Flashcards - Audit Sampling (5P)

docx

School

University of Illinois, Urbana Champaign *

*We aren’t endorsed by this school

Course

504

Subject

Statistics

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by MinisterFire15163

Flashcards: Audit Sampling Term Definition What is audit sampling? Audit sampling involves: - Taking part of a population - Subjecting it to audit procedures - And projecting results to a population What are the characteristics of statistical sampling? Statistical sampling is based on formulas . It helps: - Find an appropriate audit sample - Evaluate evidence obtained - Evaluate results - Quantify sampling risk What are the characteristics of non-statistical sampling? Non-statistical sampling is: - Based on human decision - Equally acceptable as statistical sampling What types of sampling are used for substantive tests? Substantive tests involve: - Variable sampling - Probability Proportionate to Size (PPS) Sampling What type of sampling are control tests? Attribute Sampling What is sampling risk? - Sampling risk is the risk that your sample is NOT representative of population. - It can happen even if audit is done properly. What is the risk of assessing control risk too high? - A risk of control testing – Auditor works to make control risk lower. - More substantive tests – sample overstates control risk – leads to an under-reliance on internal control – over-testing – and overall audit inefficiency. - Audit ends up being effective (correct result) – but you do more work What is the risk of assessing control risk too low? A risk of Control Testing – Complement to Confidence Level inverse relationship to Sample Size - HIGHER accepted risk of assessing Control Risk too low = SMALLER Sample - LOWER accepted risk of assessing Control Risk too low = LARGER Sample What are the risks if the auditor concludes controls are operating effectively based on the sample and control risk is set too low? - Leads to HIGHER detection risk – FEWER substantive tests - Sample UNDERSTATES control risk - This error leads to over-reliance on internal control – under-testing – and overall audit ineffectiveness. - Does NOT necessarily mean that the financial statements are materially misstated – it does mean that if there is

Flashcards: Audit Sampling one – you are less likely to find it. What is the risk of incorrect acceptance? - A risk of substantive testing. - Auditor accepts a balance as fairly stated when in fact it is NOT fairly stated. - Hurts audit effectiveness - Wrong conclusion reached - Efficient but NOT effective What is the risk of incorrect rejection? - A risk of substantive testing - Auditor rejects balance as fairly stated when in fact it is fairly stated - Hurts audit efficiency - Wrong recommendations given - Effective but NOT efficient What is non-sampling risk? - Non-sampling risk is the risk of human (auditor) missing an error. - It is also called exception-error or deviation . How does sampling risk compare to non-sampling risk? - Sampling risk deals with the chance that your audit sample is flawed. - Non-sampling risk deals with the chance that your human decisions/conclusions are flawed. What is attribute sampling? - Attributing sampling entails looking at control procedures. (Were invoices approved when paid?) - Errors are stated in terms of %, NOT dollar amount - For example: 5 invoices out of 100 were NOT properly paid. Error rate is 5%. - Hint: If you see error rate on the exam, they are referring to attribute sampling . How do you determine if control procedures are operating properly or NOT operating properly? - Control procedures are either operating properly or NOT operating properly based on error rate and the tolerance you have for errors. What is the Tolerable Error Rate? - Tolerable Error Rate is the error rate in a population that you are willing to accept/tolerate. - Inverse Relationship to Sample Size - Higher Tolerable Error Rate = Smaller Sample - Lower Tolerable Error Rate = Larger Sample - If you are willing to accept a HIGHER probability that errors exists, there is LESS pressure on the sample. What is the expected population error rate? What error rate are you expecting?

Flashcards: Audit Sampling - Judgment call – based on experience - Direct relationship to sample size MORE errors = LARGER Sample LESS errors = SMALLER Sample What is the basic premise of attribute sampling? - Attribute in the sample gives information about the entire audit population. - It is used to estimate internal control error rate. For what is the expected population deviation (error) rate used? The expected population deviation rate is used to determine initial level of control risk . What is the allowable risk of over-reliance? - The allowable risk of over-reliance is the risk of assessing control risk too low . - It gives you the sampling risk. When is attribute sampling used? Attribute sampling is used when: - There is documented evidence (an audit trail) to test. - The existence of an error needs to be verified or debunked. What is classic variable sampling? - Classic variable sampling is testing for a dollar amount. - Value in sample gives information about value in entire population. What functions are used in conjunction with classic variables sampling? Mean per Unit = Sample Average x Number in Population Stratification = Decreases effect of variance in population and reduces sample size What are the characteristics of probability proportionate to size (PPS) sampling? PPS Sampling : - A form of variable sampling - Does NOT use standard deviation - Auditor focuses on a dollar amount - Larger or more valuable items get picked more often as part of the sample What is the projected misstatement? Misstatement found in sample – MUST project it to remained of population. How does Probability Proportionate to Size (PPS) sampling compare to Classical Variables Sampling? PPS : - Easier to use - Results in a stratified (homogenous) sample - Results in a smaller sample size to audit - Easy to design Classical Variable Sampling : - Easy to expand sample size - Selecting zero and negative balances easy

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Flashcards: Audit Sampling What factors affect sample size? 1) Tolerable Rate for Error : Inverse relationship with sample size 2) Risk of assessing control risk too low : Inverse relationship with sample size 3) Expected population error rate : Direct relationship with sample size 4) Population size does NOT affect the sample size : As population is larger, sample size does NOT grow. What is the formula for audit sampling? Sample Error Rate (SER) + Allowance for Sampling Risk (ASR) - The Allowance for Sampling Risk is the amount that you add to the Sample Error Rate to get some cushion for your sample. - It could be as high as you think the population error rate could go based on experience. What is allowance for sampling risk? - The allowance for sampling risk is the amount that you add to the sampling error rate to get some cushion for your sample. - It could be as HIGH as you think the population error rate could go based on experience. What is the tolerable error rate? The TER is the amount of error rate that you can accept. - If population error rate < TER, then accept the control as effective. - If population error rate > TER, do more testing to get SER lower or calculate control is NOT effective. Do more substantive testing. What are the steps to develop a sampling plan? 1) Determine test objective. For example, have sales shipments been billed? 2) Define population and deviation. Take a sample of shipping document. Trace forward to see if billed. 3) Determine sample size based on tolerable error rate for error – risk of assessing control risk too low – and expected population error rate. 4) Select sampling technique. After a sampling plan is developed, what are the steps in sampling? 1) Perform the sampling plan 2) Evaluate results 3) Document results

Flashcards: Audit Sampling What is systematic sampling? - Every certain # of a population is selected. - Population needs to be randomly ordered. - Primary advantage is that population does NOT REQUIRE pre-numbering. What is sequential sampling? - Sequential sampling is also called Stop or Go sampling . - Each audit step determines the next step. What is discovery sampling? - Audit is testing an area that is so crucial that zero population errors can be tolerated. - Any phony employees on payroll? How does block sampling compare to other sampling methods? Block sampling is easy to implement , but is the worst method of sampling.

Flashcards - Audit Sampling (5P)

Related Documents