Chapter 5

Question 1

What is audit sampling?

Answer 1

The examination of less than 100% of the population and using the results to draw a general conclusion on the entire population.

Question 2

What is nonsampling risk and how can it be reduced?

Answer 2

Risk that test results will be misinterpreted due to human error Can be reduced by using qualified staff and good supervision and review

Question 3

What is sampling risk?

Answer 3

Risk that a sample will not be representative of the population, causing the auditor to draw a bad conclusion

Question 4

What is a Type I sampling risk?

Answer 4

“Efficiency” risk.

Population is okay, but based on the sample, you don’t rely

Incorrectly reject an account balance

Question 5

What is Type II sampling risk?

Answer 5

“Less effective” risk

Population is bad, but based on sample the auditor decides to rely

Incorrectly accept an account balance

Question 6

What is the tolerable deviation rate?

Answer 6

Percentage of time a control can be violated but still lead the auditor to believe it is operating effectively.

Question 7

What does it mean when the true deviation rate is lower than the tolerable deviation rate and vice versa?

Answer 7

If the true deviation rate is < the tolerable deviation rate then the auditor will rely on the control and reduce RMM

If the true deviation rate is > the tolerable deviation rate then the auditor will not want to rely on the control and increase RMM

Question 8

What type of sampling is used for internal control?

Answer 8

Attribute and/or statistical/judgment

Question 9

What type of sampling is used for substantial evidence?

Answer 9

Variable and/or statistical/judgemental

Question 10

What is the relationship between tolerable rate of error, expected rate of error, and acceptable risk of RMM being too low to sample size for attribute sampling?

Answer 10

Tolerable rate of error has an inverse relationship to sample size

Expected rate of error has a direct relationship to sample size

Acceptable risk has an inverse relationship to sample size

Question 11

What are the three key factors used to determine an appropriate sample size?

Answer 11

Tolerable deviation rate

Expected deviation rate

Allowable risk of assessing risk of material misstatement

TEA

Question 12

What is expected deviation rate?

Answer 12

Percentage of time the auditor expects the control to have been violated

Question 13

What is the allowable risk of assessing risk of material misstatement too low?

Answer 13

Risk the auditor uses a sample that causes them to rely on the control when in reality it should have not been relied on.

Question 14

What are the steps to evaluating the results of a sample?

Answer 14

1. Calculate the sample deviation rate
2. Determine the allowance for sampling risk
3. Add the two figures together to obtain the maximum deviation rate
4. Compare the max deviation rate to the tolerable deviation rate
5. If the max dev rate is > tolerable rate, don’t rely. If

Question 15

What is mean-per-unit estimation?

Answer 15

Type of variable sampling that measures the value in a sample to determine an average value and then applying the average to a population

Question 16

What is difference estimation?

Answer 16

Type of variable sampling that compares the recorded amounts to actual amounts of a sample and then projecting that error onto the population

Question 17

What is ratio estimation?

Answer 17

Type of variable sampling where the relationship between items in a sample is projected onto the population