Sampling Flashcards
Sample Risk and the two types
risk that the sample may not be representative of the population. Type I and Type II
Type 1 errors of sampling risk
False rejection(related to efficiency) - risk of under-reliance on IC, and risk of incorrect rejection of $balance.
Type II errors of sampling risk
False acceptance(related to effectiveness) - risk of over-reliance on IC, and risk of incorrect acceptance of $balance
Variable sampling
the term used to describe sampling for purposes of estimating the dollar balance for an account or FS element. Is used to calc a best estimate of a pop value with confidence intervals around the estimate.
Attributes sampling
used to describe sampling for purposes of evaluating the effectiveness of IC procedures under consideration
Does audit risk of both Type I and Type II errors?
No just Type II
How do statistical samples assist the auditor?
Designs an efficient sample
Measures the sufficiency of the evidence
Evaluates the sample results.
(this provides an objective basis for quantitatively evaluating sample risk
Non sampling risk
any error unrelated to sampling risk that the A might commit when performing an audit sampling task (such as failing to recognize a misstatement or otherwise misinterpret the audit evidence)
Incorrect rejection
Relates to efficiency of audit. Ex: deciding that the sample results support the conclusion that the balance is MM when it is not
The risk of over reliance
the same thing as the risk of assessing control risk too low (deals with the Type II error)
What should the A do after calc the observed deviation rate based on the sample?
the A should ascertain the achieved upper precision limit from the applicable tables before concluding that the control procedure of interest is working satisfactorily in relationship to the tolerable rate
For an attributes sampling plan,
the A determines the sample size using a table that considers the acceptable risk of assessing control risk too low, the tolerable rate, and the expected population error rate
Regarding the payroll function, the Treasurer is responsible for
Distribution of checks
Custody of unclaimed paychecks (both custody functions)
What kind of procedure is projecting a deviation rate?
test of controls
Which dept should perform billing?
Acct department
What is the purpose of operational audits
attempt to improve operations and reduce waste thru the intro of controls
Who should perform bad debt write offs?
the treasurer - bc should be independent of the sales authorization and record keeping functions
What type of sampling would an A typically use to test controls?
Attribute sampling
Stratification
Breaking the population into groups of relatively similar items. This may reduce the overall variability and thereby reduce the total sample size
PPS Sampling
groups the population into individual dollar items, which is an extreme degree of stratification (can be very efficient when there are few differences between audit and book values)
When calculating the required sample size for a variables sampling application, is the pop. size explicitly or implicitly considered?
Explicitly
When is ratio estimation most appropriate?
when the A anticipates that any diff between the sampling unit’s audit values and book values are likely to be proportional to their recorded book values
Is TM inversely or directly related to sample size in a variables sampling app
inversley
What is a disadvantage to PPS sampling?
the inclusion of zero and negative balances requires special design considerations, bc it utilizes dollar units for sampling
When is it best to stratify a population into groups?
when the pop has highly variable recorded amts
Example of stratifying
selecting all larger transactions over a dollar amt and a portion of the smaller transactions
Incorrect acceptance
involves concluding that a FS element was fairly stated, based on an audit sampling app, when in fact, the element was materially misstated
Stratifying may be more efficient bc
it produces an estimate that has a desired level of precision with a smaller sample size
The sample size for PPS sampling is determined by:
- reliaibility facctor from AICPA table
- Pop book value
- TM
equation for sample size using PPS
(Reliability factor x BV) / TM net of misstatements
For accounts having BV less than the sample interval,
the A calculates projected misstatements by applying the tainting percentage to the sample interval from which that account was selected
What is the primary objective of PPS
PPS is most effective in detecting overstatements, since the likelihood of an item’s selection increases with the recorded magnitude of the item.
PPS sampling allows the A to:
directly control the risk of incorrect acceptance by requiring the A to specify the desired level of that risk.
How to calc the projected error in a PPS - when the amount of the account is greater than the sampling interval.
the projected error is the difference between the BV and the audit value.
How to calc the projected error in a PPS - when the balance of the account is less than the sampling interval
the auditor must determine the tainting percentage and apply that percentage to the sampling interval. Ie. (recorded amount - audit amt)/recorded amount = %, % x sampling interval
