Chapter 9 Flashcards
Define Audit Sampling
Process of selecting and evaluating a sample of audit-relevant items from a population to the point that auditors can expect the sample to be representative
A sample is Representative is it is
one in which the characteristics in which characteristics in the sample of audit interests are APPROXIMATELY the same as those of the population.
Can one attribute absolute assurance to accuracy of financials?
No. Sampling is necessary in an audit due to practicality, which is why an opinion on assurance is given instead.
If an auditor would like to increase the likelihood of a representative sample, sample size should be (Increased/Decreased).
Increase. In addition, care in designing the process and evaluation the results will also increase likelihood.
A sample result can be nonrepresentative due to sampling or nonsampling risks. Define Nonsampling Risk
Risk audit tests do not uncover existing exceptions in the sample, but due to ineffective or inappropriate audit procedures.
Define Nonstatistical sampling
When the auditor tries to estimate sampling risk with professional judgement rather than susbtantial techniques
(Sampling risk/Nonsampling Risk) is an inherent part of sampling that results from testing less than the entire population.
Sampling Risk
If one would want to reduce sampling risk, one should (increase/decrease) sample size
Increase, and/or use the appropriate sample selection method, but keep in mind the risk can’t be totally avoided if testing less the entire population.
A sample result can be nonrepresentative due to sampling or nonsampling risks. Define sampling risk.
Risk an auditor reaches an incorrect conclusion due to the sample that would have been different had the entire populated been tested.
Name one of the three types of manners in which auditors select items for sample
- Random selection
- Haphazard selection
- Block selection
Describe some advantages of Statistical Sampling
See slide 8
Characteristics of Random Selection
- Every item in the population has an equal chance of being selected for inclusion in the sample
- Statistically unbiased sample is the result (of course, theres always a little bit of sampling risk but Random Selection reduces it)
- More probabilistic, thus must be used with statistical sampling and may be used for nonstatistical sampling.
What are some advantages of non-statistical sampling?
Usually more cost-effective and judgmental, thus widely used by auditors in practice especially for tests of relatively small populations.
True or False - All three methods can be used for statistical sampling
False. Haphazard and Block selection are considered NOT probabilistic. Thus, they may only be used with non statistical sampling. Random Sampling MUST be used with Statistical sampling, and MAY be used for non statistical sampling.
Whats an example of Random Selection techniques
- Random Number Tables - Systematic selection
- Random number generators
Define Stratification
Divides a population into relatively homogeneous subgroups. Allows for efficiency by allowing for smaller number of items to sample, while also enabling them to relate sample to materiality.
(Block/Haphazard) selection - selects items on an arbitrary basis and without any conscious bias.
Haphazard. Example is pulling invoices from all over a file drawer without regard to a certain characteristic.
Block Selection - Define It
A Block Sample consists of all items in a selected time period, numerical sequence, or alphabetical sequence, as opposed to individual transactions. Generally cannot be relied on as “representative”
Define Classical variables sampling
This is used to estimate the numerical quantity of a misstatement in population. Used often in substantive testing.
Probability-proportional-to-size sampling, or Dollar-Unit sampling, is a sampling plan that
Applies attribute sampling theory to develop an estimate of the total dollar amount of misstatement in population. This is an alternative to classical variables sampling.
Define Attribute Sampling, a statistical sampling plan
Estimates the rate of occurrence of certain population characteristics
Define a Dual Purpose Test
When one sampling plan is used for dual purposes, like test of control and a substantive test of dollar amount of an account balance.
Discovery sampling, a form of attribute sampling, is designed to do what?
locate at least one deviation/exception in the population (eg, looking for fraud in a series of disbursements). Used when a low rate of occurrence of a critical deviation is expected
There is always some degree of sampling error. What issampling error?
Difference between actual population rate/amount and the rate/amount indicated by sample.
What are Sampling Plans for?
Procedures used to accomplish specific audit objectives, such as estimating different population characteristics (attributes like occurrence rates and variables like numerical quantities).
After a test of control, if the sampling risk of assessing control risk is too high means that
Auditors will need to perform more substantive work accidentally, based on an inappropriately higher control risk.
What are the two types of sampling risks auditors are concerned with under Tests of Controls?
Risk of assessing control risk too high
Risk of assessing control risk too low
List one of the equirements for planning a sample
- The relationship of the sample to the relevant audit objective
- Materiality, or maximum tolerable misstatement/deviation rate
- Allowable sampling risk
- Characteristics of the population
The results of the tests of controls is known as the -
Deviation Rate. High deviation rate does notnecessarily mean there may be a misttatement in financials but, control risk is increased and it may have to be communciated to management or audit committees.
Define the Tests of Controls
Used to determine whether a client’s internal control operates effectively to prevent or detect misstatements in the financials
If sampling risk of assessing control is too low, what characteristics are pertinent?
Not as effective, as less ubstantive work will be accidentally occuring due to lowered assessed control risk.
See Slide 21 for judging whether operating effectiveness is adequate per Test of Controls
Slide 21
Define the first step of audit sampling for test of Controls.
- Determine the objective of the test.
- To provide evidence of operating effectiveness of a control
- Only necessary to support auditor’s planned reliance on a control to support a lower assessed control risk
Step 2 of Audit Sampling for Tests of Controls is to
define the attributes and deviation conditions
- Must use professional judgement to define what exactly makes a “deviation”
Step 3 is to Define the population to be sampled. Clarify this further
Used to determine the population from which sample should be selected based on the given audit objective
Step 4 is used to specify what two characteristics?
- Risk of Assessing control risk too low. This is the risk that actual deviation rate exceeds tolerable deviation rate
- The Tolerable Deviation Rate itself. This is based on planned assessed control risk and level of planned reliance on tests.
Step 5 is to estimate the population deviation rate. in further detail, this does the following
- Rates auditors expect based on population
- Based on last year’s rate, past engagement experience
- Has a direct relationship with sample size considerations
Determine the sample size is step 6. What are the three main factors of this?
- Risk of assessing control risk too low
- Tolerable deviation rate
- Expexted population deviation rate
If population is bvery small, the total size is a factor. See slide 24 for table
Step 7 is to -
select the sample. In attributes sampling = random selection
Step 8 - Test the Sample Items means to
- Examine each item for attributes of interest. Are they deviations or not? The auditor should also be alert for anything unusual like fraud or related-party transactions
Step 9 is to evaluate the sample results after testing items and summarizing deviations. Expand
- Determine the deviation rate (# of deviations/sample size)
- Determine the achieved upper deviation rate - Maximum population deviation rate auditors expect based on sample.
- Consider qualitative aspects of deviations - eg are they due to fraud?
- Reach an overall conclusion to determine if results support planned assessed level of control risk. If not, the auditory should increase the level, meaning more substantive testing.
The two approaches two reach an overall conclusion on control risk are
Approach 1 - Comparing it to parenthetical allowable # of deviations. If the actual number of deviations exceeds the allowable amount, planned control risk is not supported.
Approach 2 - This approach uses a more secific results table. Upper deviation rate exceeds tolarable deviation rate.
Step 10 is to document the sampling procedure. Explain this last step in more detail.
- Documents significant aspects of previous 9 sampling steps in the working papers
- Should include identification of selected items
Discovery Sampling is defined as
Another statistical attribute sampling approach, this is used to detect at least one deviation. Also used to search for critical deviations, like fraud.
Sequential,or Stop-And-Go, sampling is when
- Audit sample taken in several stages.
- Start with small sample. Based on these initial results, may make conclusions or decide to test more items until conclusions are more clear.
How can sampling be used in substantive tests?
substantive procedures, which are used to detect misstatements in the financials due to error or fraud, use sampling to estimate the dollar amount of misstatement in a particular account balance
Stepsfor audit sampling substantive procedures generally involve the following tests:
- Determine the objective of the test
- Define the population and sampling unit
- Choose an audit sampling technique (classical variables? probability-proportionate to size?)
- Determine the sample size
- Select the sample
- Test the sample items
- Evaluate the sample results
- Document the sampling procedure
Risk of Incorrect rejection (alpha risk) of an account is further defined as
-relates to efficiency. Auditors will perform more additional substantive work than necessary that will ultimately reveal no material misttatement May reduce efficiency, but not effectiveness, thus this risk is generally not too focused on
Risk of incorrect accepetance (beta risk)
- muck more important to control. This one does relate to effectiveness. Auditors will fail to detect misstatmeents, which compromises effectiveness of the entire audit. This risk i s thus of primary concern to auditor.
The effects of sampling risk on substantive tests is represneted in the picture attached
See slide 32
Classical Variables Sampling is defined as
enables auditor to estimate numerical quantity, such as dollar amount of misstatement in account balance. This is particularly useful in substantive testing.
List one of the methods of classical variable sampling
- Mean-per-unit estimation
- Ratio estimation
- Difference estimation
Difference estimation is when
auditors use sample to estimate average difference between audited value and book value.
See more, slide37
Mean-per-unit claculation is
sample mean X # of items in population = estimated total audited value of population
Client’s book value is accepted or rejected based on if it fals within interval. Sample mean +/- allowance for sampling risk.
Ratio estimation - see slide 38
see slide 38
Mean-Per-Unit estimation
- Enables auditor to estimate mean audited value of items in a population. this is done by determining the mean audited value of items in a sample.
Nostatistical attributes and variables sampling
differences from stats are in determining sample size and evaluating sample results.
Determine sample size - similarly consider risk of assessing control risk too low and tolerable deviation rate.
Evaluatin sample results meants to compare the sample deviation rate to tolerabe deviation rate with professional judgement.
Many CPA firms have structured approaches - increases consistency
Attributes sampling is defined as
estimating rate of occurrence of a certain population characteristic.
Probability-proportional-to-size sampling (“dollar unit sampling”)
More proportionate to size to ensure larger accounts have greater chance of being picked
Classical variables sampling
estimates numerical quantity of a misstatment in population. Frequently usef in susbtantive testing.
Define discovery sampling
form of attribute sampling designed to locate at elast one deviation or exxepction (fraud or cash disbursement). Used when auditors expect a low occurence of a critical deviation
As a sample size increases - sampling risk and allowance for sampling risk (increase/decrease)
Increase. Sample size has significant effect on allowance for sampling risk and sampling risk. (The smaller the desired sampling risk/allowance, the larger the sample required)
The Allowance for Sampling risk is defined as
amount used to create a range within which the true value of population characteristic being mesured is likely to lie. The wider, the mroe confident we are that the actual population amount is within range.
Sample size is also affected by certain population characteristics. Sample size must increase if one of the following happens
- Population size increases (attributes and variables sampling)
_Expected population deviation rate increases (attributes sampling)
- Variability/Standard deviation of item values in population increases - (variables sampling)
True or False: Block samples are used extensively in auditing.
False
True or False: Discovery sampling is best suited to discovering examples of commonplace errors, such as the wrong price entered on a sales invoice.
False. Discover Sampling is to locate at least one deviation/exception in the population
True or False: Random sampling is another term for statistical sampling.
False
To estimate the total audited dollar value of a population of 10,000 items, using the mean-per-unit estimation method, one would multiply the sample mean audited value times 10,000. True or False?
True - sample mean X # of items in population = estimated total audited value of population
The risk of incorrect rejection relates more to the efficiency of a substantive procedure than to the effectiveness of the test. true or false?
True
True or False: In variables sampling, as the variability of the population increases, as measured by the standard deviation, the required sample size increases.
True
True or False - Mean–per–unit estimation is often used in tests of controls, because an estimate of the misstatement is usually desired.
False
There are many kinds of statistical estimates that an auditor may find useful, but basically every accounting estimate is either of a quantity or of an occurrence rate. The statistical terms that roughly correspond to quantities and occurrence rate, respectively, are:
Variables and Attributes
Auditors often utilize sampling methods when performing tests of controls. Which of the following types of sampling methods is most useful when testing controls?
Attributes sampling.
The audit risk against which the auditors require reasonable protection is a combination of two separate risks. The first of these is that material misstatements will occur and the second is that:
those misstatements that occur will not be detected in the auditors’ procedures.
Jones, CPA, believes the industry–wide occurrence rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, Jones should use which type of sampling?:
Attributes sampling
If certain forms are not consecutively numbered, which sampling may be appropriate?
systematic sampling may be appropriate
What best describes the distinguishing feature of statistical sampling?
It provides for mathematically measuring the degree of uncertainty that results from examining only a part of the data.
In attributes sampling, which one of the following must be known in order to appraise the results of the auditor’s sample?
Deviations in sample.
Which statistical selection techniques is least desirable for use by an auditor?
block selection
A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. illustrates sampling risk well or not well?
Well
This Relies on the auditor’s judgment to determine sample size and evaluate the results
Nonstatistical sampling
Define Desired Confidence level
The probability that the true but unknown measure of the characteristic of interest is within specified limits
Attribute sampling -
Used to estimate the proportion of a population that possesses a certain characteristic
All or a subset of the items that constitute the class of transactions is known as a
sampling population
which auditing technique - The auditors wish to test the operating effectiveness of a control, and expect a 2 percent deviation rate in the population.
attributes sampling
