Chapter 9 - Audit Sampling

Question 1

Mandatory Audit Procedures

Answer 1

Physical Inspection of Assets - particularly inventory
Confirmation of Receivables
Applying:
Substantive Testing- controls follow objects
Test of Controls - controls are effective

To Estimate Characteristics:
Qualitative - valid transactions
Quantitative - Amount is properly calculated

Question 2

Risk of Sampling

Answer 2

That the conclusion would be different is tested every transaction.

Sampling might not respect the population

Need to select which control on what samples to select out of population

Question 3

Non Sampling

Answer 3

You could be testing the wrong objective against the wrong sample. Mistake on the judgement and conclusions

Question 4

Bigger Sample = >

Reduce and Effective Planning

Answer 4

Bigger Sample Size

Question 5

Non statistical sampling

Answer 5

Judgement Sample
No theory based on statistical analysis
Estimate sample risk by professional judgement

Cons: people are usually conservative and could be ineffective

Question 6

Advantages of Statistical Sampling

Answer 6

Design Samples
Objective Results
Measure Sufficient Evidence

Question 7

PCAOB

Answer 7

Inspects the audit working papers

They assess how auditors asses risk and could judge their methods as effective or ineffective.

Question 8

Selection of Random Sample

Answer 8

Unbaised Sample

Cons: maximize likelihood that samples size is ineffective

Question 9

Techniques for Random Sample

Answer 9

Number Tables
Number Generators
Systematic Selection

Question 10

Tech. for Random Sample:

Haphazard Selection:

Answer 10

basis w.o conscious basis & no order

Question 11

Tech. for Random Sample:

Block Selection:

Answer 11

selected time period: numerical or alphabetical sequence

Question 12

Tech. for Randolph Sample

Stratification:

Answer 12

Organize population into homogeneous groups

Question 13

Step 1: What should be factors considered before Determining a Sample size?

Of performing an audit sampling

Answer 13

Expected population deviation rate ( Amount of misstatements, or areas commonly misstated)

Risk of assessing control risk too low

Tolerable rate of deviation

Question 14

Expected Population Deviation Rate is determined by:

Answer 14

Old Customer:

Past experience with areas of misstatements and understanding of company’s controls and environment.

New Customer:

Results from pilot sampling

Question 15

Risk of Assessing control risk too low

Answer 15

What the audit wants to basis level of control risk to be based on the understanding of internal control’s weaknesses

Question 16

Tolerable rate of Deviation

Answer 16

Based on the control risk assessment, what is the tolerable rate of deviation before the statements are considered materially misstated?

Question 17

Step 2: What should be considered in Determining a Sample size?

Of performing an audit sampling

Answer 17

Use the sample size table that goes with the control risk

Use the expected deviation rate row
Along with the tolerable deviation rate column

At the junction, gives the number of the sample size

Question 18

Increase in number of purchased _________ on determining the sample size

Answer 18

Does not affect the table or any factors

Question 19

When the control deficiencies are fixed it affects ________ and would result in ________

Answer 19

expected population deviation and results in a decreased sample size.

Question 20

High Turn over in a company would result in ______

Answer 20

an increase in the expected deviation rate and an new assessment of the control risk, which may also increase

Question 21

Decrease in control risk results in a ______ and ______, which ______ the sample size

Answer 21

Decrease of Expected population deviations and a decrease in tolerable deviation rate (MAJOR FACTOR) , which results in a INCREASE IN SAMPLE SIZE.

Because they are trying to find errors due to the expectation of the control risk

Question 22

Increase in control risk results in a _______ and ______ Which ______ the sample size

Answer 22

Increases the expected deviation levels and increase the tolerable deviation levels which would result in a smaller sample size.

Question 23

New Vendors would do what to the sample size and affect which consideration?

Answer 23

It would increase the sample size because the expected deviation would increase due to the change

Question 24

Mean per unit sampling Formula

Answer 24

Allowance Sampling Risk = Tolerable Misstatement /(1+(incorrect acceptance coefficient / Incorrect rejection coefficient)

Question 25

Sample Size Formula

Answer 25

(Population size * incorrect R.C * Estimated std Dev. / planned allowance sampling risk) ^2

Question 26

Adjusted Adjusted Sampling Risk

Answer 26

Tolerable Misstatement - (N * Incorrect accept Coefficient * est std. Dev. / square root of Sample size )