Module 3 - Audit Sampling Flashcards
What is a representative sample?
A sample of items with characteristics approximately the same as the population.
What are the two types of risk that auditors face when sampling?
Sampling risk
Sample is not representative of the population
Non-sampling risk
Risk that auditor reaches incorrect conclusion for reason not related to sample pool
What are the differences in:
Statistical sampling
Nonstatistical sampling
Statistical sampling
- Allows quantification of sampling risk in planning the sample and evaluating results
- Auditor randomly selects items
Nonstatistical sampling
- Sampling risk not quantified
- Auditor plans and selects items that auditor believes will provide best example
What are the available methods of sample section for:
- Nonstatistical Method
- Statistical Method
_Nonstatistical Method**_
- Haphazard Sample Selection
- Block Sample selection
Statistical Method
- Simple random sample selection
- Systematic Sample selection
- Probability proportional to size sample selection
** Nonstatistical can use all 5 methods
Explain these sample selection methods:
Block Sample Selection
Haphazard Sample Selection
Block Sample Selection
- Auditor selects items in a sequence; “blocks” a segment of selection
- For example, 100 transactions in March
Haphazard Sample Selection
- Auditor randomly selects items without any bias/conscious decision to why
- No regard to size, source
Simple Random Sample Selection
- Explain this approach
- Why choose this method?
- Every item has an equal chance of being included in sample
- Use this method when there is no need to emphasize types of population items
Systematic Sample approach
- Explain this approach
- How do auditors calculate the “interval”
Auditor calculates an interval and selects items based on the interval (if interval is 20, will be every 20th item)
Interval = population size/sample size
Probability Proportional Size
What are the two approaches that can be used during this sampling method?
- Take sample in which probability of selecting item is proportional to recorded amount
- Divide population into subpopulations, by dollar size, and take larger samples from larger subpopulations
What is the occurence rate (exception rate)?
What “exceptions” is the auditor looking for?
Estimation of the percent of items in a population containing a certain characteristic
Look for items with these characteristics:
- Deviations from client’s established controls
- Monetary misstatements in populations of transaction/balance data
What are the steps auditors take in applying nonstatistical/statistical audit sampling methods?
1) Plan the Sample
2) Select the sample and perform audit procedures
3) Evaluate the results
What steps do auditors take when planning the sample (step 1 of applying sample selection methods)?
- State objectives of audit test
- Define attributes and exception conditions of items
- Define population and sampling unit
- Determine TER then ARO then EPER
- Determine the sample size
Define these terms:
- Tolerable Exception Rate
- Acceptable risk of overreliance
Tolerable Exception Rate
Highest exception rate the auditor will permit and still conclude control is effective
Acceptable risk of overreliance
Risk that true population exception rate is > than tolerable exception rate after auditor concluded control is effective
Define this term:
Estimated population exception rate (EPER)
Advanced estimate made by auditor; how many exceptions are within the population as a whole
What 3 things does the auditor take into consideration when deciding appropriate sample size?
- How do these items effect sample size?
Acceptable risk of overreliance (ARO)
- Inverse relationship with sample size
- Higher acceptable risk ; Lower sample size
Tolerable Exception rate (TER)
- Inverse relationship with sample size
- Higher acceptable risk ; Lower sample size
Estimated population exception rate (EPER)
- Direct relationship
- Higher estimated exceptions ; Greater sample size
Statistical vs Nonstatistical testing
What is the difference when defining Acceptable Risk of Overreliance?
Statistical
Quanitfied; Usually 5-10%
Nonstatistical
Not quantified; Defined as low, moderate, or high
Statistical vs Nonstatistical testing
What is a key difference between the two methods when determining the sample size (last step of planning)?
Statistical
Determined using tables based on ARO, TER, and EPER (see pg. 502; table 15-8)
Nonstatistical
Determined with judgement based on ARO, TER, and EPER
Select the sample and perform audit procedures
(step 2 of sample methodology)
What steps do auditors take?
Select the sample
Use appropriate method (block, random etc) to pick from population
Perform the audit procedures
Continue with test of controls and substantive tests
What are the steps auditors take when evaluating the results of sample procedures (step 3 of audit sample methodology)?
- Generalize from the sample to the population
- Analyze exceptions
- Decide the acceptability of the population
Sample exception rate
- Define this term
- How is it used in evaluating the results of audit sampling?
Sample exception rate
Calculation of actual sample results
= (Sample exceptions) / (Sample size)
Used to help generalize from the audit sample to the population
Statistical vs Nonstatistical testing
What are the differences when generalizing from the sample to the population (step in evaluating the results)?
Statistical
Use table based on ARO, Sample size, and # of exceptions found to determine CUER (pg. 503; 15-9)
Nonstatistical
Use Sample Exception Rate and Tolerable Exception rate
What is CUER (Upper Precision Limit)?
Upper precision limit
Calculation found during statisitical testing to determine the # of exceptions in the total population
Explain how Sample exception rate is used to generalize from the sample to the population. in nonstatistical sampling:
Used to determine sampling error:
Sampling error = (Tolerable exception rate) - (Sample exception rate)
Higher Sampling error = more likely true population exception rate is < tolerable exception rate
Decide the acceptability of the Population
If the auditor finds Sampling error (TER - SER) to be too small, what actions should be taken?
1) Revise TER or ARO **
** Extra precaution in relaxing TER and ARO (if case goes to court)
2) Expand the sample size
Increasing sample size may saturate the exceptions found within the selected sample
3) Revise assessed control risk
Revise control risk upward; increase substantive test of transactions
