Sampling

Question 1

Sample Risk and the two types

Answer 1

risk that the sample may not be representative of the population. Type I and Type II

Question 2

Type 1 errors of sampling risk

Answer 2

False rejection(related to efficiency) - risk of under-reliance on IC, and risk of incorrect rejection of $balance.

Question 3

Type II errors of sampling risk

Answer 3

False acceptance(related to effectiveness) - risk of over-reliance on IC, and risk of incorrect acceptance of $balance

Question 4

Variable sampling

Answer 4

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.

Question 5

Attributes sampling

Answer 5

used to describe sampling for purposes of evaluating the effectiveness of IC procedures under consideration

Question 6

Does audit risk of both Type I and Type II errors?

Answer 6

No just Type II

Question 7

How do statistical samples assist the auditor?

Answer 7

Designs an efficient sample
Measures the sufficiency of the evidence
Evaluates the sample results.
(this provides an objective basis for quantitatively evaluating sample risk

Question 8

Non sampling risk

Answer 8

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)

Question 9

Incorrect rejection

Answer 9

Relates to efficiency of audit. Ex: deciding that the sample results support the conclusion that the balance is MM when it is not

Question 10

The risk of over reliance

Answer 10

the same thing as the risk of assessing control risk too low (deals with the Type II error)

Question 11

What should the A do after calc the observed deviation rate based on the sample?

Answer 11

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

Question 12

For an attributes sampling plan,

Answer 12

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

Question 13

Regarding the payroll function, the Treasurer is responsible for

Answer 13

Distribution of checks

Custody of unclaimed paychecks (both custody functions)

Question 14

What kind of procedure is projecting a deviation rate?

Answer 14

test of controls

Question 15

Which dept should perform billing?

Answer 15

Acct department

Question 16

What is the purpose of operational audits

Answer 16

attempt to improve operations and reduce waste thru the intro of controls

Question 17

Who should perform bad debt write offs?

Answer 17

the treasurer - bc should be independent of the sales authorization and record keeping functions

Question 18

What type of sampling would an A typically use to test controls?

Answer 18

Attribute sampling

Question 19

Stratification

Answer 19

Breaking the population into groups of relatively similar items. This may reduce the overall variability and thereby reduce the total sample size

Question 20

PPS Sampling

Answer 20

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)

Question 21

When calculating the required sample size for a variables sampling application, is the pop. size explicitly or implicitly considered?

Answer 21

Explicitly

Question 22

When is ratio estimation most appropriate?

Answer 22

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

Question 23

Is TM inversely or directly related to sample size in a variables sampling app

Answer 23

inversley

Question 24

What is a disadvantage to PPS sampling?

Answer 24

the inclusion of zero and negative balances requires special design considerations, bc it utilizes dollar units for sampling

Question 25

When is it best to stratify a population into groups?

Answer 25

when the pop has highly variable recorded amts

Question 26

Example of stratifying

Answer 26

selecting all larger transactions over a dollar amt and a portion of the smaller transactions

Question 27

Incorrect acceptance

Answer 27

involves concluding that a FS element was fairly stated, based on an audit sampling app, when in fact, the element was materially misstated

Question 28

Stratifying may be more efficient bc

Answer 28

it produces an estimate that has a desired level of precision with a smaller sample size

Question 29

The sample size for PPS sampling is determined by:

Answer 29

1. reliaibility facctor from AICPA table
2. Pop book value
3. TM

Question 30

equation for sample size using PPS

Answer 30

(Reliability factor x BV) / TM net of misstatements

Question 31

For accounts having BV less than the sample interval,

Answer 31

the A calculates projected misstatements by applying the tainting percentage to the sample interval from which that account was selected

Question 32

What is the primary objective of PPS

Answer 32

PPS is most effective in detecting overstatements, since the likelihood of an item’s selection increases with the recorded magnitude of the item.

Question 33

PPS sampling allows the A to:

Answer 33

directly control the risk of incorrect acceptance by requiring the A to specify the desired level of that risk.

Question 34

How to calc the projected error in a PPS - when the amount of the account is greater than the sampling interval.

Answer 34

the projected error is the difference between the BV and the audit value.

Question 35

How to calc the projected error in a PPS - when the balance of the account is less than the sampling interval

Answer 35

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