Audit Sampling (Chapter 9 Auditing)
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Explain how, in using the mean-per-unit method to evaluate results, the auditors use the differences between the audited values and the book values of the individual items in their sample.
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In selecting items for examination, an auditor considered three alternatives: (a) random number table selection (b) Systematic selection (c) random number generator selection. Which if any, of these methods would lead to a random sample if properly applied?
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Is it correct to say that when using non statistical variables sampling, one is unable to project the misstatements identified to the entire population? Explain why this is or is not the case.
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The mean of the audited values in a sample is $20. Accounts have a mean book value of $21 avg bv of entire population of 10,000 is $19 Calculate the estimated total audited value of the account.
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What options are available to an auditor when the client's book value falls outside the acceptance interval calculated using the estimate of the total value of the population (the adjusted allowance for sampling risk)?
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What will affect an auditor's belief that the population's actual deviation rate exceeds the tolerable deviation rate have on the test of controls sample size?
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In performing a substantive test of the book value of a population, auditors must be concerned with two aspects of sampling risk. What are these two aspects of sampling risk, and which aspect is of greater importance to auditors? Explain.
...1. The risk of incorrect rejection (alpha risk) of an account. 2. The risk of incorrect acceptance (beta risk) of an account.
If a sample of 100 items indicates a deviation rate of 3%, should the auditors conclude that the entire population also has approximately a 3% deviation rate?
...A deviation from performance of a control does not necessarily indicate a misstatement of the financial statements.
What is a dual-purpose test?
...A dual-purpose test, in a sampling plan may be used to (1) test a control and (2) substantiating the dollar amount of an account balance.
What relationship exists between an attributes sampling plan and a variables sampling plan in a test of inventory extensions?
...Attributes sampling involves determining the deviation of internal controls on a selected sample. ...Variables sampling plan is ???????????????
What would be the difference between an attributes sampling plan and a variables sampling plan in a test of inventory extensions?
...Classical variables sampling plans enable auditors to estimate a numerical quantity such as the dollar amount of an account balance. ...Attributes sampling enables the auditors to estimate the rate of deviation (occurrence) in a population. This is normally used to determine deviations in internal controls.
Explain how the auditors may obtain an estimate of a population's standard deviation to determine an appropriate sample size.
...In estimating the expected population deviation rate, the auditors often use the sample results from prior years, as documented in their working papers. Auditors may also estimate the rate based on their experience with similar tests on other audit engagements or by examining a small pilot sample.
For what purposes is the planned allowance for sampling risk used in mean-per-unit sampling?
...It is used to determine the sample size for substantive procedures.
Describe what is meant by a sequential sampling plan.
...Sequential sampling plan is a Attribute Sampling Approach. Under this plan, the audit sample is taken in several stages. Auditors start by examining a small sample.
When using non statistical sampling, what relationship must exist between the projected misstatement and tolerable misstatement in order for the auditors to conclude that an account balance is acceptable?
...The projected misstatement must be below the tolerable misstatement.
When performing a dual-purpose test, how does the auditor arrive at the required sample size?
...The size of a sample used for a dual-purpose test should be the larger of the two samples than would have been required for the two separate purposes.
Using the approach presented in this chapter for mean-per-unit sampling, when is it necessary to calculate an adjusted allowance for a sampling risk?
...When the actual deviation differs from the estimated rate
What conditions are necessary for the auditors to use either the ratio or difference estimation techniques?
...ration estimation requires (1) each population item has a book value (2) an audited value may be determined for each sample item, and (3) differences between audited and book values (misstatements) are relatively frequent. ...difference estimation is most appropriate when the size of misstatements does not vary significantly in comparison to book value.
When performing attributes sampling, may auditors include several types of attributes in their definition of a deviation? Explain.
Attributes are characteristics that provide evidence that a control procedure was actually performed. They must be precisely defined along with deviation conditions before the test of control is performed otherwise , a staff accountant may not make the appropriate decision about which sample items represent deviations. If any one of the attributes aren't followed through by the client it is considered a deviation.
An auditor has reason to suspect that fraud has occurred through forgery of the treasurer's signature on company checks. Can discovery sampling rule out the possibility that any forged check exists?
Discovery sampling is a sampling plan for locating at least 1 deviation, providing that the deviation occurs in the population with a specified frequency. It is most often used to detect a fraudulent transaction. If there is one deviation (i.e., one fraudulent transaction) in the sample, the auditor must examine the population.
When using attributes sampling, the auditors must estimate the expected population deviation rate. What sources are used to make this estimate?
In estimating the expected population deviation rate, the auditors often use the sample results from prior years, as documented in their working papers. The auditors may also estimate the rate based on their experience with similar tests on other audit engagements or by examining a small pilot sample.
Explain what is meant by the following statement: "When sampling the auditors must determine that the physical representation of the actual population is complete."
It must determine that the physical list represents those selected from a complete list or population and that there aren't missing items from the list.
An auditor is sampling with replacement and, by chance, a particular account has been selected twice. Should it be included two times in the sample?
No because the auditor is sampling with replacement. If the account has been selected twice the account is replaced by another eligble account.
Define, and differentiate between, non statistical (judgmental) sampling and statistical sampling.
Non statistical, also known as, judgmental sampling is when the auditors estimate sampling risk by using professional judgment rather than statistical techniques. Statistical sampling allows the auditors to measure and control sampling risk. They are based upon the laws of probability. The advantages of statistical sampling over non statistical sampling include assisting the auditors in (1) designing efficient samples, (2) measuring the sufficiency of the evidence obtained, and (3) objectively evaluating sample results. However these advantages can be costly.
Explain the meaning of sampling without replacement and sampling with replacement.
Occurs is random sampling. Sampling with replacement means that once an item has been selected, it is immediately replaced into the population of eligible items and may be selected a second time. Sampling without replacement means that an item once selected is not replaced in the population of eligible items, and consequently it cannot be drawn for inclusion in the sample a second time.
Describe the difference between sampling risk and non sampling risk.
Sampling risk is the risk that the auditors conclusion based on a sample might be different from the conclusion they would reach if they examined every item in the entire population. Non sampling risk relates to "human" rather than "statistical" errors such as not finding errors when examining a document.
Which technique results in a smaller sample size, sampling with or without replacement?
Sampling without replacement results in a small sample size.
Explain briefly the term systematic selection as used in auditing and indicate the precautions to be taken if a random sample is to be obtained. Is systematic selection applicable to unnumbered documents? Explain
Systematic selection involves selecting every nth item in the population following one or more random starting points. It may not result in a random sample when positions in the populations are assigned in other than a random order. Systematic selection applies to unnumbered documents. Auditors count off the sampling interval to select the documents or use a ruler to measure the interval.
What are the three major factors that determine the sample size for an attributes sampling plan?
The three major factors that determine the sample size for an attributes sampling plan are: the risk of assessing control risk too low the tolerable deviation rate expected population deviation rate
In performing a test of controls for sales order approvals, the CPAs stipulate ...a tolerable deviation rate of 8% ...assessing control risk to low of 5% ...deviation rate of 2% a. What type of sampling should the auditors use for this test? b. Using the above data what is the sample size? c. Assume that the sample indicates 4 deviations. May the CPAs conclude with a 5% risk of assessing control risk too low that the population deviation rate does not exceed the tolerable rate of 8%?
a. Attributes sampling for test of controls. b. 77 with maximum of 2 deviations ... c. the actual population rate of 11.8% rate exceeds the tolerable deviation of 8% .
a. What is an example of an element of sampling risk? b. c. Which statistical sampling technique is least desirable for use by auditors and why? d. The auditors primary objective in selecting a sample of items from an audit population is to obtain ... e. Discovery sampling is particularly effective when: f. g. What sampling technique is typically used for tests of controls? h. i. j. k. l.
a. Sampling risk is the risk that the auditors conclusion would be different if the test were applied to the entire population. b. c. Block selection cannot be relied upon to efficiently produce a representative sample due to the relatively large number of blocks needed to form a reasonable audit conclusion. d. A representative sample. e. The auditors are looking for critical deviations that are not expected to be frequent in number. g. Attributes sampling is frequently used in performing tests of control.
a. List and explain the advantages of applying statistical sampling techniques to audit testing. b. List and discuss the decisions involving professional judgment that must be made by the CPAs in applying statistical sampling techniques to tests of controls. c. You have applied attributes sampling to the client's pricing of the inventory and discovered from your sampling that the sample deviation rate exceeds your tolerable rate. Discuss the courses of action you should take.
a..(1) designing efficient samples (2) measuring the sufficiency of the evidence obtained. (3) objectively evaluating sampling results. b. (1) Determine the objective of the test. (2) Define the attributes and deviation conditions. (3) Define the population to be sampled (4) Specify the risk of assessing control risk too low and the tolerable deviation rate (5) Estimate the expected population deviation rate. (6) Determine the sample size (7) Select the sample (8) Test the sample items (9) Evaluate the sample results. (10)Document the sampling procedure. c.First consider the nature of the deviation. Assuming the deviations are not deliverate then I would increase the assessed level of control risk in this area and increase the extent of my substantive testing procedures (i.e. decrease detection risk).
