Chapter 9 Audit

Nonstatistical sampling

Using judgment to plan, perform, and/or evaluate the sample -Provides no means of quantifying sampling risk -Sample may be larger than necessary -Auditors may unknowingly accept a higher-than-acceptable degree of sampling risk

In estimating the expected population deviation rate the auditors often use

(1) the sample results from prior years (2) experience with similar tests for other clients (3) results of a small pilot sample.

In attributes sampling, what effect does an increase in the acceptable risk of assessing control risk too low have on sample size? (1) Decrease. (2) Increase. (3) Indeterminate (4) No effect.

(1) Accepting more risk allows the auditor to decrease the sample size. N increases = allowable risk and tolerance decreases

Relative to nonstatistical sampling, statistical techniques may provide the auditors with the following advantages:

(1) Designing efficient samples (that may avoid "over auditing"). (2) Measuring the sufficiency of the evidence obtained (this potentially could be helpful in a court proceeding or to help justify work to a client who was critical of the extent of testing). (3) Objectively evaluating sample results.

What effect on sample size does increasing the allowable risk of incorrect acceptance have for a substantive test? (1) Decrease. (2) Increase. (3) Indeterminate. (4) No effect.

(1) Increasing the allowable risk of incorrect acceptance for a substantive test decreases required sample size because when more risk is accepted, a smaller sample is appropriate. N increases = allowable risk and tolerance decreases

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the: (1) Efficiency of the audit. (2) Effectiveness of the audit. (3) Selection of the sample. (4) Audit quality controls.

(1) The risk of incorrect rejection and assessing control risk too high relate to the efficiency of the audit since the related errors result in additional, unneeded, audit procedures. The risks of incorrect acceptance and assessing control risk too low relate to audit effectiveness.

Which of the following is accurate regarding tolerable misstatement? (1) Tolerable misstatement is directly related to materiality. (2) Tolerable misstatement cannot be determined until the sample results are evaluated. (3) Tolerable misstatement does not affect sample size. (4) Tolerable misstatement is a measure of reliability of the sample.

(1) Tolerable misstatement is directly related to materiality. That is, as the measure of materiality increases, the tolerable misstatement allocated to the various accounts is increased. Tolerable misstatement may be viewed as materiality at the account balance level.

In which of the following circumstances is it least likely that tests of controls will be performed? (1) The expected deviation rate exceeds the tolerable deviation rate. (2) The planned assessed level of control risk is at a level slightly below the maximum. (3) The risk of assessing control risk too low is less than the expected deviation rate. (4) The tolerable deviation rate exceeds the risk of assessing control risk too low.

(1) When the expected deviation rate exceeds the tolerable deviation rate it is unlikely that tests of controls will be performed. This is because in such a situation testing is only likely to reveal to the auditors that the system is not operating effectively as they expected.

The three major factors that determine the sample size for an attributes sampling plan are

(1) the risks of assessing control risk too low (2) the tolerable deviation rate (3) the expected population deviation rate. In addition, the size of the population has a small effect on the sample size.

In attributes sampling, what effect does a decrease in the tolerable deviation rate have on sample size? (1) Decrease. (2) Increase. (3) Indeterminate. (4) No effect

(2) A decrease in the tolerable deviation rate increases required sample size as a more precise estimate is required. N increases = allowable risk and tolerance decreases

Discovery sampling is particularly effective when: (1) There are a large number of errors in the population. (2) The auditors are looking for critical deviations that are not expected to be frequent in number. (3) The auditors know where deviations are likely to occur. (4) The population is large in size.

(2) Discovery sampling is a modified case of attributes sampling. Its purpose is to detect at least one deviation, with a predetermined risk of assessing control risk too low, if the deviation rate in the population is greater than the specified tolerable deviation rate. It is effectively used when auditors are looking for critical deviations that are not expected to be frequent in number.

Which of the following is an element of sampling risk? (1) Choosing an audit procedure that is inconsistent with the audit objective. (2) Concluding that no material misstatement exists in a materially misstated population based on taking a sample that includes no misstatement. (3) Failing to detect an error on a document that has been inspected by an auditor. (4) Failing to perform audit procedures that are required by the sampling plan.

(2) Sampling risk is the risk of making a wrong decision based on a sample result. The other choices are elements of nonsampling risk.

The auditors' primary objective in selecting a sample of items from an audit population is to obtain: (1) A random sample. (2) A stratified sample. (3) A representative sample. (4) A large sample.

(3) A sample that is representative of the audit population must be obtained. The sample is "representative" in the sense that it allows the auditor to project sample results to the overall population. The sample may, but need not be random, stratified, or large.

This year the audit plan, as compared to the prior year, includes a lower risk of assessing control risk too low. Other factors held constant, which of the following is most likely to be correct relating to the planned risk of incorrect acceptance for substantive procedures? (1) Lower than prior year. (2) Same as prior year. (3) Higher than prior year. (4) Indeterminate as there is no certain relationship between the acceptable levels of the risks.

(3) Decreasing the planned risk of assessing control risk too low would be expected to allow a higher planned assessed risk of incorrect acceptance (thereby allowing a decrease in the scope of substantive audit procedures .

Types of Statistical Sampling Plans

- Attributes sampling - Discovery sampling (a type of attributes) - Monetary unit sampling (Module A) - Classical variables sampling (Module B) -Mean-per-unit estimation -Ratio estimation -Difference estimation

Statistical Sampling allows auditors to measure and control sampling risk which helps:

-Design efficient samples -Measure sufficiency of evidence -Objectively evaluate sample results

Primary random sample techniques

-Random number generator (e.g., use IDEA or Excel) -Systematic selection—selecting every nth item. (Sometimes bias)

Non-sampling risk

-Risk of erroneous conclusion due to any factor other than the sample -Can be reduced to low levels through effective planning and supervisions of audit engagements

Decisions requiring professional judgment in performing statistical tests of controls include:

1) Identifying the controls to be tested 2) Defining a "deviation" 3) Determining the maximum tolerable deviation rate 4) Establishing an appropriate risk of assessing control risk too low 5) Defining the population to be tested 6) Evaluating the results

Deviation rate exceeds their stipulated maximum tolerable deviation rate, the following courses of action are available to them:

1) Investigate 2) Extend the size of the sample 3) Increase their assessment of control risk

In performing substantive tests of the book value of a population, the two aspects of sampling risk are:

1) The risk of incorrect rejection 2) The risk of incorrect acceptance

Dual Purpose Test

A test used both as a test of control and to substantiate the dollar amount of an account balance

Allowance for Sampling Risk

Amount used to create a range, set by + or - limits from the sample results, within which the true value of the population characteristic being measured is likely to lie -Precision -The wider the interval, the more confidence but with less precise conclusion -Can be used to construct a dollar interval

Sampling that reaches a conclusion about a population in terms of a rate of occurrence is: (1) Attributes sampling. (2) Binomial sampling. (3) Occurrence sampling. (4) Variables sampling.

Attributes sampling reaches a conclusion about a population in terms of a rate of occurrence. Binomial sampling and occurrence sampling are unused terms. Variables sampling reaches a conclusion about amounts (generally monetary) of a population.

Which of the following statistical sampling techniques is least desirable for use by the auditors? (1) Random number table selection. (2) Block selection. (3) Systematic selection. (4) Random number generator selection.

Block sampling is least desirable. It consists of all items during a selected time period, numerical sequence, or alphabetical sequence. Due to the relatively large number of blocks needed to form a reasonable audit conclusion, block sampling cannot generally be relied upon to efficiently produce a representative sample

Sample size affected by characteristics of population

Generally: Population increases the Sample Size increases

In substantive tests the sample size

Increases with an increase in the variability of the items in the population

Sampling risk

Risk that the auditors' conclusion based on a sample may be different from the conclusion they would reach if they examined every item in the population

Significant effect on allowance for sampling risk and sampling risk

Sample size increase -> sampling risk and allowance for sampling risk decrease

Haphazard selection

Select items on an arbitrary basis, but without any conscious bias

Stratification

Technique of dividing population into relatively homogeneous subgroups

Example of a Dual Purpose Test

Test to evaluate the effectiveness of a control over recording sales transactions and to estimate the total overstatement or understatement of the sales account

Audit Sampling

The selection and evaluation of less than 100 percent of the population of audit relevance such that the auditor expects the items selected to be representative of the population and, thus, likely to provide a reasonable basis for conclusions about the population.

Nonsampling risk may be controlled by

adequate planning and supervision of engagements, and the establishment of effective quality control policies and procedures.

Sampling with replacement means that selected items

are replaced into the population prior to drawing the next item. Under this method, it is possible for one item in the population to be drawn several times, thus representing several sample items in a given sample.

Expected deviation rate is a term associated with

attributes sampling

Nonstatistical sampling is an

audit sampling technique in which the risk of sampling error is estimated by the auditors using professional judgment rather than by the laws of probability.

When performing dual-purpose test the sample size is determined by

calculating the sample sizes for each of the purposes and ordinarily then using the larger of the two, although this is only required by the PCAOB.

Systematic selection is easily applied to unnumbered documents merely by

counting off the sampling interval between documents to be selected.

"Systematic selection" in auditing means

drawing every nth item from the population of items to be sampled. For example, the auditors might draw every tenth check from a file of paid checks.

Non-sampling risk can be reduced to low levels through

effective planning and supervisions of audit engagements

In tests of controls the sample size

increases with an increase in the expected deviation rate

the "expected" deviation rate in a discovery sampling plan

is always zero

To help insure a random sample, the auditors should ascertain that the population

is in random sequence, and is not, for example, classified by size of check

The physical representation of the actual population

is the recorded value that represents the population

Sampling without replacement means that once an item is drawn for inclusion in a sample

it is not replaced into the population prior to drawing the remaining items. Therefore, one item cannot be included more than once in a given sample

when using systematic sampling on a population that is not in random order

it may be necessary to stratify the population into segments, or to use a relatively large number of starting points to produce a random sample.

Block selection

lock sample consists of all items in a selected time period, numerical sequence, or alphabetical sequence

When an auditor believes that the expected rate exceeds the tolerable deviation rate

no test of controls will generally be performed This is because control risk will normally be assessed at the maximum level since the control is believed to be ineffective since the expected deviation rate exceeds the deviation rate exceeding the tolerable deviation rate

A dual-purpose test is

one which tests and internal control procedure and substantiates the dollar amount of an account balance.

Sampling risk is the

possibility that the auditors will make an erroneous decision based on a sample result

All three of the methods of selecting items for examination (random number table selection, systematic selection, random number generator selection) will

produce a random sample if properly applied.

Nonstatistical Sampling, the auditor estimates sampling risk by using

professional judgment rather than statistical techniques

guard against a nonrandom sample by using

several random starting points.

Statistical sampling

sing mathematics and statistics plan, perform, and evaluate the sample

Sampling without replacement results in a

smaller sample because the population is treated as finite.

Random sample results in a

statistically unbiased sample that may or may not be a representative sample

If the population is not in random order, the auditors may be able to

stratify it into segments, each of which is in random order

The risk of incorrect acceptance is of more significance to auditors

than the risk of incorrect rejection

Combining several types of attributes in a definition of a deviation is acceptable, provided that

the attributes are of similar audit significance

To control sampling risk

the auditors increase the size of their samples.

In using a sequential sampling plan

the auditors select a small initial sample, and based on the results of examining it they decide (1) to assess control risk at the planned level (2) assess control risk at a level higher than the planned level (3) to increase their sample size to get more information about operating effectiveness of the procedure

Attributes sampling estimates

the deviation rate (occurrence rate) of a characteristic

Variables sampling estimates

the dollar value of a characteristic

If a particular account is drawn twice when sampling with replacement

the item is included twice in the sample.

The higher the expected deviation rate

the larger the sample required to give an estimate of the true deviation rate with a specified sampling risk and allowance for sampling risk.

Attributes sampling would estimate

the percentage of extensions that are in error

The risk of incorrect acceptance

the possibility that the sample results will cause the auditor to accept the population as free of material misstatement when, in fact, material misstatement does exist.

The risk of incorrect rejection

the possibility that the sample will indicate the existence of material misstatement when, in fact, material misstatement does not exist

Statistical sampling involves

the quantification of the risk of sampling error through the use of mathematics and laws of probability.

Nonsampling risk is

the risk of erroneous conclusions by the auditors based on any factor other than sampling

if various attributes of differing importance are combined

the significance of a specified deviation rate becomes obscured.

If auditors incorrectly reject a population

they will perform more audit procedures to determine the nature and extent of the assumed material misstatement

Variables sampling would estimate

total dollar amount of misstatements in the schedule

In sampling for attributes, the required sample size

will vary directly with the expected deviation rate