Lec 14 Q3 Flashcards
what is the definition of audit sampling
application of audit procedure to less than 100% of the items within an account balance population
what is the purpose of sampling
to evaluate characteristics of the sample and project it onto the population
N, E and T are aspects of audit procedure - what are they are what do they stand for
nature - the techniques used
extent - the amount of tests done
timing - point in audit in which the procedures are to be performed
for internal controls doe you sample from accounts or classes of trans
classes of transactions
is sampling for IC really sampling?
not really because you take 2-3 I/C procedure and do a walkthrough
what is attribute sampling
looking at the documents of physical units such as sales documents
what sort of sampling is the effectiveness of control procedures based on
attribute sampling
when you sample for substantive testing, do you sample class or accounts
accounts, more specifically A or L
what is sampling risk
the risk that a conclusion drawn from sample is different from the actual characteristics of the sample
what types of sampling does a balance/substantive audit use
variable sampling and attribute sampling of monetary units
assuming all else if fine, what might cause sample risk
sample that is chosen is wrong
can sample risk ever be 0
no, it can never be 0 unless the entire population is is tested
what are the two types of audit sampling
statistical and non-statistical
what is statistical sampling
the use of probability to select and evaluate the results of a sample
what are two features of statistical sampling
- risks can be quantified through a formula
- they are more expensive to and require use of CATs
what is non-statistical sampling
sampling based on professional judgement
can sr be evaluated in non-stat
no, there is no formula to evaluate samp risk in non-stat
when should you use non-statistical sample
when you have good professional judgement and knowledge of the industry and business
which is cheaper, stat or non-stat
non-stat thus it is used to balance the cost between the two sampling methods
can both stat and non-stat be used for evidence and cas?
yes, both can provide sufficient appropriate evidence and both are allowed by cas, individually or in combination
when should you use non-statistical
- when there is a small population (costly and inconvenient to do statistical)
- high percentage of the population are individual accounts with high value and risk items
- accounts’ records for entire population are difficult to access
- records are maintained manually
what are the three non-statistical sampling methods
haphazard method, block/cluster sampling, significant transactions sampling
what is the haphazard method of non-s sampling and give an example
items selected manually to draw a representative sample.
e.g. pick documents randomly from a box
what i/c objective does this haphazard method test
objective of validity
what is the block/cluster method and give an example
select consecutive sequences of transactions by time, location, #
in the A/R cycle when you trace to ensure you do not miss anything
what i/c objective does block method test
completeness
what is significant transaction sampling
select items only above or specifically below a materiality limit
can result from significant transactions be be projected
no, they cannot be projected because since the sample is only a particular transaction(s) thus it is not representative
do both stat and non-stat require prof judgement
yes
when is professional judgement required in stat sampling
- tolerable deviation rate
- confidence level
what professional judgement is requited in non-stat sampling
professional judgement to draw conclusions about the population
what is representative sampling and what is an example
characteristics of the sample that are reflective of the population
e.g. if the population and the sample both have a 4% rate of error, sample is representative
does each unit have a chance of selection in representative sampling
yes, each unit has equal chances of selection
what are 2 methods to obtain a representative sample
- unrestricted random selection
- systematic random - meaning first was chose randomly, but the rest were chose by procedure; relies on some sort of ordering - most likely for block sampling
what is a sampling unit composed of
test of controls and details
what does test of controls involve
looking at physical units, invoices, shipping documents, POs
what does test of details involve
you are looking at the balances - dollar amount
what are the 7 steps to assessing control risk
- specifying audit objectives
- define deviation conditions
- define population
- determine sample size
- select the sample
- perform control test procedures
- evaluate the evidence
what are the first 3 steps in the CR assessment related to and what do they ensure
they are related to problem recognition
ensuring that controls work, people are compliant to controls and if I/C objectives are being met
describe the first step of CR assessment - specifying audit objectives
- identify and test only key controls
- identify whether control objectives related to I/C objectives of validity, completeness, proper period, authorization, accuracy and classification are met
describe the second step of CR assessment - define deviation conditions
define the departures from I/C procedures
this must be done prior to testing so it is known to auditors before they encounter it
what presence are we looking for in defining deviations Incontrol test and give an example
we are looking for the presence of an absence of I/C.
e.g. knowing that deviation is a credit manager not initialing on credit sale approvals, thus looking for this
describe the third step of CR assessment - define population
says that conclusions can only be projected onto the sample the population comes from. this is important for validity and completeness
describe the fourth step of CR assessment - determine sample size
consider that
- the higher the sample, the lower the sample risk
- tolerable deviation rate
- expected population deviation rate
- population size (very slight relation to sample size)
describe the fifth step of CR assessment - select sample
should be selected from the population that the conclusion will apply to
describe the sixth step of CR assessment - perform process
tests are performed with more than one test being performed on one sample - this is favorable because sampling is costly
describe the seventh step of CR assessment - evaluate evidence
determine risk of assessing CR as too low or too high and compare TDR to EPDR and SDR
what are the risks of assessing CR as too low
if you class it as too low, DR will be high and thus underestimated CR and overestimated the allowable DR. this means that not enough work is done. effectiveness suffers
what are the risks of assessing CR as too high
if you class it as too high, DR will be low and thus overestimating CR and underestimated the allowable DR. this means that too much work is done. efficiency suffers
is sdr calculated and is tdr expected to be perfect
yes, sdr is calculated and tdr is not expected to be perfect
what is tdr
tolerable deviation rate
this is the error rate that you accept and still consider the control as functioning
determined through professional judgement prior to testing
what is sdr
sample deviation rate
this is the actual rate of error in the sample
determined through testing
what is EPDR
expected population deviation rate
rate expected prior to performing tests
this is determined through professional judgement from prior years and change in I/C
what should be done if epdr is greater than tdr
testing of controls should not be done since rate is higher than tolerable - resume with pure substantive
what should be done is epdr is less than tdr
test controls and get sdr
what does it means it sdr is greater than tdr
controls are not working thus must do pure substantive
what is an alternative path if sdr is greater than tdr but your are confident that is not true
obtain a bigger sample. this decision can come from your professional judgement
what should be done if sdr is less than tdr
controls are working and a combined approach can be done
what should be done when you discover deviations
follow up on the deviations by performing qualitative work and determine if the errors are
- pervasive
- misunderstanding
- deliberate
evaluate the effect on F/S and possible purpose and motives
what is the A/R not authed example for 3 weeks example
discover that sales on credit have not been authed for 3 weeks
perform qualitative work and discover from HR that credit manager was on vacation
if all SDR creater than TDR are here - DISSMISS
qualitative trumps quantitative
what is the price deviations for specific customer example
discover that there are price deviations
further research shows that it is only for a specific customer which means that it might be a special contract for lower price and higher volume
need to find contract
what are the 7 steps in sampling for substantive
- specify audit objective
- define population
- chose audit sample method
- determine sample size
- select sample size
- perform substantive procedure
- evaluate evidence
Describe the first step in sampling for substantive procedures - specify audit objective
determine whether all management assertions are materially accurate
hypothesize whether BV is materially accurate
when are assertions made
when numbers go from trial balance to F/S
Describe the second step in sampling for substantive procedures - define population
examine individually significant items that exceed materiality
supplement significant items with representative sample from population by using stratification
what is stratification
separation of the population into layers that are homogenous
what is the main purpose of stratification
reduce sample size
what can we stratify on
balance of the item
on what can we make conclusions for strata samples
can only make conclusions on the population where the strata comes from
how is stratification easier in terms of staffing
it makes it easier to assign staff as higher value items are assigned to higher experience staff and vise versa or lower value
Describe the third step in sampling for substantive procedures - chose sampling method
decide whether to use statistical or judgmental sampling
for statistical use classical variable or attribute sampling
Describe the fifth step in sampling for substantive procedures - select sample
can use random or non-random
Describe the sixth step in sampling for substantive procedures - perform procedure
evidence gather will either back or refute management assertions
Describe the seventh step in sampling for substantive procedures - evaluate evidence
where you determine identified misstatement (IM) and project it onto the population
what is IM similar to in internal control testing
SDR
when IM is projected what is it projected as
likely misstatement
what is future possible misstatements (FPM)
misstatements that are determined through:
- professional judgement for non-sampling risk
- formula for sampling risk
what is the equation to compare LM and FPM to performance materiality
LM + FPM < performance materiality, the population is accepted
what happens if misstatements are less than performance materiality
it will go on the statement of unadjusted items
what is the issue with convincing management to make an adjustment
there is a persuasion issue and management have to go back to the subledger and find the mistakes because LM is just a projection and they need to be convinced that they are actually there
what will management try and argue
they will try to argue that the only existing misstatements are the known misstatements (IM) and there are no more
