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80 Cards in this Set
- Front
- Back
Attribute
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characteristic of interest being tested in a population. Can be a control or transaction. Can be to look for initials or check a price vs. quantity
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Exception
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When attribute tested does not meet the objective
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deviation
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When a control does not function as intended
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A specific exception is considered
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a deviation
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Exception rate
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# exceptions / population
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Sample exception rate
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# of exceptions in sample / sample size
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Example of exceptions
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Auditor determines exception rate for internal verification of sales invoices is 3% then on average 3 of every 100 are not verified properly.
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Auditors are interested in 3 types of exceptions
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1. Deviations from client's internal controls
2. Monetary misstatements in populations of transaction data 3. Monetary misstatements in populations of account balances detials. |
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What is the exception rate of a sample used to estimate?
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Used to estimate exception rate in the entire population.
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Because the exception rate is based on a sample what happens?
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It is likely that the sample rate differs from the actual population exception rate. The difference is called sampling error.
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CUER stands for
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Computed Upper Exception Rate
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CUER - def.
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In using audit sampling for exception rates, the auditor wants to know the most the exception rate is likely to be, rather than the width of the confidence interval so the auditor focuess on the upper limit of the interval estiamte.
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CUER simple def
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The highest estimated exception rate in the population for a given ARACR
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ARACR stands for
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Acceptable risk of assessing control risk too low
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ARACR def
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The risk that the auditor is willing to take of accepting a control as effective or a rate of monetary misstatements as tolerable, when the true population exception rate is greater than the tolerable exception rate.
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TER stands for
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Tolerable Exception Rate
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TER def
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Exceptionr rate that the auditor will permit in the population and still be willing to conclude the control is operating effectively and/or the amount of monetary misstatements in the transactions established during planning is acceptable
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EPER stands for
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Estimated population exception rate
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EPER def.
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Exception rate that the auditor expcets to find in the population before testing begins.
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What are the 9 steps that go into planning the sample for nonstatistical sampling??
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1. State objectives of audit test
2. Decide whether audit sampling applies 3. Define attributes and exception conditions 4. Define the population 5. Define the sampling unit 6. Specify the tolerable exception rate 7. Specify acceptable risk of assessing control risk too low. 8. Estimate the population exception rate 9. Determine initial sample size. |
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What are the 2 steps for selecting sample and perform the audit procedures
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1. select the sample
2. Perform the audit procedures |
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What are the 3 steps for evaluating the results
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1. Generalize from the sample to the population
2. Analyze exceptions 3. Decide the acceptability of the sample |
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State the objectives of the audit test
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these must be stated in terms of the transaction cycle being tested. typically test effectiveness of controls and determine whether the transactions contain monetary misstatements.
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Decide whether audit sampling applies
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Audit sampling applies when auditor plans to reach conclusions about a population based on a sample. The auditor should examine the audit program and select those audit procedures where audit sampling applies.
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Define attributes and exception conditions
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When sampling is used, auditors must carefully define characteristics (attributes) being tested and the exception conditions. Unless they carefully define each attribute in advance, the staff person who performs the audit procedures will have no guidelines to identify exceptions.
Attributes of interest and exception conditions for audit sampling are taken directly from the auditor's report procedures. |
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What hapens if there's an absence of attribute?
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The absence of the attribute for any sample item will be an exception for that attribute. Both missing documents and immaterial misstatements result in exceptions unless the auditor specifically states otherwise in the exception conditions.
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Define the population
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The population is those items the auditor wishes to generalize about. Auditors can define the population to include any items they want, but when they select the sample, it must be selected from the entire population as it has been defined.
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What should the auditor test the population for before sampling?
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Test for detail tie in and completion
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What can the auditor generalize about?
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ONLY the population sampled. Also if sample from only one month's transactions cannot generalize for the whole year.
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When is the population defined?
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Must be defined in advance, consistent with the objectives of the audit test.
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Define the sampling unit
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The sampling unit is defined by the auditor based on the definition of the population and objective of the audit test. The sampling unit is the physical unit that corresponds to the random numbers that the auditor generates. It is often helpful to think of the
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how is it helpful to think of the sampling unit
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as the starting point of the audit tests. For sales and collections often sales invoice or shipping document number. For example if they want to test occurrence of sales, the appropriate sampling unit is sales invoices recorded in the sales journal.
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Specify the tolerable exception rate for each attribute
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Based on professional judgement. TER represents the highest exception rate the auditor will permit in the control being tested and still be willing to conclude the control is operating effectively. For example if the auditor says TER is 9% this means the auditor decided even if 9% of the invoices aren't approved, the approval process is still effective in terms of assessed control risk.
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What is TER a question of?
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TER is a question of materiality.
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Since TER is a question of materiality what affects TER?
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It is affected by both the definition and importance of the attribute in the audit plan. If only one internal contorl is used to support a low control risk assessment for an objective, TER will be lower for the attribute than if multiple controls are used to support a low control risk assessment for the same objective.
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What can be said about TER for accellerated filing public companies?
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TER will normally be lower because results of tests of controls provide the basis for audipr's report on internal control over financial reporting.
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What affect does TER have on sample size?
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It can have a significant impact on sample size. A larger sample size is needed for a low TER than for a high TER. if the TER is decreased from 9% to 6% a larger sample is needed. Since a lower TER is used requires larger sample size to gather sufficient evidence about effectiveness of control or absence of monetary misstatements.
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What do auditors determine TER for?
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Auditors determine the TER for each attribute being tested in audit procedures by deciding what exception rate is material.
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ARACAR represents the auditor's
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measure of sampling risk
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Example of ARACAR and TER
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Assume that TER is 6% ARACR is high and the true population exception rate is 8%. The control in this case is not acceptable because the true exception rate 8% exceeds TER. The auditor doesn't know the true exception rate tho.
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What does it mean if ARACR is set at high?
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THe auditor is willing to take a fairly substantial risk of concluding that the control is effective after all testing is completed, even when it is ineffective
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in choosing the ARACR what must auditors use?
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Their best judgment
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What is the main consideration when choosing ARACR?
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Main consideration is the extent to which they plan to reduce assessed control risk as a basis for the extent of tests of details of balances.
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What can generally be said about ARACR for public companies?
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Usually ARACR is set as low because the auditor needs to be confident internal controls are effective t support opinion on internal controls over financial reporting.
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for non-statistical sampling how does ARACR change?
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common for auditors to use ARACR of high, medium, or low instead of a percentage. For statistical sampling it is common for auditors to use a % such as 5%. A low aracr implies tests of controls are important and will correspond to a low assessed control risk and reduced test of balances.
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What is the relationship between ARACR and planned sample size?
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If auditor reduces ARACR from high to low, planned sample size must be increased.
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Estimate populaton exception rate
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Should make an estimate of the population exception rate to plan the appropriate sample size.
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What happens if EPER is low?
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if EPER is low relatively small sample size will satisfy because less precise estimate is required
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what does an auditor often use to set EPER?
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Often use the preceding years audit report.
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What 4 factors determine initial sample size?
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1. population size
2. TER 3. ARACR 4. EPER |
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What happens to sample size if increase acceptable risk of assessing control risk too low?
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decrease sample size
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What happens to sample size if increase TER?
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decrease sample size
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What happens to sample size if increase in estimated population exception rate
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increase sample size
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What happens to sample size if increase in population size
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increase (minor effect)
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A combo of what 2 factors has the greatest effect on sample size?
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TER minus EPER
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If TER is 4% and EPER is 3%
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precision is 1% which will result in a large sample size. if TER is 8% and EPER is 0 then sample size can be small.
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Select the sample
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Auditors cn choose the sample using any probabilistic method they want. To minimize possibility of client altering sample itmes don't inform the client of selection too far in advance.
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Perform the audit procedures
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Perform these by examining each item in the sample to determine whether it is consistent with the definition of the attribute and by maintaining a record of all exceptions found. Upon completion of this auditor will have a sample size and a number of exceptions for each attribute.
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SER calculation
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SER = actual number of exceptions / sample size
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For nonstatistical sampling methods, auditors use 2 ways to generalize from the sample to the population:
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1. Add estimate of sampling error to SER to arrive at computed upper exception rate (CUER) for a given aARACR. It is extremely difficult and not used much
2. subtract sample exception rate from tolerable exception rate to find the calculated sampling error (TER-SER) and evaluate if it is sufficiently large to conclude that the true population rate is acceptable. |
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When SER exceeds EPER
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auditors usually conclude sample results do not support preliminary assessed control risk.
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Analyze exceptions
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If exceeds TER auditors must analyze individual exceptions to determine the breakdown in the internal controls that allowed them to happen. Exceptions can be caused by many factors such as carelessness of employees, misunderstood instructions, or intentional failure to perform procedures.
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Decide the acceptability of the population
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When generalizing form sample to population, most auditors subtract SER from TER and evaluate if the differnce is sufficiently large, If si the control being tested can be used and control risk can be reduced as planned.
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When TER-SER is too small to conclude population is acceptable 4 courses of actions:
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1. Revise TER or ARACR
2. Expand sample size 3. Revise assessed control risk 4. Communicate with audit committee or management. |
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REvise TER or ARACR
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Alternative should only be followed if auditor concludes original specifications were too conservative. Relaxing these may be difficult to defend if the auditor is ever subject to review by a court.
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Expand sample size
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increasing sample size has the effect of decreasing the sampling error if the actual sample exception rate does not increase. Increasing the sample size is appropriate if the auditor believes the initial sample size wasn't representative, or if it is important to obtain evidence that the control is operating effectively
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Revise assessed control risk
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If results of tests of controls and sunstative tests of trans don't support preliminary assessed control risk, auditors should revise assessed control risk upwards. This will likely result in increased tests of transa and balances.
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How does an auditor decide whether to increase sample size or revise assessed control risk?
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Basis of cost vs. benefit.
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Communicate with management and audit committee
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Communication is desirable regardless of nature of exceptionsn. Auditor REQUIRED to notify management in writing regarding significant deficiencies and material weaknesses in controls.
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Attributes sampling
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Statistical sampling method most commonly used for controls and tests is attribute sampling.
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What is the main difference between statistical and nonstatistical sampling?
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Main difference is how the initial sample sizes are calculaed. Used tables now for
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Sampling distribution
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Frequency distributon of results of all possible samples of specified size that could be ontained from a population containing some specific characteristics.
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What do sampling distributions allow the auditor to make?
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Allow the auditor to make probability statements about the likely representativeness of any sample that is in the distribution.
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What does a binomial based sampling distribution tell us?
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Tells us the probabilty of each possible number of exceptions occuring
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How does specifying acceptable risk of assessing control risk too low differ
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The concepts are teh same but method of quantification is diff. For nonstatistical sampling, auditors use low, med or high risk, whereas auditors using attribute sampling assign a specific amount such as 5% ect.
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Determine initial sample size how does this differ?
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Four factors impact both statistical and nonsatatistical sample size. In attribute sample auditors determine sample sie by using computer programs or tables developed by statistical formulations.
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Use of tables follow 4 steps
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1. Select the table corresponding to the ARACR
2. Locate the TER at the top of the table 3. Locate the EPER in the far left column 4. REad down TER until intersects with EPER this number is the sample. |
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Select the sample difference
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Difference is requirement that probabilistic methods must be used for statistical sampling. Rndom or systematic is used for attribute sampling.
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Generalize from sample to population difference
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For attribute sampling, auditor calculates CUER at a specific ARACR using tables.
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Decide acceptability of the population difference
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For attributes auditor compares CUER with TER for each attribute. Before the population can be considered acceptable, the CUER determined on the basis of the actual sample results must be less than or equal to TER when both based on the same ARACR. see page 507 for more info.
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