Unit 9 - Evaluating Audit Data Analytics and Audit Sampling for Substantive Tests

Question 1

When relevant data is not reliable and internal controls over the reliability of data are weak, should the auditor use ADA or Audit Sampling?

Answer 1

Audit Sampling

Question 2

What are the two consequences of sampling risk?

Answer 2

1) The risk that the audit will be ineffective (the sample chosen by the auditor is not representative of the population and the auditor concludes that a material misstatement does not exist when it actually does or a material misstatement exists when it actually does not

2) The risk that the audit will be inefficient

Question 3

Define risk of incorrect acceptance.

Answer 3

This is the risk that the auditor concludes, based on sample results, that a material misstatement does not exist when it does exist.

Question 4

Define risk of incorrect rejection.

Answer 4

This is the risk that the auditor concludes, based on sample results, that a material misstatement exists when it does not exist.

Question 5

What are the three major advantages of nonstatistical sampling?

Answer 5

1) decreased complexity

2) lower training cost

3) may be less time consuming

Question 6

What are the three major disadvantages of nonstatistical sampling?

Answer 6

1) cannot quantify sampling risk

2) cannot measure the sufficiency of evidence

3) may not get the most efficient sample

Question 7

Define stratification.

Answer 7

Stratification is breaking the population into groupings (strata) that have common characteristics, such as invoices over $10,000 and invoices under $10,000.

Stratification can be used prior to random selection for audit sampling to improve efficiency.

Question 8

How is a sampling interval calculated?

Answer 8

Population size / Sample size

Question 9

Define systematic selection.

Answer 9

Systematic selection involves the selection of a sample for testing by dividing the number of items in a population by the sample size, resulting in the sampling interval.

Selection starting with a random starting point and a specified sample interval.

Question 10

Define haphazard selection.

Answer 10

Involves the selection of a sample by an auditor without using a methodical technique.

Question 11

What are the two types of substantive procedures?

Answer 11

1) tests of details

2) substantive analytical procedures

Question 12

What five things are required to cover in documentation?

Answer 12

1) Overall response at the FS level to assessed RMM

2) Nature, timing, and extent of further audit procedures

3) Linkage of those procedures with the assessed RMM at the relevant assertion level

4) Results of the audit procedures performed

5) Conclusions reached in the current audit about the operating effectiveness of controls tested in a prior period

Question 13

Define PPS “Sampling Unit”

Answer 13

Probability-Proportional-to-Size Sampling

An individual dollar associated with the financial statement element involved.

Ex. suppose AR consists of 7500 customer accounts having a total balance of $3,000,000. The population is viewed as consisting of 3,000,000 individual items (dollars) rather than 7500 accounts.

Question 14

What is the advantages of PPS?

Answer 14

Efficiency - if there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than the other sampling methods

Question 15

What is the disadvantage with PPS?

Answer 15

PPS sampling does not work well in auditing negative balances (understatement) or zero (unrecorded) balances. Best used when overstatments are the primary concern.

Question 16

What are the three considerations that determine the PPS sample size?

Answer 16

1. The “reliability factor” (from an AICPA table based on the risk of incorrect acceptance and the number of overstatements allowed)
2. The population book value ($ amount in total)
3. The tolerable misstatement (net of any expected misstatements)

Question 17

What is the equation to determine the PPS sample size?

Answer 17

Reliability factor x Book Value / Tolerable misstatement, net of expected misstatements

Question 18

When defining the population and sampling unit, sometimes an auditor must look for a reciprocal population. A reciprocal population is:

Answer 18

a population that is overstated if the population of interest is understated (or vice versa).

Question 19

Define tolerable misstatement when performing a substantive test.

Answer 19

The maximum dollar amount of misstatement that an auditor is willing to accept within the population tested and conclude that the population is presented fairly.

Question 20

When planning a classical variables sample, the risk of incorrect acceptance and the risk of incorrect rejection are related to what general factor that influences sample size?

Answer 20

The desired level of assurance from the sample.

Question 21

An auditor is tasked with testing the existence of accounts receivable on a client’s balance sheet. The audit team decides that probability proportionate to size sampling (PPS) will be used. In applying PPS, the auditor determines that

the upper misstatement limit is $40,000,

the tolerable misstatement is $45,000,

and the projected misstatement is $35,000.

Which quantitative audit conclusion should be made?

a) Since the tolerable misstatement is more than the projected misstatement, additional testing needs to be performed.

b) Since the upper misstatement limit is less than the tolerable misstatement, the accounts receivable balance is considered fairly stated.

c) Since the tolerable misstatement is more than the projected misstatement, additional testing does not ned to be performed.

d) Since the upper misstatement limit is less than the tolerable misstatement, the accounts receivable balance is considered materially misstated.

Answer 21

b) since the upper misstatement limit is less than the tolerable misstatement, the accounts receivable balance is considered fairly stated.

Question 22

Which factor limits the effective use of audit data analytics instead of traditional audit sampling?

a) The client’s industry

b) The auditor’s risk assessment

c) The organization’s management structure

d) The client’s publicly traded status

Answer 22

b) The auditor’s risk assessment

The auditor will consider the risk involved with using data by taking into account if there are effective internal controls.