Module 5 - Sampling for tests of D.O.B.

Question 1

Differences among tests:

Answer 1

• Transactions and Balances both test for monetary misstatements
• Test of transactions may also act as a controls test

Question 2

What are the three primary sampling methods for calculating dollar misstatements in account balances?

Answer 2

1. Nonstatistical sampling
2. Monetary Unit Sampling
3. Variables Sampling

Question 3

Steps of nonstatistical sampling - Differences

Do not memorize

Learn differences

Answer 3

Question 4

Nonstatistical testing - Plan the Sample

Define a misstatement when sampling for A/R:

Answer 4

Any client misstatement in a customer balance included in the auditor’s sample is a misstatement

Question 5

Nonstatistical sampling - Plan the sample

What is stratified sampling?

Answer 5

Categorizes entire population of accounts into stratum

• Usually by dollar amount
• Could be by geographical location, etc…

Allos auditor to emphasize/deemphasize certain balances

Question 6

Nonstatistical sampling - Plan the sample

Specify tolerable misstatement:

Answer 6

Based on performance materiality for specific audit segment:

Threshold amount (usually lower than performance materaility) for individual balances

any amounts that exceed are considered misstatement

Question 7

Nonstatistical sampling - Plan the sample

Define Acceptable Risk of Incorrect Acceptance (ARIA)

What is relationship between ARIA and sample size?

Answer 7

Risk that conclusion from sample suggests account balance is not materially misstated when it actually is

Inverse relationship; as sample size increases, ARIA decreases

Question 8

What is the relationship between:

Control risk

ARO

ARIA

Substantive testing

Answer 8

Question 9

Conditions affecting sample size for tests of details of balances:

Answer 9

Question 10

Audit sampling for tests of D.O.B

What should auditors determine when analyzing the misstatements

Answer 10

Auditor should determine:

• Why misstatement occured
• Implications of misstatement on other audit areas*
• Potential impact on financial statements; is it material

_{*was misstatement caused by control risk; increase control risk, which in turn would reduce ARIA and require an increased sample size}

Question 11

What are some actions to take when population is rejected based on misstatements found in tests of D.O.B?

Answer 11

• Finish testing other audit areas; misstatement may be offset by another misstatement
• Perform expanded tests in specific area
• Increase sample size; increases tolerable misstatement
• Tell client to adjust account balance
• Refuse to give unqualified opinion if client does not

Question 12

What is monetary unit sampling?

Answer 12

Statistical sampling method for testing D.O.B.; Provides a statistical result expressed in dollars (or appropriate currency)

Question 13

What are the differences of monterary unit sampling compared to nonstatistical sampling?

Answer 13

Expresses individual dollars as the sampling units; not physical units like individual account balances.

The population size is the recorded dollar population

Question 14

How is sampling performed for monetary unit sampling?

Answer 14

• Sample size is determined using a statistical formula
• Sample selection is probability proprtional to size (larger items have a greater chance of being selected)
• Using systematic selection and starting with a random number, the auditor selects accounts that fall within a certain number interval

Question 15

How do auditors generalize from the sample to the population when using monetary unit sampling?

Answer 15

Auditor uses accounting software to calculate misstatement bound;

Estimate of the maximum overstatement at given ARIA

Question 16

What are the steps in determining sample size using montary unit sampling?

Answer 16

Question 17

What are the advantages to using Monetary Unit Sampling?

Answer 17

• Increases the likelihood of selecting high-dollar items; higher risk among these accounts
• Often reduces costs by reducing total sample items
• Easy to apply
• Provides a statistical conclusion

Question 18

What are some statistical sampling methods for tests D.O.B.(two)?

Answer 18

1. Montary Unit Sampling
2. Variables Sampling*

_{*Not discussed in this chapter; provides a more statistical approach that involves Bell curve and confidence intervals}

Question 19

What are the two types of sampling risks the auditor accepts when sampling for test of D.O.B.?

Answer 19

ARIA: Risk auditor has accepted a population, when it is actually materially misstated

ARIR: Risk auditor concludes population is materially misstated when it is not.

Question 20

What is the importance of determining ARIR when sampling test of D.O.B.?

Answer 20

If auditor concludes population is materially misstated, auditor may have to perform expand/perform additional tests.

Important when high costs involved; increases costs to firm