Auditing - Ch. 08 Audit Sampling

Front 1

What is audit sampling?

Back 1

The application of audit procedures to less than 100% of the items in a population of audit relevance selected in such a way that the auditor expects the sample to be representative of the population and thus likely to provide a reasonable basis for conclusions about the population.

Front 2

What is the objective of sampling?

Back 2

To make a statement about a population by examining only a subset of that population.

Front 3

What does sampling trade for efficiency when you only test a subset of the population?

Back 3

Effectiveness

Front 4

What is the reason you trade effectiveness for efficiency in sampling?

Back 4

Because you only test a subset of the population.

Front 5

When do auditors use sampling techniques?

Back 5

In Attribute Sampling and Variables Sampling.

Front 6

When do auditors use Attribute Sampling?

Back 6

Used in the study and evaluation of internal control -- Determine whether important control policies and procedures are functioning as intended to prevent and detect material misstatements.

Front 7

What is Variables Sampling?

Back 7

Used during substantive testing procedures ---
Determine whether the client's accounting balances are recorded and presented in conformity with GAAP.

Front 8

How does Audit sampling differ from Traditional statistical sampling?

Back 8

Auditors - more concerned with incorrectly ACCEPTING a HYPOTHESIS (Type II or beta errors)
Statisticians - more concerned about incorrectly REJECTING A HYPOTHESIS (Type I or alpha errors)

Front 9

How are accounting distributions different from other data distributions in audit sampling?

Back 9

Accounting distributions are generally MORE SKEWED than other data distributions (more LOW dollar items with NO ERROR and more HIGH dollar items with ERRORS)

Front 10

When should sampling be used?

Back 10

When:
- the need for EXACT INFORMATION IS NOT IMPORTANT
- the number of items comprising a population is LARGE.

Front 11

What are the benefits of sampling?

Back 11

1. Cost is lower than sampling entire population
2. Data collection is faster
3. Since data set is smaller, it's possible to ensure homogeneity and improve the accuracy and quality of data.

Front 12

What is Sampling Risk?

Back 12

Risk that the decision made based on the sample differs from the decision that would have been made by examining the population

Front 13

What are the types of errors in Sampling Risk?

Back 13

Type I Error: Risk if INCORRECT REJECTION (relates to the EFFICIENCY of the audit)
Type II Error: Risk of INCORRECT ACCEPTANCE (relates to the EFFECTIVENESS of the audit)

Front 14

What causes sampling risk?

Back 14

Selecting a Non-Representative sample.

Front 15

What controls sampling risk?

Back 15

1. Determining an appropriate SAMPLE SIZE
2. Ensuring that all items have an equal opportunity of selection.
3. Mathematically evaluating sample results.

Front 16

What is NON-SAMPLING RISK?

Back 16

Incorrect conclusion unrelated to the nature of the sample.

Front 17

How does non-sampling risk arise?

Back 17

Arises from the possibility that the auditor:
1. may sample the wrong population to test an assertion,
2. fail to detect a misstatement when applying an audit procedure, or 3. misinterpret an audit result.

Front 18

How is non-sampling risk controlled?

Back 18

Controlled by:
1. Training and supervision
2. Working conditions
3. Effort

Front 19

SAMPLING APPROACHES
What results are found by using the laws of probability?

Back 19

1. Statistical sampling methods use the LAWS OF PROBABILITY TO:
- Select sample items
- Evaluate sample results
(Judgmental)

Front 20

SAMPLING APPROACHES
What is it that statistical sampling methods control?

Back 20

The auditor's exposure to sampling risk

Front 21

SAMPLING APPROACHES
What is it that violates one or both of the statistical sampling methods criteria?

Back 21

Nonstatistical sampling (haphazard selections)

Front 22

Which sampling can be used in a GAAS audit?

Back 22

Both statistical sampling and nonstatistical sampling.

Front 23

Which sampling approach should not be used in an audit and why?

Back 23

Nonstatistical sampling should not be used as a means to reduce sample sizes.

Front 24

Name the steps in Sampling.

Back 24

1. Determine the objective of sampling
2. Define the population characteristics
----- Define the sampling population
----- Define the sampling unit.
----- Define the control deviation conditions.
3. Determine the sample size using the following:
----- The desired confidence level or risk of incorrect acceptance
----- The tolerable deviation rate
----- The expected population deviation rate.
4. Select sample items.
5. Perform the auditing procedures
6. Calculate the sample deviation rate and the computed upper deviation rate.
7. Draw final conclusions.

Front 25

What is meant by the "objective of sampling"?

Back 25

The objective of attribute sampling when used for tests of controls to EVALUATE THE OPERATING EFFECTIVENESS of the Internal Control.

Front 26

What are the Population characteristics?

Back 26

1. Define the Sampling Population
2. Define the Sampling Unit.
3. Define Control Deviation Conditions.

Front 27

What is the Sampling Population?

Back 27

All or a subset of the items that constitute the class of transactions (or account balance when not testing controls) make up the sampling population.

Front 28

What is the meant by the Sampling Unit?

Back 28

The individual members of the sampling population.

Front 29

What is a deviation?

Back 29

A deviation is a departure FROM ADEQUATE PERFORMANCE of the INTERNAL CONTROL.

Front 30

What is the 3rd step in Sampling?

Back 30

3. Determine the sample size using the following inputs:
-- Desired confidence level
-- Tolerable deviation rate
-- Expected deviation rate

Front 31

What is meant by "Desired Confidence Level" (DCL) ?

Back 31

This is the desired level of assurance that the sample results will support a conclusion that the control is functioning EFFECTIVELY.

Front 32

What is the desired confidence level affected by?
(Assn: Direct/Positive)

Back 32

by the SIGNIFICANCE OF ACCOUNT/ ASSERTATION

Front 33

What is the Tolerable Deviation Rate (TDR) ?
(Assn to sample size: INVERSE)

Back 33

The maximum deviation rate that the auditor is willing to accept and still consider the control EFFECTIVE.

Front 34

What is the Expected Deviation Rate (EDR) ?
(Assn to sample size: Direct)

Back 34

The deviation rate that the auditor expects to EXIST in the population

Front 35

What is the 4th step in Sampling?

Back 35

4. Select sample items (ensure all items of population can be selected)

Front 36

What are the various ways in selecting sample items?

Back 36

1. Unrestricted Random Selection - select items based on random numbers matched to items in population
2. Systematic Random Selection - Auditor determines sampling interval by dividing population / sample size. (N / # in sample)
3. Block Selection: Select contiguous units (not random)
4. Haphazard Selection: Select items in nonsystematic manner (judgmental)

Front 37

What is the 5th step in Sampling?

Back 37

5. Perform the Audit Procedures
-- Perform TEST OF CONTROL PROCEDURE and make appropriate evaluation/measurement
-- Nonsampling risk can occur if incorrect procedures are performed or mistakes in evaluation or measurement are made

Front 38

What is the 6th step in Sampling?

Back 38

6. Calculate the Sample Deviation and Upper Deviation Rates.

Front 39

How do you calculate the Sample Deviation?

Back 39

Sum the deviations in the sample
(ex - 2 deviations out of a sample of 50)
Deviation rate = 2 / 50 = 4%

Front 40

How do you calculate the Upper Deviation Rate (UDR) ?

Back 40

SUM: Sample Deviation Rate + appropriate Allowance for sampling risk

Front 41

What is the 7th step in Sampling?

Back 41

7. Draw final conclusions: compare the tolerable deviation rate (TDR) to the computed upper deviation rate (UDR)

Front 42

Conclusion: What if UDR > TDR ?

Back 42

Internal Control is NOT functioning Effectively,
Need to:
-- Increase sample size to support planned level of control risk (bad idea)
-- Increase level of control risk, leading to larger sample for substantive tests or more effective substantive procedures (lower DR)

Front 43

Conclusion: What if UDR <= TDR?

Back 43

Internal control is functioning effectively
-- Maintain planned level of CR, leading to planned level of substantive procedures.

Front 44

What is the documentation required?

Back 44

Required for each of the steps of Sampling, especially for important Judgments, including:
-- Factors affecting SAMPLE SIZE
-- METHOD OF SELECTING sample and description of items selected
-- Method of MEASURING sample items and summary of measurements
-- EVALUATION of sample results and overall conclusion

Front 45

What is the relationship of Desired Confidence level to the Sample Size?

Back 45

Direct - so if sample size increases, so does DCL.

Front 46

What is the relationship of Tolerable deviation rate (TDR) to the Sample Size?

Back 46

Inverse - so if sample size decreases, TDR goes up.

Front 47

What is the relationship of Expected Population Deviation (EDR) rate?

Back 47

Direct - so if sample size decreases, then EDR goes down.

Front 48

What is the effect of population size to sample size?

Back 48

You only DECREASE sample size when population is small (fewer than 500 items)

Front 49

Attribute Sampling:
Determine appropriate sample size

Back 49

Go to table and using the TDR and the EDR, find the Desired Confidence Level.

Front 50

Attribute Sampling:
Determine the Sample deviation rate (SDR)

Back 50

# Deviations / Desired Confidence Level (DCL)

Front 51

Determine the UDR

Back 51

Go to the table, using the # of deviations and the sample size (or closest number without going over).

Front 52

Using the RACTL (1 - RACTL),
how do you make a conclusion about the UDR?

Back 52

You can state that you are ? % confident that the actual (true) population deviation is more or less than or equal to the UDR.

Front 53

What is statistical sampling?

Back 53

Use the laws of probability to:
1. Select sample items
2. Evaluate sample results
(these methods control the auditor's exposure to sampling risk)

Front 54

What is Non-Statistical sampling?

Back 54

Sampling is considered Non-statistical if:
1. Sample size is determined judgmentally
2. Sample size is selected haphazardly
3. Sample results evaluated judgmentally
(Violates one or both of the criteria for statistical sampling)

Front 55

What is the similarity and difference between Statistical and Non-Statistical sampling?

Back 55

They can both be used in a GAAS audit, but Non-statistical sampling should NOT BE USED AS A MEANS TO REDUCE SAMPLE SIZES

Front 56

What is ATTRIBUTE SAMPLING?

Back 56

Used to estimate the proportion of a population that possesses a specified characteristic.

Front 57

What do auditing standards say about sampling techniques?

Back 57

Requires the auditor to PROPERLY PLAN, PERFORM, AND EVALUATE THE SAMPLING APPLICATION and ADEQUATELY DOCUMENT each phase of the sampling application in the WORKING PAPERS.