Sampling Part 1 M8 Flashcards
What does the Auditor consider when determining sample size?
Attribute Sampling / Test of Controls
- Tolerable deviation rate.
- Acceptable level of the risk of overreliance or assessing control risk too low.
- Expected deviation rate.
Variable Sampling / Test of Details
- Tolerable misstatement.
- Used to determine whether a given account balance is reasonable.
What are the different types of Attribute Sampling?
- Discovery Sampling: Used when looking for a very distinct characteristic such as fraud
- Stop-n-Go Sampling
- Attribute sampling involves statistical sample selection:
Random sampling or Systematic sampling. These sample methods are considered statistical sampling because every population item has an equal chance of being selected
What is Attribute Sampling?
- Statistical approach is used to test controls.
- Statistical approaches allow auditors to quantify sampling risk.
- Random sampling or Systematic sampling. These sample methods are considered statistical sampling because every population item has an equal chance of being selected.
- Attribute sampling is used to test the attributes, or characteristics, of each item in a sample.
What is attributes sampling used for?
- To test the attributes, or characteristics, of each item in a sample.
- To determine if proper procedures were followed for each item in the sample.
- To determine amounts were properly recorded for each item in the sample.
- To determine if discounts were properly applied to each item in the sample.
What is Variable Sampling used for?
- Substantive Testing
- is typically used to estimate a numerical quantity, such as the amount in an expense account.
- Stratified sampling is used in conjunction with variables sampling
- Ratio estimation is used in conjunction with variables sampling
What are the 2 types of statistical sampling problems?
ATTRIBUTES SAMPLING
- Auditor assessing internal control as NOT operating effectively when it is. This is the risk of assessing control risk too high. / Too much work / The audit work is NOT efficient.
- Auditor assessing internal control as MORE effective than it is. This is the risk of assessing control risk too low. / not enough work / the audit work is not effective.
VARIABLES SAMPLING
- The auditor concluding the account balance is not materially misstated, but it is. / The Risk of incorrect acceptance / not enough work / audit work is not effective
- The auditor concluding the account balance is materially misstated, but it is NOT. / The risk of incorrect acceptance / too much work / the audit work done was not efficient.
How is efficiency and effective determined by sampling risk?
- Both the risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement.
- The efficiency of the audit is related to the risk of incorrect rejection and the risk of assessing control risk too high.
What are the different types of audit risk?
Audit Risk
- refers to uncertainty in applying audit procedures to specific risks.
Sampling Risk
- Sampling risk arises from the possibility that, when a test of controls or substantive test is restricted to a sample, the auditor’s conclusions may be different from the conclusions that would have been reached had the tests been applied to all items in the account balance or class of transactions.
Non-Sampling Risk
- Selecting audit procedures that are not appropriate to achieve the specific objective.
- Inappropriate audit evidence.
- Failure to recognized misstatements in documents.
- Includes all aspects of audit risk that are not due to sampling.
- It is always present and cannot be measured
- The auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality control of all firm practices.
When would an Auditor increase the preliminary assessment of control risk?
- When tolerable rate (maximum rate of deviations from IC is accepted by auditor) is less than the upper deviation rate.
Sampling Formulas
Allowance for Sampling Risk = Upper Deviation Rate - Sample Deviation Rate
Given - (Deviation of Sample/ Sample Size)
What are the factors in audit sampling risk?
Nonsampling Risk
* Audit risk that are not due to sampling.
* Auditor fails to recognize misstatements.
Sampling Risk
* Substantive test is restricted to a sample vs. testing each item in the population.
The auditor’s evaluation would be to modify the planned assessed level of control risk WHEN:
The sample deviation rate of 6% (3 deviations/50 sample population) + the allowance for sampling risk of 2% (the sum of which is called the upper deviation rate) exceeded the tolerable rate of 7%.
Which 2 rates are used to determine if a control can be relied upon?
- Tolerable Rate compared to the Upper Deviation Rate
How to determine sample size for Internal Control?
- The auditor should consider the expected deviation rate (which is the auditor’s best estimate), the tolerable deviation rate, and the allowable risk of assessing control risk too low.
- The upper deviation rate is used to evaluate a balance after a sampling plan.
- The risk of incorrect acceptance and risk of incorrect rejection are considered in direct tests of balances.
How does the sample size vary with internal control testing?
The sample size for a test of controls varies directly with the expected deviation rate and inversely with the tolerable rate. If the auditor expects more errors, he or she would increase sample size; conversely, if the tolerable rate of deviation increases, not as many items need to be selected.
