected rate of deviation or expected misstatement
5) Determine sampling approach
6) Determine sample size
7) Select items by choosing appropriate method
Define tolerable rate of deviation?
A tolerable rate of deviation set by auditor in respect of which the auditor obtains assurance that the actual rate of deviation in the population does not exceed the rate of deviation rate set by the auditor
Define tolerable Misstatement ?
It is the amount of misstatement set by auditor for which auditor obtains assurance that the actual amount of misstatement does not exceed the amount of misstatement set by auditor
Define statistical sampling
A sampling approach that involves random selection of items and application of probability theory to evaluate results of the sample and measurement of sampling risk
Define non-statistical sampling
A sampling approach that does not involves characteristics of statistical sampling. It is based on auditor judgement
What are the advantages of statistical sampling?
1) It is based on scientific technique.
2) Using scientific techniques, sample size can be calculated accurately, precisely and objectively
3) It is free from bias and can be easily defended review
4) special softwares are available.
5) It is mean of efficient auditing in case of large population
What are the Disadvantages of statistical sampling ?
1) Lacks Human judgement and over-emphasizes statistical conclusion.
2) Investment, Training and technical expertise are required for statistical sampling
3) As the technique is not easily understood, false conclusion may also be drawn
4) Sample size may be larger than under a judgemental approach
What are the methods of sample selection?
1) systematic selection
2) Random selection
3) Haphazard
4) Block selection
What course of action required if projected misstatements is below tolerable misstatements?
Population is not materially misstated. No further work necessary.
What course of action required if projected misstatements is above tolerable misstatements?
Auditor shall;
1) Request management to investigate identified misstatements and search further misstatements to make adjustments.
2) Revise the nature, timing and extent of further audit procedures. e.g. increase in related substantive procedures
What course of action required if projected deviation rate is below tolerable rate of deviation ?
Controls are operating effectively. Auditor can rely on internal control, and can decrease substantive testing.
What course of action required if projected deviation rate is above tolerable rate of deviation?
Auditor shall increase his assessment of control risk, and may place no reliance on controls
Define anomalous error. And how should it be treated at the time of projecting sample errors to the population?
Anomaly error is a deviation or misstatements that occurs because of one-off event and is not representative of misstatements or deviations in a population e.g. error by a temporary employee.
Auditor shall not consider it for projection.
Name the types of deviation and misstatements
1) Anomalous
2) Sharing common features
What should auditor do if deviation and misstatements are anomalous?
Auditor shall obtain high degree of certainty that the deviation or misstatements does not affect remainder of the population. Auditor shall not consider it for projection. However, this still shall be included in list of identified misstatements
What should auditor do if the deviation and misstatements are sharing common features ?
Auditor shall select all such items in the population and shall extend his procedures on those items. If such deviation/misstatement are intentional, auditor shall also increase risk of fraud
What course of action required by auditor if audit procedures is not applicable to selected item?
Auditor shall perform procedures on its replacement
for example, if a cheque is cancelled then auditor can perform procedure by selecting very next cheque.
What should auditor do if auditor is unable to apply desired or alternative procedures on selected item?
Auditor shall treat this as deviation (in case of test of control) and misstatement (in case of test of details).
for example, If a cheque/document is lost
Explain systematic selection.
In this method, first sample size is determined and then total no of units in a population are divided by the sample size. this gives a sampling interval. A random starting point is chosen and then every nth item is selected
Explain random selection
In this method, all items in the population have a equal chance of selection. Random no are used to select items for testing.
Explain Haphazard selection
In this method, Auditor select the sample on arbitrary basis, without a structural technique e.g. choosing any 100 item from population. Haphazard se;lection is not appropriate when using statistical sampling beacuse sample may contain bias.
Explain Block selection.
Block selection involves selection of a complete block of adjacent items from the population. e.g. selecting all sales invoices of a particular week or a month.
What factors influence determination of sample size in test of controls?
1) Tolerable rate of deviation
2) Expected rate of deviation
3) Desired level of assurance
4) Extent to which auditor plans to rely on controls
5) Population size
What factors influence determination of sample size in test of details?
1) Tolerable misstatements
2) Expected misstatements
3) Desired level of assurance
4) Stratification of population
5) Other substantive procedures
6) Population size
If tolerable rate of deviation increases in test of controls, then what would be effect on sample size?
decreases
If Expected rate of deviation increases in test of controls, then what would be effect on sample size?
Increases
If desired level of assurance increases in test of controls, then what would be effect on sample size?
increase
If tolerable rate of deviation increases in test of details, then what would be effect on sample size?
no effect, as this is not factor of test of details.
If extent to which auditor plans to rely on controls of deviation increases in test of controls, then what would be effect on sample size?
increases
If population size increases in test of controls, then what would be effect on sample size?
negligible effect
If tolerable misstatements increase in test of details, then what would be effect on sample size?
decreases
If tolerable misstatements increases in test of controls, then what would be effect on sample size?
no effect, as this is not factor of test of control.
If Expected misstatements increases in test of details, then what would be effect on sample size?
increases
If desired level of assurance increases in test of details, then what would be effect on sample size?
increases
If stratification of population increases in test of details, then what would be effect on sample size?
decreases
If other substantive procedures increase in test of details, then what would be effect on sample size?
decreases
If population size increases in test of details, then what would be effect on sample size?
negligible effect
If Expected rate of deviation increases in test of details, then what would be effect on sample size?
no effect, as this not the factor of test of details
