# Auditing Principles - CH9 - Audit Sampling

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 Author: acelaker ID: 285327 Filename: Auditing Principles - CH9 - Audit Sampling Updated: 2014-10-09 22:39:56 Tags: Auditing Principles CH9 Audit Sampling Folders: Description: Auditing Principles - CH9 - Audit Sampling Show Answers:

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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
• ØAllows auditors to measure and control sampling risk which helps:
• lDesign efficient samples
• lMeasure sufficiency of evidence
• lObjectively evaluate sample results
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
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
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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