Auditing Principles - CH9 - Audit Sampling

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acelaker
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Auditing Principles - CH9 - Audit Sampling
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2014-10-09 22:39:56
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Auditing Principles CH9 Audit Sampling
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Auditing Principles - CH9 - Audit Sampling
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  1. What it Audit Sampling
    ØApplying a procedure to less than 100% of a population

    ØTo estimate some characteristic of the population

    • lQualitative
    • lQuantitative
  2. Risk
    • ØSampling risk
    • lrisk that the auditors’ conclusions based on a sample may be different from the conclusion they would reach if they examined every item in the population

    • ØNon-sampling risk 
    • lrisk pertaining to non-sampling errors
    • lCan be reduced to low levels through effective planning and supervisions of audit engagements
  3. Non-statistical Sampling
    ØThe auditor estimates sampling risk by using professional judgment rather than statistical techniques

    ØProvides no means of quantifying sampling risk

    • ØSample may be larger than necessary or auditors may unknowingly accept a higher than
    • acceptable degree of sampling risk
  4. Advantages of Statistical Sampling
    • ØAllows auditors to measure and control sampling risk which helps:
    • lDesign efficient samples
    • lMeasure sufficiency of evidence
    • lObjectively evaluate sample results
  5. Disadvantages of Statistical Sampling
    lComplications, need for training

    lMathematics, need for computer applications
  6. Selection of Random Sample
    • ØRandom sample results in a statistically unbiased sample that may not be a
    • representative sample

    • ØRandom sample techniques
    • lRandom number tables
    • lRandom number generators
    • lSystematic selection
  7. Other Methods of Sample Selection
    • lHaphazard selection
    • •Select items on an arbitrary basis, but without any conscious bias

    • lBlock selection
    • •Block sample consists of all items in a selected time period, numerical sequence or alphabetical sequence

    • ØStratification 
    • lTechnique of dividing population into relatively homogeneous subgroups
  8. Types of Statistical Sampling Plans
    • ØAttributes sampling 
    • ØDiscovery sampling

    • ØClassical variables sampling
    • ØProbability-proportional-to-size sampling
  9. Types of Statistical Sampling Plans - 
    Attributes Sampling
    • Qualitative
    • Occurrence for operation of control
  10. Types of Statistical Sampling Plans - 
    Discovery Sampling
    • subset of attribute sampling
    • used for fraud
  11. Types of Statistical Sampling Plans - 
    Classical Variable Sampling
    Numerical - ck correction of amounts
  12. Dual Purpose Test
    • ØTested used both as a test of control and
    • substantiating the dollar amount of an account balance

    lEx. Test to evaluate the effectiveness of a control over recording sales transactions and to estimate the total overstatement or understatement of the sales account
  13. Allowance for Sampling Risk
    ØAmount 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 

    • ØPrecision
    • ØWider the interval, more confident but less
    • precise conclusion
    • ØCan be used to construct a dollar interval
  14. Sample Size
    • sample risk DOWN sample size UP
    • sample risk UP sample size DOWN

    • ØSignificant effect on allowance for sampling
    • risk and sampling risk
    • lSample size increase -> sampling risk and allowance for sampling risk decrease

    • ØSample size affected by characteristics of
    • population
    • lGenerally as Population increases -> sample size increase
  15. Requirements of Audit Sampling Plans
    • ØWhen planning the sample consider:
    • lThe relationship of the sample to the relevant audit objective
    • lMateriality or the maximum tolerable misstatement or deviation rate
    • lAllowable sampling risk
    • lCharacteristics of the population

    • ØSelect sample items in such a manner that
    • they can be expected to be representative of the population

    • ØSample results should be projected to the
    • population

    • ØItems that cannot be audited should be
    • treated as misstatements or deviations in evaluating the sample results

    • ØNature and cause of misstatements or
    • deviations should be evaluated
  16. Sampling Risks--Tests of Controls
    Risk of assessing control risk too high

    Risk of assessing control risk too low
  17. Sampling Risks--Tests of Controls -
    Risk of assessing control risk too high
    • !EFFICIENCY
    • !Testing too much (better than testing too little)
    • !Assessing control risk at a higher level than is warranted 
    • !Saying it is inadequate when it is actually adequate
  18. Sampling Risks--Tests of Controls -
    Risk of assessing control risk too low
    • !EFFECTIVENESS
    • !Not testing enough (VERY BAD)
    • !Assessing control risk at a lower level than is warranted 
    • !Saying it is adequate when it is actually inadequate
  19. Audit Sampling Steps for Tests of Controls
    ØDetermine the objective of the test

    ØDefine the attributes and deviation conditions

    ØDefine the population to be sampled

    • ØSpecify:
    • lThe risk of assessing control risk too low
    • lThe tolerable deviation rate

    ØEstimate the population deviation rate

    ØDetermine the sample size

    ØSelect the sample

    ØTest the sample items

    ØEvaluate the sample results

    ØDocument the sampling procedure
  20. Attributes Sampling: Relationship Between the Planned Assessed Level of Control Risk and
    the Tolerable Deviation Rate
    • Low
    • 2%-7%

    • Moderate
    • 6%-12%

    • Sightly below max
    • 11%-20%

    • Max
    • Omit Test
  21. Sampling Risks--Substantive Tests
    • Risk of incorrect rejection:
    • results will indicate that account balance is materially mistated when it not mistated

    • Risk of incorrect acceptance:
    • results will indicate that account balance is not materially mistated when it is
  22. Audit Sampling Steps for Substantive Tests
    ØDetermine the objective of the test

    ØDefine the population and sampling unit

    ØChoose an audit sampling technique

    ØDetermine the sample size

    ØSelect the sample

    ØTest the sample items

    ØEvaluate the sample results

    ØDocument the sampling procedure
  23. Nonstatistical Variables Sampling Illustration
    • lPopulation: •Size=363•BV=$200,000
    • lTolerable misstatement  =  $10,000
    • lRisk assessments:
    • •Inherent and control risk=Slightly below Max
    • •Other substantive tests = Moderate



  24. Audit Risk
    • AR = IR x CR x DR
    • where
    • ØAR=The allowable audit risk that a material misstatement might remain undetected for
    • the account balance and related assertions. 

    • ØIR= Inherent risk, the risk of a material misstatement in an assertion, assuming
    • there were no related controls.

    ØCR= Control risk, the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by internal control.

    ØDR= Detection risk, the risk that the auditors’ procedures will fail to detect a material misstatement if it exists.

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