Chapter 6 Flashcards
Statistical sampling
involves random selection and probability theory to determine the sample size and evaluate the results, including sampling risk
Non-statistical sampling
any sample selection method that does not have the characteristics of statistical sampling
An advantage of statistical sampling
is that it allows an auditor to measure sampling risk; that is, the risk that the sample chosen by the auditor is not representative
Disadvantage of statistical sampling
is the cost involved in using this technique
Advantage of Non-statistical sampling
is easier to use than statistical sampling, is lower cost, and allows an auditor to select a sample that they believe is appropriate
What will be an auditor’s strategy when control risk is assessed as high?
No tests of controls
Detection Risk
Increased reliance on substantive tests of transactions and account balances
What are the two broad purposes of tests of controls?
operate effectively, meaning that the rate of deviation from prescribed control procedures are minimized and controls effectively prevent and detect material misstatements, and
operate consistently throughout the accounting period.
What are the three main categories of substantive procedures?
Nature of audit testing - refers to the purpose of the test (that is, to test controls, transactions, or account balances) and the procedure used (that is, inspection, observation, enquiry, confirmation, recalculation, re-performance, or analytical procedures).
Timing of audit testing - refers to the stage of the audit when procedures are performed and the date, such as within or outside the accounting period, that audit evidence relates to.
Extent of audit testing - refers to the amount (quantity) of audit evidence gathered when testing controls and conducting detailed substantive procedures.
What are the two most common types of testing that can be started during the interim audit?
Tests of controls
Substantive testing of transactions
What does the extent of audit testing refer to?
refers to the amount (quantity) of audit evidence gathered when testing controls and conducting detailed substantive procedures.
What is audit sampling?
the application of audit procedures to less than 100 percent of items within a population
When is it appropriate to use audit sampling?
When an audit procedure is tested on an entire group of transactions (for example, the purchase of machinery) or all items within an account balance (for example, motor vehicles), sampling is not required
Sampling Risk
the risk that the sample chosen by the auditor is not representative of the population available for testing and, as a consequence, the auditor arrives at an inappropriate conclusion
How does sampling risk relate to tests of controls and substantive testing?
When conducting substantive tests, sampling risk is the risk that an auditor concludes that a material misstatement does not exist when it does or an auditor concludes that a material misstatement exists when it does not.
What is non-sampling risk?
is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.
What is the difference between random and haphazard sample selection?
Random - process whereby a sample is selected free from bias and each item in a population has an equal chance of selection
Haphazard - the selection of a sample without use of a methodical technique
What is the risk in using systematic sample selection?
The risk in using systematic selection is that items will be listed in such a way that by selecting every nth item, the auditor is selecting items that are related in some way.
What factors should be considered when selecting a sample?
When selecting a sample, an auditor will use their judgement and knowledge of the client to determine control risk, detection risk, and planning materiality, all of which impact the sample size.
Understand the difference between tests of controls and substantive tests.
The purpose of tests of controls is to assess the effectiveness of a client’s system of internal controls throughout the accounting period being audited. The purpose of substantive testing is to gather direct evidence that the financial statements are free from material misstatement
Explain the factors that impact the nature, timing, and extent of audit testing.
The nature of audit testing refers to the purpose of the test and the procedure used. The timing of audit testing refers to the stage of the audit when procedures are performed and the date, such as within or outside the accounting period, that audit evidence relates to. The extent of audit testing refers to the amount of audit evidence gathered when testing controls and conducting detailed substantive procedures.
Explain how audit sampling is used in an audit.
When creating an audit plan and designing audit procedures, an auditor also decides how to select appropriate items for testing. When there are numerous transactions or items within an account balance available for testing, an auditor must decide how best to select a sample that is representative of the entire population of items available for testing.
Understand the difference between sampling and non-sampling risk.
Sampling risk is the risk that the sample chosen by the auditor is not representative of the population of transactions or items within an account balance available for testing and, as a consequence, the auditor arrives at an inappropriate conclusion. Non-sampling risk is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues, such as an auditor using an inappropriate audit procedure
Differentiate between statistical and non-statistical sampling.
Statistical sampling involves random selection and probability theory to evaluate the results. Non-statistical sampling is any sample selection method that does not have these characteristics.
Describe sampling methods and the factors to be considered when choosing a sample.
Sampling methods include random selection, systematic selection, haphazard selection, block selection, and judgemental selection. Before selecting a sample, an auditor will set parameters pertaining to control and detection risk, planning materiality, population, tolerable error rate, and the required level of confidence. Once these parameters are set, an auditor may select a sample using a statistical or non-statistical sampling technique.
Determine the factors that influence the sample size when testing controls.
When testing controls, the factors that influence the sample size include the extent to which the risk of material misstatement is reduced by the operating effectiveness of controls, the rate of deviation from the prescribed control activity that the auditor is willing to accept, the rate of deviation from the prescribed control activity that the auditor expects to find in the population, the auditor’s required confidence level, and the number of sampling units in the population.
Determine the factors that influence the sample size when substantive testing.
When conducting substantive testing of transactions and balances, the factors that influence the sample size include the auditor’s assessment of the risk of material misstatement, the use of other substantive procedures directed at the same assertion, the auditor’s required confidence level, the tolerable error, the amount of error the auditor expects to find in the population, the stratification of the population, and the number of sampling units in the population.
Outline how to evaluate the results of tests conducted on a sample.
When testing controls, the auditor will compare the rate of deviation with the tolerable rate of deviation and determine whether they believe that the control tested is effective in preventing and/or detecting a material misstatement. When testing transactions and balances, the error in the sample will be projected onto the population and then compared to the tolerable error rate. The auditor will then determine whether the class of transactions or account balance being tested appears to be materially misstated.
