Chapter 9

Question 1

Define Audit Sampling

Answer 1

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

Question 2

A sample is Representative is it is

Answer 2

one in which the characteristics in which characteristics in the sample of audit interests are APPROXIMATELY the same as those of the population.

Question 3

Can one attribute absolute assurance to accuracy of financials?

Answer 3

No. Sampling is necessary in an audit due to practicality, which is why an opinion on assurance is given instead.

Question 4

If an auditor would like to increase the likelihood of a representative sample, sample size should be (Increased/Decreased).

Answer 4

Increase. In addition, care in designing the process and evaluation the results will also increase likelihood.

Question 5

A sample result can be nonrepresentative due to sampling or nonsampling risks. Define Nonsampling Risk

Answer 5

Risk audit tests do not uncover existing exceptions in the sample, but due to ineffective or inappropriate audit procedures.

Question 6

Define Nonstatistical sampling

Answer 6

When the auditor tries to estimate sampling risk with professional judgement rather than susbtantial techniques

Question 7

(Sampling risk/Nonsampling Risk) is an inherent part of sampling that results from testing less than the entire population.

Answer 7

Sampling Risk

Question 8

If one would want to reduce sampling risk, one should (increase/decrease) sample size

Answer 8

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.

Question 9

A sample result can be nonrepresentative due to sampling or nonsampling risks. Define sampling risk.

Answer 9

Risk an auditor reaches an incorrect conclusion due to the sample that would have been different had the entire populated been tested.

Question 10

Name one of the three types of manners in which auditors select items for sample

Answer 10

1. Random selection
2. Haphazard selection
3. Block selection

Question 11

Describe some advantages of Statistical Sampling

Answer 11

See slide 8

Question 12

Characteristics of Random Selection

Answer 12

• 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.

Question 13

What are some advantages of non-statistical sampling?

Answer 13

Usually more cost-effective and judgmental, thus widely used by auditors in practice especially for tests of relatively small populations.

Question 14

True or False - All three methods can be used for statistical sampling

Answer 14

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.

Question 15

Whats an example of Random Selection techniques

Answer 15

• Random Number Tables - Systematic selection

- Random number generators

Question 16

Define Stratification

Answer 16

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.

Question 17

(Block/Haphazard) selection - selects items on an arbitrary basis and without any conscious bias.

Answer 17

Haphazard. Example is pulling invoices from all over a file drawer without regard to a certain characteristic.

Question 18

Block Selection - Define It

Answer 18

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”

Question 19

Define Classical variables sampling

Answer 19

This is used to estimate the numerical quantity of a misstatement in population. Used often in substantive testing.

Question 20

Probability-proportional-to-size sampling, or Dollar-Unit sampling, is a sampling plan that

Answer 20

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.

Question 21

Define Attribute Sampling, a statistical sampling plan

Answer 21

Estimates the rate of occurrence of certain population characteristics

Question 22

Define a Dual Purpose Test

Answer 22

When one sampling plan is used for dual purposes, like test of control and a substantive test of dollar amount of an account balance.

Question 23

Discovery sampling, a form of attribute sampling, is designed to do what?

Answer 23

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

Question 24

There is always some degree of sampling error. What issampling error?

Answer 24

Difference between actual population rate/amount and the rate/amount indicated by sample.

Question 25

What are Sampling Plans for?

Answer 25

Procedures used to accomplish specific audit objectives, such as estimating different population characteristics (attributes like occurrence rates and variables like numerical quantities).

Question 26

After a test of control, if the sampling risk of assessing control risk is too high means that

Answer 26

Auditors will need to perform more substantive work accidentally, based on an inappropriately higher control risk.

Question 27

What are the two types of sampling risks auditors are concerned with under Tests of Controls?

Answer 27

Risk of assessing control risk too high Risk of assessing control risk too low

Question 28

List one of the equirements for planning a sample

Answer 28

- The relationship of the sample to the relevant audit objective - Materiality, or maximum tolerable misstatement/deviation rate - Allowable sampling risk - Characteristics of the population

Question 29

The results of the tests of controls is known as the -

Answer 29

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.

Question 30

Define the Tests of Controls

Answer 30

Used to determine whether a client's internal control operates effectively to prevent or detect misstatements in the financials

Question 31

If sampling risk of assessing control is too low, what characteristics are pertinent?

Answer 31

Not as effective, as less ubstantive work will be accidentally occuring due to lowered assessed control risk.

Question 32

See Slide 21 for judging whether operating effectiveness is adequate per Test of Controls

Answer 32

Slide 21

Question 33

Define the first step of audit sampling for test of Controls.

Answer 33

1. 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

Question 34

Step 2 of Audit Sampling for Tests of Controls is to

Answer 34

# define the attributes and deviation conditions - Must use professional judgement to define what exactly makes a "deviation"

Question 35

Step 3 is to Define the population to be sampled. Clarify this further

Answer 35

Used to determine the population from which sample should be selected based on the given audit objective

Question 36

Step 4 is used to specify what two characteristics?

Answer 36

- 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.

Question 37

Step 5 is to estimate the population deviation rate. in further detail, this does the following

Answer 37

- Rates auditors expect based on population - Based on last year's rate, past engagement experience - Has a direct relationship with sample size considerations

Question 38

Determine the sample size is step 6. What are the three main factors of this?

Answer 38

- 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

Question 39

Step 7 is to -

Answer 39

select the sample. In attributes sampling = random selection

Question 40

Step 8 - Test the Sample Items means to

Answer 40

- 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

Question 41

Step 9 is to evaluate the sample results after testing items and summarizing deviations. Expand

Answer 41

- 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.

Question 42

The two approaches two reach an overall conclusion on control risk are

Answer 42

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.

Question 43

Step 10 is to document the sampling procedure. Explain this last step in more detail.

Answer 43

- Documents significant aspects of previous 9 sampling steps in the working papers - Should include identification of selected items

Question 44

Discovery Sampling is defined as

Answer 44

Another statistical attribute sampling approach, this is used to detect at least one deviation. Also used to search for critical deviations, like fraud.

Question 45

Sequential,or Stop-And-Go, sampling is when

Answer 45

- 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.

Question 46

How can sampling be used in substantive tests?

Answer 46

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

Question 47

Stepsfor audit sampling substantive procedures generally involve the following tests:

Answer 47

1. Determine the objective of the test 2. Define the population and sampling unit 3. Choose an audit sampling technique (classical variables? probability-proportionate to size?) 4. Determine the sample size 5. Select the sample 6. Test the sample items 7. Evaluate the sample results 8. Document the sampling procedure

Question 48

Risk of Incorrect rejection (alpha risk) of an account is further defined as

Answer 48

-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

Question 49

Risk of incorrect accepetance (beta risk)

Answer 49

- 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.

Question 50

The effects of sampling risk on substantive tests is represneted in the picture attached

Answer 50

See slide 32

Question 51

Classical Variables Sampling is defined as

Answer 51

enables auditor to estimate numerical quantity, such as dollar amount of misstatement in account balance. This is particularly useful in substantive testing.

Question 52

List one of the methods of classical variable sampling

Answer 52

- Mean-per-unit estimation - Ratio estimation - Difference estimation

Question 53

Difference estimation is when

Answer 53

auditors use sample to estimate average difference between audited value and book value. See more, slide37

Question 54

Mean-per-unit claculation is

Answer 54

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.

Question 55

Ratio estimation - see slide 38

Answer 55

see slide 38

Question 56

Mean-Per-Unit estimation

Answer 56

- 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.

Question 57

Nostatistical attributes and variables sampling

Answer 57

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

Question 58

Attributes sampling is defined as

Answer 58

estimating rate of occurrence of a certain population characteristic.

Question 59

Probability-proportional-to-size sampling (“dollar unit sampling”)

Answer 59

More proportionate to size to ensure larger accounts have greater chance of being picked

Question 60

Classical variables sampling

Answer 60

estimates numerical quantity of a misstatment in population. Frequently usef in susbtantive testing.

Question 61

Define discovery sampling

Answer 61

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

Question 62

As a sample size increases - sampling risk and allowance for sampling risk (increase/decrease)

Answer 62

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)

Question 63

The Allowance for Sampling risk is defined as

Answer 63

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.

Question 64

Sample size is also affected by certain population characteristics. Sample size must increase if one of the following happens

Answer 64

- 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)

Question 65

True or False: Block samples are used extensively in auditing.

Answer 65

False

Question 66

True or False: Discovery sampling is best suited to discovering examples of commonplace errors, such as the wrong price entered on a sales invoice.

Answer 66

False. Discover Sampling is to locate at least one deviation/exception in the population

Question 67

True or False: Random sampling is another term for statistical sampling.

Answer 67

False

Question 68

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?

Answer 68

True - sample mean X # of items in population = estimated total audited value of population

Question 69

The risk of incorrect rejection relates more to the efficiency of a substantive procedure than to the effectiveness of the test. true or false?

Answer 69

True

Question 70

True or False: In variables sampling, as the variability of the population increases, as measured by the standard deviation, the required sample size increases.

Answer 70

True

Question 71

True or False - Mean–per–unit estimation is often used in tests of controls, because an estimate of the misstatement is usually desired.

Answer 71

False

Question 72

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:

Answer 72

Variables and Attributes

Question 73

Auditors often utilize sampling methods when performing tests of controls. Which of the following types of sampling methods is most useful when testing controls?

Answer 73

Attributes sampling.

Question 74

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:

Answer 74

those misstatements that occur will not be detected in the auditors' procedures.

Question 75

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?:

Answer 75

Attributes sampling

Question 76

If certain forms are not consecutively numbered, which sampling may be appropriate?

Answer 76

systematic sampling may be appropriate

Question 77

What best describes the distinguishing feature of statistical sampling?

Answer 77

It provides for mathematically measuring the degree of uncertainty that results from examining only a part of the data.

Question 78

In attributes sampling, which one of the following must be known in order to appraise the results of the auditor's sample?

Answer 78

Deviations in sample.

Question 79

Which statistical selection techniques is least desirable for use by an auditor?

Answer 79

block selection

Question 80

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?

Answer 80

Well

Question 81

This Relies on the auditor’s judgment to determine sample size and evaluate the results

Answer 81

Nonstatistical sampling

Question 82

Define Desired Confidence level

Answer 82

The probability that the true but unknown measure of the characteristic of interest is within specified limits

Question 83

Attribute sampling -

Answer 83

Used to estimate the proportion of a population that possesses a certain characteristic

Question 84

All or a subset of the items that constitute the class of transactions is known as a

Answer 84

sampling population

Question 85

which auditing technique - The auditors wish to test the operating effectiveness of a control, and expect a 2 percent deviation rate in the population.

Answer 85

attributes sampling