Module 5 - Sampling for tests of D.O.B. Flashcards
Differences among tests:
- Transactions and Balances both test for monetary misstatements
- Test of transactions may also act as a controls test
What are the three primary sampling methods for calculating dollar misstatements in account balances?
- Nonstatistical sampling
- Monetary Unit Sampling
- Variables Sampling
Steps of nonstatistical sampling - Differences
Do not memorize
Learn differences
Nonstatistical testing - Plan the Sample
Define a misstatement when sampling for A/R:
Any client misstatement in a customer balance included in the auditor’s sample is a misstatement
Nonstatistical sampling - Plan the sample
What is stratified sampling?
Categorizes entire population of accounts into stratum
- Usually by dollar amount
- Could be by geographical location, etc…
Allos auditor to emphasize/deemphasize certain balances
Nonstatistical sampling - Plan the sample
Specify tolerable misstatement:
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
Nonstatistical sampling - Plan the sample
Define Acceptable Risk of Incorrect Acceptance (ARIA)
What is relationship between ARIA and sample size?
Risk that conclusion from sample suggests account balance is not materially misstated when it actually is
Inverse relationship; as sample size increases, ARIA decreases
What is the relationship between:
Control risk
ARO
ARIA
Substantive testing
Conditions affecting sample size for tests of details of balances:
Audit sampling for tests of D.O.B
What should auditors determine when analyzing the misstatements
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
What are some actions to take when population is rejected based on misstatements found in tests of D.O.B?
- 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
What is monetary unit sampling?
Statistical sampling method for testing D.O.B.; Provides a statistical result expressed in dollars (or appropriate currency)
What are the differences of monterary unit sampling compared to nonstatistical sampling?
Expresses individual dollars as the sampling units; not physical units like individual account balances.
The population size is the recorded dollar population
How is sampling performed for monetary unit sampling?
- 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
How do auditors generalize from the sample to the population when using monetary unit sampling?
Auditor uses accounting software to calculate misstatement bound;
Estimate of the maximum overstatement at given ARIA
What are the steps in determining sample size using montary unit sampling?
What are the advantages to using Monetary Unit Sampling?
- 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
What are some statistical sampling methods for tests D.O.B.(two)?
- Montary Unit Sampling
- Variables Sampling*
*Not discussed in this chapter; provides a more statistical approach that involves Bell curve and confidence intervals
What are the two types of sampling risks the auditor accepts when sampling for test of D.O.B.?
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.
What is the importance of determining ARIR when sampling test of D.O.B.?
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
