Sampling

Question 1

Allowance for Sampling Risk

Answer 1

• The objective of the allowance for sampling risk is to estimate the confidence interval (range of procedural deviations) of the population

Question 2

Allowance for Sampling Risk - Precision

Answer 2

• Precision (the allowance for sampling risk) is used to construct an interval around the sample results in which the true population characteristic is expected to lie.
• Accordingly, possible error in either direction from the sample results is considered

Question 3

Attribute Sampling

Answer 3

• Attributes sampling deals with deviation rates
• Attribute sampling expresses a conclusion about the population in terms of a rate of occurrence.
• As an example, determining the percentage of slow-moving inventory items would be an appropriate attribute sampling application.
• “Error” Rate is Attribute sampling
• Control Procedures are Opertating Properly or Not - based on error rate and tolerance
• Attribute sampling is only usefule when there is an audit trail to test

Question 4

Attribute Sampling Tolerable Rate

Answer 4

• Error rate in population willing to accept
• Inverse relationship to sample size
  
  • higher tolerable rate = smaller sample size

Question 5

Deviation Rate

Answer 5

Deviation rate applies to attribute sampling which is appropriate for tests of controls, not substantive tests

Question 6

Difference and Ratio Estimation

Answer 6

Difference and ratio estimation methods are statistical sampling methods:

• They measure the difference between audit and book values or the ratio of audit to book values.
• As these differences should not be great, the population of these differences will have little variance.
• In statistical sampling, the less variation in a population, the smaller the required sample to provide an estimate of the population.
• Difference and ratio estimation methods are more efficient because the differences between audit and book values are expected to vary less than the actual items in the population

Question 7

Discovery Sampling

Answer 7

• Discovery sampling is a special case of sampling for attributes.
• In discovery sampling there should be no opportunity to observe more than one occurrence, because it is designed to sample for serious or critical errors.
• Once a critical or serious error is discovered, the sampling plan will probably be abandoned and a more comprehensive examination undertaken.

Question 8

Discovery Sampling

Answer 8

• The determination of a sample size sufficient to include at least one such exception is a characteristic of Discovery Sampling
• Discovery sample sizes and related discovery sampling tables are constructed to measure the probability of at least one error occurring in a sample if the error rate in the population exceeds the tolerable rate

Question 9

Probability-Proportional-to-size (PPS) Sampling

Answer 9

• The sampling interval is calculated by dividing the book value of the population by the sample size.
• The book value of the unit determines how probable it is that it will be included in the sample
• PPS sampling does not assume a normal distribution

Question 10

Ratio Estimation

Answer 10

Ratio Estimation sampling technique is based upon comparing the ratio of the book value to the audited value of the sampled items.

This method cannot be used when book values for the sample items are unknown.

Ratio estimation is appropriate when testing a population for which a large number of errors of pricing and extensions of perpetual inventory balances with a larger number of items, is expected

Question 11

Ratio Estimation

Answer 11

• The ratio estimation sampling technique uses the ratio between the audited to book amounts as a measure of standard deviation in its sample size computation
• When audit differences are approximately proportional to account size the standard deviation of the ratio is small and this results in a relatively small required sample size
• Appropriate when numerous pricing and extension errors are expected

Question 12

Sampling Risk

Answer 12

Sampling risk is the possibility that the items selected in a sample are not truly representative of the population being tested.

Question 13

Sequential sampling

Answer 13

Sequential sampling results in the selection of a sample in several steps, with each step conditional on the result of the previous steps.

Therefore, sample size will vary depending upon the number of stages that prove necessary and does not use a fixed sample size

Question 14

Standard Deviation - (Variability)

Answer 14

In the application of statistical techniques to the estimation of dollar amounts, a preliminary sample is usually taken primarily for the purpose of estimating the population variability

It is necessary to obtain an estimate of a population’s standard deviation (variability) when calculating the required sample size and when using sampling techniques.

Question 15

Stratified Sampling

Answer 15

Stratified sampling is a technique of breaking the population down into subpopulations and applying different sample selection methods to the subpopulations.

Stratified sampling is used to minimize the variance within the overall population

Question 16

Stratified Sampling

Answer 16

Stratified sampling is a technique of breaking the population down into subpopulations and applying different sample selection methods to the subpopulations.

Stratified sampling is used to minimize the variance within the overall population.

Question 17

Systematic Sampling

Answer 17

• Systematic sampling is a procedure where a random start is obtained and then every nth item is selected.
• If certain forms are not consecutively numbered systematic sampling may be appropriate.

Question 18

Tolerable Rate

Answer 18

• Tolerable rate is calculated to determine the range of procedural deviations in the population
• The objective of the tolerable rate in sampling for tests of controls of internal control is to estimate the range of procedural deviations in the population.

Question 19

Variables Sampling

Answer 19

• Variables Samplings deals with dollar amounts for quantities
• Variables sampling is measurement of a continuous variable (i.e., a variable such as number of items in inventory or amount of accounts receivable).
• The variable being estimated can take on a continuum of values (e.g., zero to infinity).
• Variable sampling is based upon the normal distribution.
• The auditor must set an acceptable level of risk for variables sampling n order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation
• Preliminary judgments of materiality levels are used in variables sampling

Question 20

Variables Sampling

Answer 20

Sampling for variables is used in substantive testing to estimate the dollar amount of a population or the amount of error in a population

Question 21

analytical procedures

Question 22

Attribute Sampling

Answer 22

• Attribute Sampling = Tests of Internal Control
• Used to determine initial level of Control Risk
• Attribute sampling deals with whether an attribute either exists or does not exist in a particular circumstance
• Tests of controls utilize attribute sampling.
• Attribute sampling is based on the binomial distribution which describes yes/no decisions, and error/nonerror situations.
• Attribute sampling is most applicable to tests of compliance
• variables sampling is most applicable to substantive tests.

Question 23

Attribute Sampling

Answer 23

• Attribute sampling expresses a conclusion about the population in terms of a rate of occurrence
• Attributes sampling addresses deviation rates from various controls.

Question 24

Nonsampling Risk

Answer 24

Nonsampling risk is the risk of choosing an audit procedure inconsistent with the audit objective.

Nonsamping risk is unrelated to the mathematics of the sampling process.

Nonsampling risk includes all audit risks other than sampling risk.

Or, stated differently, nonsampling risk is the probability of arriving at an incorrect conclusion, despite having selected a correct sample.

Examples of nonsampling risk are:

• Applying inappropriate audit procedures
• Failure to detect a material misstatement
• Misinterpretation of audit test results

A high level of audit planning and review can minimize the amount of nonsampling risk.

Question 25

Probability-Proportional-to-size Sample

Answer 25

for accounts with a book value less than the sampling interval:

One must first calculate a tainting percentage which is equal to:

[(Recorded amount - Audit amount)/Recorded amount].

The tainting percentage is multiplied by the sampling interval to determine projected error.

In this question the tainting percentage is 60% [($5,000 - $2,000)/$5,000].

The projected error is calculated as 60% times the sampling interval, or .60 x $10,000 = $6,000.

Question 26

Statistical Sampling

Answer 26

Statistical sampling helps the auditor to provide an objective basis for quantitatively evaluating sample risk by:

• design an efficient sample,
• measure the sufficiency of the audit evidence obtained
• evaluate the sample results.

Population size has little or no effect on sample size, except for very small populations

Question 27

Tolerable Rate

Answer 27

Tolerable rate is calculated to determine the range of procedural deviations in the population

Question 28

Planning Sample

Answer 28

When planning a particular sample for a substantive test of details, the auditor should consider the following:

• The relationship of the sample to the relevant audit objective
• Preliminary estimates of materiality levels
• The auditor’s allowable risk of incorrect acceptance
• Characteristics of items comprising the account balance or class of transactions to be sampled (the population)