SU 08 Statistical Sampling

Question 1

When sampling is used

Answer 1

• when evidence to support the test is not in electronic form
• when the audit population is small and it is efficient to test with traditional procedures
• when relevant data is not reliable and internal controls over reliable data are weak
• when relevant data is in multiple formats/ not easy to use

Question 2

When is data analytics used

Answer 2

• when the evidence to support the audit test is available in electronic form
• when the audit population is large, and the auditor’s tests are supported by reliable/relevant data in electronic form
• relevant data is reliable and internal controls over reliability are strong
• ## when relevant data is already clean or can be cleaned up easily

Question 3

Where is data analytics used in the confirmation process of evidence gathering?

Answer 3

In selecting items to confirm (previously used sampling)

Question 4

Sample selection methods

Answer 4

• non statistical sampling
• statistical sapling

Question 5

Non-statistical sampling

Answer 5

when auditor uses their subjective judgement to determine sample size and sample selection

Question 6

Statistical sampling

Answer 6

aka probability or random sampling

randomly selects sample items and uses a statistical method to evaluate results

Question 7

Attribute sampling

Answer 7

used on tests of controls - tests a binary statement: are the controls working or not

Question 8

Variables sampling

Answer 8

used for substantive testing of specific details (such as dollar values or quantities). Considering the accuracy of a variable

Question 9

Sample risk

Answer 9

the risk that the auditor’s conclusion based on the sample is not correct if the procedure was applied to the whole population (risk sample is not representative)

Question 10

Nonsampling risk

Answer 10

risk of an erroneous conclusion caused by a factor besides sampling risk (such as inappropriate procedures used, evidence misinterpreted, failure to recognize misstatements and control deviation

Question 11

Types of sampling risk

Answer 11

Type I (Alpha) Risk aka audit efficiency error

Type II (Beta) Risk aka audit effectiveness error

Question 12

Type I risk

Answer 12

Sample is overly negative so auditor assumes controls are not/ less effective or that a material misstatement exists when that is actually not the case for the population

risk of incorrect rejection

Causes unnecessary audit effort doing follow-up

Question 13

Type II Risk

Answer 13

Sample is overly positive, so auditor assumes that the controls ARE effective, or that there are no material misstatements when that is not the case for the population

Risk of incorrect acceptance

Could potentially cause audit failure

Question 14

Confidence level

Answer 14

Reliability level of sampling

Per statista: indicates the probability with which the estimation of the location of a statistical parameter (e.g., an arithmetic mean) in a sample survey is also true for the population.

COMPLEMENT of sampling risk

Question 15

Relationship between confidence level and sampling risk

Answer 15

complementary: sum to one

Question 16

Factors affecting sampling size

Answer 16

Population size: direct relationship not linear

Acceptable risk: inverse relationship

Variability in population: direct relationship

Question 17

Tolerable deviation rate

Answer 17

acceptable (sampling) risk for attribute sampling

Question 18

Tolerable Misstatement

Answer 18

Acceptable misstatement that may exist without causing the financial statements to be materially misstated - generally a value

expression of performance materiality

Question 19

Expected deviation rate

Answer 19

in attribute sampling, an estimate (potentially based on a prior year or pilot sample) of the deviation rate in the population

deviation = control failure rate

should be less than tolerable rate - if more control should be omitted

Question 20

Standard deviation

Answer 20

for variable sampling, estimate of population SD based on pilot sample or prior year

Question 21

Determining sample size for attribute sampling

Answer 21

Use a table with axis of:
- expected population deviation
- tolerable deviation rate

Question 22

If expected population deviation is greater than tolerable deviation

Answer 22

Cannot rely on that control, control risk for that control is 100%

Question 23

if tolerable deviation rate is 0

Answer 23

auditor cannot afford any deviations, entire population must be assessed

Question 24

Allowable risk of over reliance

Answer 24

allowable type II risk (risk of audit failure)

complement to confidence level

Question 25

Inputs for determining sample size for variable sampling

Answer 25

• Confidence coefficient (C)
• Population standard deviation (S)
• items in population (N)
• tolerable misstatement (TM)
• allowed % for sampling risk aka Precision (taken from table) (P)
• allowance for sampling risk = precision x tolerable misstatement
  A = TM x P

Question 26

equation for variable sampling sample size

Answer 26

n= ((C x S x N) / A) ^2

Question 27

Sampling approaches

Answer 27

-Random sampling
- systematic sampling
- block sampling (Cluster sampling)
- Stratification & money unit sampling

Question 28

Systematic sampling

Answer 28

Random start + every nth item in population (determined by dividing the full population by the necessary sample size

Question 29

Block sampling

Answer 29

Selecting groups rather than individual items

Question 30

Stratification

Answer 30

Divide population into sub groups - results in less variability within groups than within whole population

can use a smaller sample size to get the same desired confidence level

Question 31

Monetary unit sampling

Answer 31

stratification based on dollar value - risk-based

Question 32

Is sampling with replacement or without replacement more conservative

Answer 32

with replaces

Question 33

which sampling approach is assumed by the tables

Answer 33

with replacement (requires larger sample size)

Question 34

Which sampling approach do most auditors use

Answer 34

without replacement - more efficient

Question 35

Statistical sampling procedure steps

Answer 35

• Define objectives (account and assertion being tested)
• Define population
• Define acceptable level of sampling risk
• calculate the sample size needed for significant results
• select sampling approach
• collect samples
• evaluate sample results
• document procedures and results

Question 36

Population in test of controls

Answer 36

• what control is being tested for what period

Question 37

Population in substantive procedures

Answer 37

What items are being tested