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40 Cards in this Set
- Front
- Back
What is sampling?
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taking part of a population, subjecting it to audit procedures, projecting results to a population
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Sampling is used in both
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tests of controls
substantive testing |
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Statistical sampling
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Based on formulas
Helps quantify Sampling Risk |
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Non-statistical Sampling
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Based on human decision
Equally acceptable as Statistical Sampling |
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What is sampling risk?
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The risk that your sample isnt representative of the population
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Sampling Risk & Tests of Control
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Risk of Assessing Control Risk too Low
Risk of Assessing Control Risk too High |
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Risk of Assessing Control Risk too High
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Sample overstates control
Auditor concludes control is ineffective when it actually is Underreliance on IC Overtesting Audit Inefficiency |
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Risk of Assessing Control Risk to Low
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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 |
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Sampling Risks & Substantive Tests
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Risk of Incorrect Acceptance
Risk of Incorrect Rejection |
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Risk of Incorrect Acceptance
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Hurts effectiveness
Efficient, ineffective Auditor will inappropriately issue unmodified report? |
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Risk of Incorrect Rejection
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Hurts efficiency
Effective, inefficient Requires adjustment or will issue inappropriately modified report |
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Three types of statistical sampling
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Attribute sampling
Variables sampling Probability proportionate to size sampling |
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Attribute Sampling
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Used for tests of controls
Estimate errors in pop based on frequency in sample Determine whether est. error rate indicates control working efficiently |
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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 |
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How to calculate sample deviation rate?
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Errors in sample/items in sample
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How to calculate upper deviation limit
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Sample deviation rate + allowance for sampling risk
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If upper precision limit is less than or equal to the tolerable rate
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assessed level of CR is unchanged
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If upper precision limit is greater than the tolerable rate
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assessed level of CR is increased
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Attributes sampling - effects of factors on sample size
Risk of assessing CR too low Tolerable rate Expected pop deviation rate Population |
Decrease
Decrease Increase Increase (slightly for large samples) |
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Variations of attribute sampling
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Stop or go sampling (sequential sampling)
Discovery sampling |
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Stop or go sampling (sequential)
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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 |
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Discovery sampling
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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 |
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Variables Sampling
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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 |
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Steps in variables sampling
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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 |
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If precision is less than or equal to tolerable misstatement
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opinion may require modification
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If precision greater than tolerable misstatement
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Opinion will not require modification
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How to calculate the allowable risk of incorrect acceptance
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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 |
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Variables sampling - Effects of factors on sample size
Risk of Incorrect Acceptance Risk of Incorrect Rejection Tolerable Misstatement Expected Misstatement Population Variation (standard deviation) |
Decr
Decr Decr Incr Incr Incr |
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Probability Proportionate to Size Variation
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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 |
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PPS most effective when
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Few or no errors expected
Auditor concerned about overstatements |
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Advantages of PPS
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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 |
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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 |
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Steps in applying PPS
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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 |
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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 =
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Tolerable misstatement / reliability factor
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Sample size =
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Total dollar amount of population / sampling interval
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PPS - Selecting the sample
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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 |
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Calculating the Projected Misstatment
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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 |
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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 |
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Block sampling
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Worst method of sampling
ex: auditor picks all transactions from June and projects results to the rest of the year. |