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45 Cards in this Set

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Representative sample
one in which the characteristics in the sample are approximately the same as those of the population. This means that the sampled items are similar to th items not sampled. Assume a client's internal controls require a cleark to attach a shipping document to every duplicate sales invoice, but the cleak fails to follow the procedure exactly 3% of the time. If the auditor selects a sample of 100 duplicate sales invoices and finds three are missing attached shipping documents, the sample is highly representative. IF two or 4 are found reasonably representative. IF none are found sample is nonrepresentative.
In practice do auditors ever know if the sample is representative
no not even after testing is complete. Only way to tell is by testing everything.
How can you increase the likelihood of the sample being representative?
By using careful care in designing the samplling process, sample selection, and evaluation of sample results.
How can a sample be nonrepresentative?
If there is nonsamplinr error or sampling error
nonsampling risk
The risk that audit tests do not uncover existing exceptions in the sample. The 2 causes of risk are the auditr's faliure to recognize exceptions and inappropriate or ineffective audit procedures.
Why might an auditor fail to recognize an exception?
exhaustion, boredom, or lack of understanding of what to look for.
If an auditor concluded no exceptions existed hwat is it?
nonsampling error
What would an ineffective audit procedure for detecting the exceptions in question would be
to examine a sample of shipping documents and determine whether each is attached to a duplicate sales invoice, rather than to examine a sample of duplicate sales invoices to determine if shipping documents are attached.
Sampling risk
Risk an auditor reaches an incorrect conclusion because the sample is not representative of the population. TSAmplling risk is an inherent part of sampling that results from testing less than the entire population.
Example of sampling risk
Assume auditor decided that a control is not effective if there's a population exception rate of 6% assume auditor accepts the control as effective based on tests of the control with a sample of 100 items that had 2 exceptions. IF the population actually has an 8% exception rate, the auditor incorrectly accepted the population because the sample was not sufficiently representative of the population.
2 ways to detect sampling risk
1. Adjust sample size
2. Use an appropriate method for selecting sample items from the population.
what affect does increasing sample size have on sampling risk
it reduces sampling risk and vice versa
WHat does using an appropriate sample selection do
increases likelihood of representativeness. Doesn't eliminate or reduce sampling risk, but it does allow auditor to measure risk associated with given sample size if statistical methods of sample selection and evaluations are used.
What can audit sampling methods be divided into
1. statsitical sampling
2. nonstatistical sampling
What three phases do each category involve?
1. Plan the sample
2. Select the sample and perform the tests
3. Evaluate the results
What purpose does planning the sample serve?
Makes sure audit tests are performed in a manner that provides desired sampling risk and minimizes likelihood of nonsampling error
Selecting a sample involves
Deciding how a sample is selected from the population The auditor can perform the audit tests only after the sample items are selected.
Evaluating the results is
drawing of conclusions based on audit tests.
Statistical sampling differs from nonstatistical sampling
By applying mathematical rules auditors can quantify (measure) sampling risk in planning the sample and evaluating the results.
Nonstatistical sampling
Auditors do not quantify sampling risks. INstead auditors choose sample items they believe will provide the most useful information, given the circumstances, and reach conclusions about populations on a judgmental basis. For that reason often termed judgemental sampling.
Probabilistic sample selection
the auditor randomly selects items such that each population item has a known probability of being included in the sample. This process requires great care and uses one of several methods.
Nonprobabailistic sample selection
Auditor selects sample items using professional judgement rather than probabilisitc methods. Auditors can use one of several nonprobabilisitc sample selection methods.
Nonprobabilistic (judgmental) sample selection methods include
1. Directed sample selection
2. Block sample selection
3. Haphazard sample selection
Probabilistic sample selection methods
1. Simple random selection
2. Systematic sample selection
3. Probability proportional to size sample selection
4. Stratified sample selection
Directed sample selection
Auditors deliberately select each item in the sample based on their own judgmental criteria instead of using random selection.
Items most likely to contain misstatements
Often able to identify examples include accounts receivable outstanding for a long time, urchases from and sales from related officers and affiliated companies. Investigates these. IN evaluating samples auditors reason that if none of the items selected are misstated it is unliekly that the population is materially misstated.
Items containing selected population characteristics
By selecting one or more items with different populaton characteristics auditor may be able to design the sample to be representative. Example may select a sample of cash disbursements that includes some from each month, each bank account or location, and each major type of acquisition.
Large dollar coverage
Auditors can sometimes select a sample that includes a large portion of total population dollars and therebyt reduce the risk of drawing an improper conclusion by not examining small items.
Block sample selection
Select first item in a bloc, and the remainder of the block is chosen in sequence. Assume block sample will be a sequence of 100 sales trans from sales journal for third week of March. Auditors can select total sample of 100 by taking 5 blocks of 20 items, 10 blocks of 10 50 blocks of 2 or 1 block of 100
Acceptable to use block samples if
a reasonable number of blocks is used if a reasonable number of blocks is used. If few blocks are used probability of obtaining nonrepresentative sample is too great, considering changes in acocunting system, emp turnover, ect
Block sampling can be used to suplement other when
there is high likelihood of misstatement for know period.
Haphazard sample selection
Selection without any conscious bias by auditor. Selects pop items without regards for their size, source, or other distinguishing characteristics.
SHortcoming of haphazard
Difficulty of remaining unbiased in selection because of auditpr's training and unintentiaonal bias, certain population items are more likely than others to be included in the sample.
Although less logical than directed sample selection used
hwne cose of more complex sample outweighs benefits.
Random sample
EVery possible combo of population items has an equal chance of being included in the sample. Auditors use simple random sampling to sample populations when there is no need to emphasize one or more types of population itmes.
When simple random sample what method must hey use
One that allows equal chance of selection. Suppose wants to sample 12000. Simple sample will be one such that each of the 12000 has an equal chance of being selected. Auditor will choose one random number betwee 1 and 12000. ASsume 2895. if that's it must check the 2895 dispursement transaction.
What are random numbers
A series of digits that have equal probabilities of occurring over long runs and which have no identifiable pattern. Auditors most often generate random numbers by using one of three computer sample selection techniques: electronic spreadsheets, random number generators, and generalized audit software.
With replacement
an element in pop can be included in the sample more than once.
Without replacement
AN item can be included only once. Although both are usable but auditors rarely use replacement sampling
systematic sample selection
Calculates an interval and then selects the items for the sample based on the size of interval whcih iss determined by dividing the population size by desired sample size.
Advantage of systematic selection
ease of use in most populations this can be drawn quickly and approach automatically puts numbers in sequence making it easy to developp appropriate documentation.
WHat is a concern of systematic selection
A concern is that because of the way it is done once the first item in the sample is selected, all other items are chosen automatiacally.. This causes no problem if teh characteristic of interst such as a possble control deviation, is distributed randomly throughout the population.
In many auditing situations, it is advantageous to select samples that emphasize population items with larger recorded amounts 2 ways.
1. TAke sample in which probability of selecting any individual population item is proportional to its recorded amount. this iscalled sampling with probability proportional to size. (PPS) and is evaluated using non-statistical sampling or monteary unit statistical sampling.
2. Divide population into subpopulations, usually by dollar size, and take larger samples from the subpopulations with larger sizes. This is called stratified sampling, and is evaluated using nonstatistical sampling or variables statistical sampling.
SAmpling with probability proportional to size
1. TAke sample in which probability of selecting any individual population item is proportional to its recorded amount. this iscalled sampling with probability proportional to size. (PPS) and is evaluated using non-statistical sampling or monteary unit statistical sampling.
Stratified sampling
Divide population into subpopulations, usually by dollar size, and take larger samples from the subpopulations with larger sizes. This is called stratified sampling, and is evaluated using nonstatistical sampling or variables statistical sampling.