Evidence -- Sampling

Question 1

How would the sample results support the assessment of the risk of material misstatement?

Answer 1

When the achieved upper deviation limit is equal to or less than the tolerable deviation rate

Note: If it does not, the auditor may decide to increase the level of the preliminary assessment of the risk of material misstatement

Question 2

What is another name for Monetary Use Sampling (MUS)?

Answer 2

Probability-proportional-to-size sampling

Note: The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan

Question 3

What is the “true” state of the population?

Answer 3

Actual rate of deviation in the population

Question 4

What happens when the true deviation rate is lower than the Tolerable rate?

Answer 4

The auditor should have an expectation of the effectiveness of the control tested

Note: If the true deviation rate is higher than the Tolerable rate;

• the auditor should NOT have an expectation of the effectiveness of the control tested

Question 5

What is a principal advantage of statistical methods?

Answer 5

They provide a scientific basis for planning the “Sample Size”

Question 6

What should the auditor consider for sample size in conducting statistical sampling?

Answer 6

The tolerable population rate of deviation from the controls being tested in determining sample size

Question 7

What is Nonsampling Risk?

Answer 7

the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk

Question 8

What is the primary objective of stratification?

Answer 8

to reduce the effect of high variability by dividing the population into subpopulations

E.g. Reducing the effect of the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and the confidence level constant

Question 9

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

Answer 9

This is an inverse relationship

E.g. The tolerable population deviation rate is set by the auditor

The sample size and the tolerable population deviation rate have an inverse relationship because

• the degree of assurance to be provided by the sample is higher (lower) when the tolerable population deviation rate is lower (higher)

Question 10

What are my (3) major considerations when determining the sample size for a test of controls?

Answer 10

(1) the tolerable population deviation rate
(2) the risk of overreliance; and
(3) the expected population deviation rate

Note: A change in the size of the population has a very small effect on the required sample size when the population is LARGE

Question 11

What does unrestricted random sampling without replacement mean?

Answer 11

This removes an item from the population after selection

E.g. This uses information about the population more efficiently and results in a smaller sample size

Question 12

What is the statistical concept of “Precision (a.k.a. confidence interval)?”

Answer 12

• an interval around the sample statistic that is expected to include the true value of the population at the specified confidence level

Question 13

In terms of the audit, what do incorrect acceptance and risk of overreliance relate to?

Answer 13

• Effectiveness of the audit

Question 14

What are some considerations when planning a sample for a substantive procedure?

Answer 14

(1) Tolerable Misstatements

(2) Preliminary estimates of materiality levels

Question 15

How is Stratified mean-per-unit (MPU) sampling more efficient than un-stratified MPU?

Answer 15

Because Stratified MPU produces an estimate having a desired level of precision with a smaller sample size

E.g. PRIMARY OBJECTIVE of stratification is to reduce the effect of high variability by dividing the population into subpopulations

Question 16

What is dual-purpose testing and when is it used?

Answer 16

Dual-purpose testing is the use of a sample for both tests of controls and substantive testing

• It is used when the auditor believes that the rate of deviations from the prescribed control in the population is acceptable

E.g. sample size should be the larger of the samples that would other wise have been for the two separate purposes

Question 17

What is an advantage of Statistical Sampling versus Non-Statistical Sampling?

Answer 17

Statistical Sampling, provides an objective basis for quantitatively evaluating sample risks

E.g. This means that this type of sampling risk can be Quantified and Controlled

Question 18

When the lower acceptable levels of the risk of incorrect acceptance and performance materiality are established what should the auditor do?

Answer 18

Find smaller misstatements

Why? - Because as the acceptable risk of incorrect acceptance decreases, the desired assurance increases, and the auditor decreases the tolerable misstatement

This means that the auditor must plan for a larger sample size and more audit work on the accounts to discover smaller misstatements

Question 19

What “Type” of Risk is the risk of incorrect acceptance?

Answer 19

This is a “Type II” Risk also known as a “Beta” risk

Question 20

What is “Audit Sampling?”

Answer 20

Sampling that applies an audit procedure to fewer than 100% of the items under audit for the purpose of drawing an inference about a characteristic of the population

Note: Sampling may be statistical or nonstatistical

Question 21

What do sampling sizes depend on?

Answer 21

Sample size depends upon

1. The population size
2. The acceptable risk
3. The variability in the population
4. The tolerable misstatement