Chapter 8: Audit Sampling

Question 1

Sampling risk

Answer 1

The possibility that the sample drawn is not representative of the population and that, as a result, the auditor will reach an incorrect conclusion about the account balance or class of transactions

Question 2

Nonsampling risk

Answer 2

Risk that the auditor reaches an erroneous conclusion for any reason that is not related to sampling risk
OR
The risk that audit tests do not uncover existing exceptions in the sample

Question 3

T/F: The auditor should not always assume that there is sampling risk

Answer 3

False, the auditor must always assume that there is some sampling risk because he or she is not examining all items in a population

Question 4

Two types of decision errors the auditor may face when evaluating a sample

Answer 4

1. Type I (risk of incorrect rejection)
2. Type II (risk of incorrect acceptance)

Question 5

Type I Error

Answer 5

Risk of Incorrect Rejection OR Risk of UNDER reliance OR Risk of Assessing Control Risk Too High
(Internal Control) The risk that the sample supports a conclusion that the control is not operating effectively when, in truth, the control is operating effectively
(Substantive Testing) The risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is actually not materially misstated

Question 6

Type II Error

Answer 6

Risk of incorrect acceptance OR Risk of OVER reliance OR Risk of Assessing Control Risk Too Low
(Internal Control) The risk that the sample supports a conclusion that the control is operating effectively when, in truth, the control is NOT operating effectively
(Substantive Testing) The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is actually materially misstated

Question 7

Which type of error deals with efficiency?

Answer 7

Type I
This means that more work than necessary happened

Question 8

Which type of error deals with effectiveness

Answer 8

Type II
This means that the auditor completely reached the wrong conclusion

Question 9

Which type of error do auditors care about more?

Answer 9

Type II

Question 10

Two causes of nonsampling risk

Answer 10

1. Auditor’s failure to recognize exceptions
2. Inappropriate or ineffective audit procedures

Question 11

What factors are needed to determine sample size?

Answer 11

1. Confidence level
2. Tolerable deviation rate
3. The expected population deviation rate

Question 12

Confidence level

Answer 12

• Desired level of assurance in the results
• The complement of sampling risk (completes sampling risk)

EX: Auditor may set sampling risk at 5%, which results in 95% confidence level

Question 13

Tolerable Deviation Rate

Answer 13

The maximum deviation rate from a prescribed control that the auditor is willing to accept and still consider the control effective

Question 14

Expected Population Deviation Rate

Answer 14

The rate the auditor expects to exist in the population.

Question 15

What is the relationship between expected population deviation rate and sample size?

Answer 15

The larger the expected population deviation rate, the larger the sample size
THEY HAVE A DIRECT EFFECT ON ONE ANOTHER

Question 16

What is the relationship between desired confidence level and sample size?

Answer 16

The larger the confidence level, the larger the sample size
THEY HAVE A DIRECT EFFECT

Question 17

What is the relationship between tolerable deviation rate and sample size?

Answer 17

The larger the tolerable deviation rate, the smaller the sample size
THEY HAVE AN INVERSE EFFECT

Question 18

What is the relationship between population size and sample size?

Answer 18

Population size decreases sample size only when population size is small (fewer than ~500-1000 items)

Question 19

Attribute sampling

Answer 19

Used to estimate the proportion of a population that possesses a specified characteristic. Most commonly used with test of controls

In the case of control testing, the auditor wants to determine the proportion of the population for which a control is not effective (AKA deviation rate)

Question 20

How does an auditor estimate expected population deviation rates?

Answer 20

Prior year results, maybe prior example

Question 21

T/F: If the expected population deviation rate is larger than the tolerable deviation rate; then just do substantive tests

Answer 21

True

Question 22

Sample deviation rate = ?

Answer 22

Number of deviation/sample size

Question 23

What are the types of Audit Sampling

Answer 23

1. Statistical sampling
2. Nonstatistical sampling

Question 24

Statistical sampling

Answer 24

Uses the laws of probability to compute sample size and evaluate results. Auditor is able to use the most efficient sample size and quantify sampling risk

Question 25

Nonstatistical sampling

Answer 25

Judgmental sampling
Auditor does not use statistical techniques to determine sample size, select the sample items, or measure sampling risk

Question 26

When is an approach nonstatistical?

Answer 26

1. Judgment is used instead of a statistical formula to determine the sample size
2. A haphazard sample selection technique is used
3. The sample results are evaluated judgmentally

Question 27

Advantages of statistical sampling

Answer 27

1. Design an efficient sample
2. Measure the sufficiency of evidence obtained
3. Quantify sampling risk

Question 28

Disadvantages of statistical sampling

Answer 28

1. Training auditors in proper use
2. Time to design and conduct sampling application
3. Lack of consistent application across audit teams

Question 29

Do testing results support operating effectiveness of the control if computed upper deviation rate is more than or less than the tolerable deviation rate?

Answer 29

Less than

Question 30

Can controls tested be relied upon if the computed upper deviation rate is more than or less than the tolerable deviation rate?

Answer 30

Less than

Question 31

Computed upper deviation rate equation

Answer 31

Allowance for sampling risk + sample deviation rate