5 - Audit Sampling

When evaluating results of testing a sample using attribute sampling, the auditor considers the sample's final error rate to be equal to Errors in the sample / total elements in the sample. (Errors in the sample + missing elements in the sample) / total elements in the sample. (Errors in the sample + missing elements in the sample) / total elements in the sample + allowance for sampling risk ((Errors in the sample + missing elements in the sample) / total elements in the sample + allowance for sampling risk) x proportion of sample to population

(Errors in the sample + missing elements in the sample) / total elements in the sample + allowance for sampling risk To determine the error rate for a sample using attribute sampling, the number of deviations detected is combined with the number of items from the sample that the client was unable to produce (missing elements), which are considered equivalent to deviations. This is divided by the number of items in the sample to give the preliminary sample rate. This amount is adjusted by adding sampling risk, the result of which is the auditor's estimate of the range of errors in the population. This estimate is also referred to as the Upper Precision Limit. Since the error rate is evaluated to determine if it is not greater than the tolerable rate, the auditor is concerned about the upper limit, not the lower limit.

An auditor performs attribute sampling to test for proper cancellation of payment vouchers. In a sample population of 100, two vouchers are missing the proper cancellation, while one simply cannot be located. The error rate of the sample is 2% Cannot be determined without knowing standard deviation. 3% 4%

3%

5 - Audit Sampling

5 - Audit Sampling

An auditor examining inventory most likely would use variables sampling rather than attributes sampling to Discover whether misstatements exist in inventory records. Determine whether discounts for inventory are properly recorded. Identify whether inventory items are properly priced. Estimate whether the dollar amount of inventory is reasonable.

Estimate whether the dollar amount of inventory is reasonable. Variables sampling is used to test an amount. It would be used to estimate the value of inventory for comparison to the recorded amount.

An auditor discovers that an account balance believed to be materially misstated based on an audit sample was not materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks? Incorrect acceptance. Assessing control risk too low. Incorrect rejection. Assessing control risk too high.

Incorrect rejection. Incorrect rejection means rejecting a population because of a projected error that is based on a sample exceeds the tolerable misstatement despite the fact that the actual error in the population is below the tolerable misstatement. Incorrect acceptance would occur when a projected error that is based on a sample is lower than the tolerable misstatement when the actual error in the population is higher. Assessing control risk too low or too high results from a deviation rate detected in an attribute sample, not one applied to an account balance.

An auditor established a $100,000 tolerable misstatement for an asset with an account balance of $7,500,000. The auditor selected a sample of every fiftieth item from the population that represented the asset account balance and discovered overstatements of $2,200 and understatements of $300. Under these circumstances, the auditor most likely would conclude that There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement. The there is an unacceptably high risk because the tolerable misstatement exceeds the amount of projected actual overstatements, since projected understatements are ignored. There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements. The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.

The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement. 2,200-300 = 1,900 1,900*50 = 95,000 95,000<100,000

The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk? The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated. The internal control not being as effective as the auditor believes. The internal control being more effective than the auditor believes. The auditor selecting inappropriate auditing procedures.

The auditor selecting inappropriate auditing procedures.

Which of the following characteristics most likely would be an advantage of using probability-proportional-to-size (PPS) sampling rather than classical variables sampling? It is particularly effective for detecting understatements. The sampling process can begin before the complete population is available. The selection of negative balances requires no special design considerations. The sample size can generally be lower even if many errors are expected.

The sampling process can begin before the complete population is available. Among the advantages of PPS sampling are that a standard deviation is not needed; a sample is automatically stratified; a smaller sample will often result when few errors are expected; and sampling can begin before the entire population is complete. Disadvantages are that zero and negative balances require special handling; large sample sizes result when many errors are expected; and it is not useful for detecting an understatement.

Which of the following is the primary objective of probability proportional to sample size? To identify zero and negative balances. To identify overstatement errors. To increase the proportion of smaller-value items in the sample. To identify items where controls were not properly applied.

To identify overstatement errors. The purpose of variable estimation sampling, which PPS is an example of, is to measure amounts, which can be compared to client data to identify overstatements. PPS increases the proportion of larger, not smaller items in the sample. PPS is used in substantive testing, not tests of controls, and would not be used to determine if a control was being applied. Since items are chosen based on the relationship of their balances to an interval, zero and negative balances are not a focus.