CPA Audit - Audit Sampling

CPA Audit - Audit Sampling Study online at quizlet.com/_3kr1d 1.

An auditor performs a sampling for variables test and

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What are the two major types of statistical sampling?:

sets the tolerable amount of misstatement for an item at $30,000. Based on the preliminary judgement, the population is estimated at a total value of $900,000. However, the reporting entity reports this figure at $922,00.

The two major types of statistical sampling are as follows: 1. Attribute sampling is a statistical probabilistic method of sample evaluation that results in an estimate of the proportion of the items in a population containing a certain characteristic or attribute. In many tests, the auditor is estimating a rate or percentage. 2. In variables sampling, the auditor may be estimating an amount or a balance in order to measure a misstatement in an account balance. When the auditor determines that the misstatement amount exceeds the tolerable amount, the auditor takes additional or other action. Variable sampling included difference estimation, ration estimation, and mean-per-unit estimation.

What is the impact of this on the audit sample?: Because of the difference between the projected balance of the population ($900,000) and the client's reported figure ($922,000) is less than the auditor's maximum tolerable amount of misstatement ($30,000), the test that was performed does provide evidence that the balance is presented fairly. 2.

When is an auditor most likely to use statistical sampling?: Statistical sampling is viewed as a more sophisticated audit technique than judgement sampling and provides a better quality of audit evidence. Therefore, statistical sampling is more likely to be applied when risk levels are high and must be reduced to a more acceptable lower level. If inherent risk and/or control risk are assessed as being particularly high, the use of statistical sampling is more likely.

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sampling?: Attribute sampling refers to the estimation of a rate or a percentage of a certain attribute being in a population. The need to know a rate could occur at numerous times in the audit process. However, this type of testing is often associated with the determination of an error rate, which is a central part of testing the efficiency and effectiveness of internal control in the assessment of control risk. If testing is being done to estimate control risk, sampling for attributes is most likely used. Besides tests of controls, attribute sampling is also used in substantive tests of transactions. 9.

In statistical sampling, how does an increase in the number of items in a population as a whole impact the required sample size?: Except for small populations, an increase in the number of items in the population has almost no impact on the required sample size.

What is sampling risk?: If an auditor does not look at every piece of evidence, the auditor's conclusion may be wrong because only a portion of the population was examined. There is always a chance that the sample selected will not be a fair representation of the population as a whole and the auditor will reach an incorrect conclusion based on the sample results. That chance is known as sampling risk.

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When is an auditor most likely to use attribute

What is meant by the term statistical sampling?: Statistical sampling indicates that mathematical principles are used in the following ways: 1. In planning a test of less than 100% of a population so that the sample will most likely be representative of the population. 2. To evaluate the results of the sample and make inferences about the general population being considered.

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variables?: Variable sampling refers to the estimation of a balance or an amount. The need to estimate a balance could occur at numerous times in the audit process. However, this type of testing is often associated with obtaining support for a reported figure and is therefore frequently performed as part of the substantive testing carried out to reduce detection risk.

What is nonsampling risk?: Nonsampling risk is the risk that audit tests do not uncover existing exceptions in the sample. The two causes of nonsampling risk are (1) the auditor's failure to recognize exceptions and (2) inappropriate or ineffective audit procedures. In any testing, there are many possible reasons why an auditor might reach an incorrect conclusion besides the fact that a sample was examined rather than all items in the population. For example, the auditor may not properly note an exception because of a lack of understanding of what to look for.

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What is judgement sampling?: Judgement sampling is a test made on less than 100% of a population and the number of items selected for testing and the evaluation of the results are based entirely on the auditor's experienced judgement, not on mathematical principles.

When is an auditor most likely to use sampling for

When substantive tests of details are performed, variable sampling is most likely used. 11.

An auditor wants to estimate the error rate of a particular control activity that reduces control risk. The auditor decides to apply attribute sampling. The first step is to anticipate the actual error rate (expected deviation rate) based on the difficulty of the task and the quality of company personal. How does this expected deviation rate impact the sample size needed by the auditor?: In attribute sampling, there is a direct relationship between the expected deviation rate and the appropriate sample size. In other words, the more errors that are expected, the larger the sample that must be selected by the auditor.

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An auditor wants to estimate the error rate of a

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particular control activity that reduces control risk and decides to apply attribute sampling. The auditor has taken a sample and has discovered 2% errors. Based on statistical sampling methodology, the auditor determines that the actual deviation rate in the population could be as high as 5%.

assessment of control risk. The auditor wants to estimate the error rate of a particular control activity and decides to apply attribute sampling. The auditor sets the maximum tolerable deviation rate at 4% and takes a sample that shows 2% errors. Based on statistical sampling methodology, the auditor has determined that the actual deviation (or error) rate in the population could be as high at 5%.

What is the allowance for sampling risk?: In this case, the allowance for sampling risk is 3%. That is the difference between the results of the sample errors (2%) and the assumed maximum results for the population as a whole (5%). 13.

What action should the auditor take?: Because the maximum actual deviation rate (5%) is above the maximum tolerable deviation rate (4%), the auditor has failed to gain evidence that this particular control activity is operating effectively and efficiently. Consequently, the auditor is more likely to maintain or increase the assessment of control risk.

An auditor is performing tests of controls as part of the assessment of control risk. The auditor wants to estimate the error rate of a particular control activity and decides to apply attribute sampling. The auditor has already set an expected deviation (or error) rate and wants to set a maximum tolerable deviation rate based on the importance of the activity and the presence of other controls.

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How does this expected amount of misstatement impact the sample size needed?: In variable sampling, there is a direct relationship between the expected amount of misstatement in an account and the necessary sample size. In other words, the larger the amount of error that is expected, the larger the sample that must be selected by the auditor.

An auditor is performing tests of controls as part of the assessment of control risk. The auditor wants to estimate the error rate of a particular control activity and decides to apply attribute sampling. The auditor sets the maximum tolerable rate at 6% and takes a sample that shows 2% errors. Based on statistical sampling methodology, the auditor has determined that the actual deviation (or error) rate in the population could be as high as 5%.

An auditor performs substantive tests in order to reduce detection risk. An estimation is made of a balance, and the auditor applies variable sampling. the auditor anticipates the expected amount of misstatement in that balance based on the quality of the accounting information system and other tests.

How does this maximum tolerable deviation rate impact the sample size needed by the auditor?: In attribute sampling, there is an inverse relationship between the maximum tolerable deviation rate and the necessary sample size. In other words, the smaller the tolerable rate the auditor can accept, the larger the sample size that must be selected by the auditor. 14.

An auditor is performing tests of controls as part of the

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An auditor is performing substantive tests in order to reduce detection risk to an acceptable level. An estimation is being made of a balance as part of that testing, and the auditor plans to apply variable sampling. The auditor has previously set the expected amount of misstatement in that balance and wants to set a maximum tolerable amount of misstatement based on audit materiality limits and other tests.

What action should the auditor take?: Because the maximum actual deviation rate (5%) is below the maximum tolerable deviation rate, the auditor has gained evidence that this particular control activity is operating effectively and efficiently. Consequently, the auditor is likely to reduce the assessment of control risk.

How does the maximum tolerable amount of misstatement impact the sample size that is needed?: In variable sampling, there is an inverse relationship between the maximum tolerable amount of misstatement that is acceptable in an amount and the necessary sample size. In other words, the smaller the maximum tolerable amount, the larger the sample size that must be selected by the auditor. 18.

In sampling, what is meant by the term stratification?: Stratified sampling enables the auditor to emphasize certain population items and deemphasize others. Stratification means that larger items (and sometimes smaller items) are pulled out of a sample and are tested separately. This creates a more efficient testing process and, consequently, overall sample sizes can usually be reduced.

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When is probability-proportional-to-size (PPS)

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sampling most likely to be used?: PPS sampling is a type of sampling that estimates a balance, so it is classified as variable sampling. It is often used when classical variable sampling would require an especially large sample size because of a high degree of variability of the items in the population. 20.

proportional-to-size (PPS) sampling?: In PPS sampling, the larger items have a greater chance of being selected than do smaller items. Thus, variability of the items in the population does not cause a problem in the sampling. A $100 item has ten times more chance of being selected than does a $10 item.

An auditor is performing substantive tests in order to reduce detection risk. An estimation is made of a balance as part of that testing, and the auditor applies variable sampling. she has set the expected amount of misstatement and the maximum tolerable amount of misstatement.

Unfortunately, PPS sampling is normally only effective in a population with few errors. It cannot be applied if many errors are expected. 24.

Which items will be selected?: The following five items will be sequenced based on dollars (and not on units) as follows: Item Dollars 1. 1-500 2. 501-520 3. 521-560 4. 561-960 5. 961-1,020

An auditor performs substantive tests in order to reduce detection risk. An estimation is made of a balance, and the auditor applies variable sampling. The auditor sets the expected amount of misstatement in that balance, the maximum tolerable amount of misstatement, and the level of acceptable sampling risk. The auditor takes a preliminary sample. What is the purpose of this sample?: In variable sampling, the auditor must estimate the standard deviation of the items in the population, which is a measure of the variability of the items. A preliminary sample is taken for this purpose. The more variability that is present, the larger the sample size has to be.

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Because the auditor wants an interval of $400 based on a zero start, the 400th dollar and the 800th dollar will be selected. The 400th dollar is in item 1, and the 800th dollar is in item 4. Because these two items had more dollars to pick from, they have a greater chance of selection. 25.

How does the acceptable level of sampling risk impact the sample size needed by the auditor?: In attribute sampling, there is an inverse relationship between the level of sampling risk that is acceptable to the auditor and the necessary sample size. In other words, the more sampling risk the auditor can accept in the test, the smaller the sample size that needs to be selected by the auditor.

In performing an audit test based on attribute sampling, what attributes require a larger sample size?: In attribute sampling, larger sample size results because of the following: 1. The expected deviation (or error) rate is increased. 2. The maximum tolerable deviation (or error) rate is decreased. 3. The acceptable level of sampling risk is decreased.

An auditor performs tests of controls. A control activity is identified that would reduce control risk. The auditor wants to estimate the error rate of that control activity and decides to apply attribute sampling. The auditor sets and expected and a maximum tolerable deviation (or error) rate.

Assume a population has five items: $500, $20, $40, $400, and $60. The auditor wants to select two invoices and determine that there should be an interval of $400 based on a zero start.

How does the acceptable level of sampling risk impact the sample size needed?: In variable sampling, there is an inverse relationship between the level of sampling risk that is acceptable to the auditor and the necessary sample size. In other words, the more sampling risk that the auditor can accept in the test, the smaller the sample that needs to be selected by the auditor. 21.

What is the advantage of using probability-

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In performing an audit test based on variable sampling, what attributes require a larger sample size?: In variable sample, a larger sample size results because of the following: 1. The estimated amount of misstatement is increased. 2. The maximum tolerable amount of misstatement is decreased. 3. The acceptable level of sampling risk is decreased. 4. The estimated variability of the items in the population is increased.

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What are the two primary benefits of statistical sampling?: The two primary benefits of statistical sampling are as follows: 1. The auditor is using mathematical principles to determine the number of items to be selected. Thus, the auditor can set desired boundaries for the testing and know the exact number of items that should be selected to achieve these results. 2. After the sample has been chosen, statistical sampling methodology can provide the auditor with an appropriate evaluation of those results, including the risks that are involved.

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Is sampling normally conducted in most audits?: Sampling is performed in virtually every audit. There are so many transactions and other events to be tested that no auditor could possibly look at every one. Thus, sampling is both appropriate and necessary. In addition, an auditor can provide reasonable assurance of fair presentation without examining every transaction and/or event.

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When an auditor carries out any sampling test, there is always a risk that the auditor will reach the wrong conclusion. There are two general reasons why the auditor could reach a wrong conclusion. What are they?: An audit test may lead to an incorrect conclusion because of the following reasons: 1. Sampling risk. 2. Nonsampling risk.