Aud - Sampling

Front 1

What is sampling?

Back 1

taking part of a population, subjecting it to audit procedures, projecting results to a population

Front 2

Sampling is used in both

Back 2

tests of controls
substantive testing

Front 3

Statistical sampling

Back 3

Based on formulas
Helps quantify Sampling Risk

Front 4

Non-statistical Sampling

Back 4

Based on human decision
Equally acceptable as Statistical Sampling

Front 5

What is sampling risk?

Back 5

The risk that your sample isnt representative of the population

Front 6

Sampling Risk & Tests of Control

Back 6

Risk of Assessing Control Risk too Low
Risk of Assessing Control Risk too High

Front 7

Risk of Assessing Control Risk too High

Back 7

Sample overstates control
Auditor concludes control is ineffective when it actually is
Underreliance on IC
Overtesting
Audit Inefficiency

Front 8

Risk of Assessing Control Risk to Low

Back 8

Sample understates control
Auditor concludes control is effective when its not
Overreliance on IC
Undertesting
Audit Ineffectiveness - may issue inappropriate report
Inverse relationship to sample size
Leads to higher DR

Front 9

Sampling Risks & Substantive Tests

Back 9

Risk of Incorrect Acceptance
Risk of Incorrect Rejection

Front 10

Risk of Incorrect Acceptance

Back 10

Hurts effectiveness
Efficient, ineffective
Auditor will inappropriately issue unmodified report?

Front 11

Risk of Incorrect Rejection

Back 11

Hurts efficiency
Effective, inefficient
Requires adjustment or will issue inappropriately modified report

Front 12

Three types of statistical sampling

Back 12

Attribute sampling
Variables sampling
Probability proportionate to size sampling

Front 13

Attribute Sampling

Back 13

Used for tests of controls
Estimate errors in pop based on frequency in sample
Determine whether est. error rate indicates control working efficiently

Front 14

Steps in attribute sampling

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Establish tolerable deviation rate
Determine allowable risk of overreliance (assessing CR too low)
Determine expected pop deviation rate
Calculate sample size
Select & test sample

Front 15

How to calculate sample deviation rate?

Back 15

Errors in sample/items in sample

Front 16

How to calculate upper deviation limit

Back 16

Sample deviation rate + allowance for sampling risk

Front 17

If upper precision limit is less than or equal to the tolerable rate

Back 17

assessed level of CR is unchanged

Front 18

If upper precision limit is greater than the tolerable rate

Back 18

assessed level of CR is increased

Front 19

Attributes sampling - effects of factors on sample size
Risk of assessing CR too low
Tolerable rate
Expected pop deviation rate
Population

Back 19

Decrease
Decrease
Increase
Increase (slightly for large samples)

Front 20

Variations of attribute sampling

Back 20

Stop or go sampling (sequential sampling)
Discovery sampling

Front 21

Stop or go sampling (sequential)

Back 21

Testing discontinues when auditor acquires sufficient data
Appropriate when expected deviation rate is low
Sample selected in steps
Each step based on results of previous step
No fixed sample size

Front 22

Discovery sampling

Back 22

Appropriate when expected deviation rate is extremely low or zero
Sample size is very small, but large enough to detect at least 1 error if it exists
Any errors in sample result in rejection

Front 23

Variables Sampling

Back 23

Mean Per Unit (sample average x number in pop)
Stratification (similar transactions grouped and subjected to procedures)
Decreases effect of variance and reduces sample size

Front 24

Steps in variables sampling

Back 24

1. Est. tolerable misstatmenet
2. Determine allowance risk of incorrect acceptance
3. Determine expected misstatement
4. Calc sample size
5. Select & test sample
6. Calc upper deviation limit (diff b/w actual & reported amt based on the sample)
7. Reach conclusions

Front 25

If precision is less than or equal to tolerable misstatement

Back 25

opinion may require modification

Front 26

If precision greater than tolerable misstatement

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Opinion will not require modification

Front 27

How to calculate the allowable risk of incorrect acceptance

Back 27

1. Determine acceptable audit risk
2. Measure inheren risk
3. Assess level of CR
4. Use AR, IR, CR to calc DR
5. At various level sof DR, measure allowance risk of incorrect acceptance

Front 28

Variables sampling - Effects of factors on sample size

Risk of Incorrect Acceptance
Risk of Incorrect Rejection
Tolerable Misstatement
Expected Misstatement
Population
Variation (standard deviation)

Back 28

Decr
Decr
Decr
Incr
Incr
Incr

Front 29

Probability Proportionate to Size Variation

Back 29

Form of variable sampling
Does not use standard deviation
Larger more valuable items get picked more often
Projected misstatement - if misstatement found in sample, auditor has to project to remainder of pop

Front 30

PPS most effective when

Back 30

Few or no errors expected
Auditor concerned about overstatements

Front 31

Advantages of PPS

Back 31

Large items selected
Material items automatically selected
Sample size reduced as same item can be selected more than once
Sample distribution does not have to be close the the distribution in pop to be valid
Sampling can be initiated prior to YE

Front 32

Disadvantages of PPS

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Understated items have lower probability of being selected
Items with zero or negative balances not included
Lots of misstatements results in increase in sample size

Front 33

Steps in applying PPS

Back 33

1. Determine risk of incorrect acceptance & est. overstatement errors
2. Measure necessary reliability factor for errors
3. Determine tolerable misstatement
4. Determine sampling interval
5. Calculate sample size
6. Select & test sample
7. Calculate projected error in population
8. Evaluate sample results and draw conclusion

Front 34

What about the reliability factor?

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The higher the risk of incorrect acceptance, the lower the reliability
The high the estimated number of overstatement errors, the higher the reliability

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Sampling interval =

Back 35

Tolerable misstatement / reliability factor

Front 36

Sample size =

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Total dollar amount of population / sampling interval

Front 37

PPS - Selecting the sample

Back 37

1. List items in pop in logical sequence
2. Based on the amt of an item and the total amts of previous items, each item will represent a cumulative amount
3. Assign item a range of values
---lower end of range = previous item's cumulative amount
---upper end of range = item's cumulative amount
4. Select items within the pop where a multiple of sampling interval is included in range

Front 38

Calculating the Projected Misstatment

Back 38

1. Determine items in sample containing misstatement
2. If item has dollar amt > sampling interval, misstatement is added to projected mstmt
3. If item has dollar < sampling interval, effect of mstmt on projected mstmt must be calculated and added to proj. mstmt

Tainting factor = amt of misstatement / dollar amt of item
Proj mstmt = taint % x sampling interval

Front 39

Systematic sampling

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Every certain number of a pop is selected
Pop needs to be randomly ordered
Primary advantage = doesn't involve pre numbering

Front 40

Block sampling

Back 40

Worst method of sampling

ex: auditor picks all transactions from June and projects results to the rest of the year.