Introduction to Sampling

Question 1

When performing tests of details and determining that the sample is materially misstated when in fact it is not occurs because of what?

Answer 1

incorrect rejection; auditor now has to perform additional work to reach the correct conclusion if the balance is fairly stated

Question 2

what should an auditor in response to vendor invoices being misplaced?

Answer 2

fraud risks increases when there are photocopies of vendors rather than original copies; hence an auditor should try to reevaluate the risk of fraud and design more tests for related transactions

Question 3

Both the expected amount of misstatements and the measure for tolerable misstatements would affect the sample size for substantive tests of details.

Answer 3

true

Question 4

What doe statistical sampling help an auditor do? (4 factors)

Answer 4

1) design an efficient sample
2) measure the sufficiency of the evidential matter obtained
3) evaluate the sample results

-results may be more defensible than others

this ultimately provides an objective basis for quantitatively evaluating the sample risk

judgments are explicit

Question 5

What does the risk of incorrect acceptance and assessing low control risk relate to?

Answer 5

effectiveness of the audit

the risk of incorrect acceptance is the risk that an auditor will accept a balance that is fairly stated when in fact it isnt

the risk in assessing control risk too low is the risk that an auditor will conclude that the controls are effective when in fact they aren’t

in either case, this can result in an erroneous judgment and the failure to detect a material misstatement and the issuance of an incorrect opinoon

Question 6

What does the risk of incorrect rejection related to?

Answer 6

efficiency of the audit

Question 7

What happens when the auditor increases the risk of incorrect rejection?

Answer 7

increases the risk of inefficiency which means the auditor is doing too much work; hence this option is only appropriate if the cost and effort of additional work is low

Question 8

Non-statistical sampling (judgmental)

Answer 8

any error that is unrelated to sampling risk that the auditor may commit when performing an audit task (eg. failing to recognize a misstatement or misinterpreting an audit evidence)

Question 9

Audit Sampling relates to what two factors?

Answer 9

1) “sufficiency” of evidence (quantity of evidence)

2) “extent” of testing (large vs small sample size)

Question 10

Sampling definition

Answer 10

selection/evaluation of less than 100 percent of the population of audit relevance such that the auditor expects the items selected to be representative of the population

Question 11

Attributes Sampling

Answer 11

tests of controls (related to assessment of control risk)

Question 12

Variables Sampling

Answer 12

substantive tests to evaluate populations implied audit value ($$$; dollar value)

-risk of incorrect (acceptance) $$ balance

Question 13

What types of variable sampling are there?

Answer 13

1) difference estimation
2) mean per unit estimation
3) ratio estimation
4) probability-proportionate-to-size (PPS) sampling

Question 14

If internal control is effective but the auditor concludes it is ineffective what type of error is this?

Answer 14

Type 1 Error (Efficiency)

Question 15

If internal control is ineffective but the auditor concludes that it is effective, what type of error is this?

Answer 15

Type 2 error (effectiveness)

Question 16

Non-sampling risk

Answer 16

a mistake made by auditor that is not representative of the population

1) inappropriate audit procedures
2) failure to recognize the actual characteristics of a sampled item; misinterpreting results of the sample

Question 17

What are the two contexts of sampling applications?

Answer 17

attribute sampling and variable sampling

Question 18

audit risk

Answer 18

probability of the failure of an auditor to modify opinion on financials containing material misstatements

Question 19

AR=RMMAPTD

Answer 19

RMM=risk of material misstatement; combination of inherent and control risk

AP= risk that analytical procedures will not detect a mm

TD= risk that tests of details will fail to detect mm

Question 20

Type 1 Error

Answer 20

under reliance
control risk is too high
false rejection
efficiency (appropriate conclusions but not in an efficient manner; may take more than one sample)

Question 21

Type 2 Error

Answer 21

over-reliance
control risk is too low
false acceptance
effectiveness (failed to meet objectives of limiting risk at low level and so there is no second look since there are no complaints)