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 Becker Auditing – 2008 Edition Chapter 5 1
AUDITING & ATTESTATION – 5
Audit Sampling: TIP PIE ACDO
the risk of reaching the wrong conclusion based on the sampleEvidence: Auditor must obtain sufficient appropriate audit evidence.Rule 1: Central limit theorem: Assume that population being sampled is a normal distribution = a bell-shaped curveRule 2: For mathematical validity, the samples have to be unrestricted and randomly selected. Every item in population must have an equalchance of being selected. No bias and no substitution. This is the only area where CPA does not use judgment.Rule 3: If sample is large and randomly selected, it will be representative of the population.Rule 4: Standard deviation is a measure of variability. Variability = Uncertainty = Larger Sample SizeSampling risk: The probability that the sample is wrongMethods can be either statistical or non-statistical and both require professional judgment.Statistical Sampling: auditors specify the risk they are willing to accept and calculate the sample size. Evaluating quantitatively.Non-statistical Sampling: sample size is not determined mathematically, instead auditor’s judgment is used for sample size. Evaluated judgmentally.GAAS – Approves both, the statistical and non-statistical approach.Sufficiency depends on size of sample. Size of sample depends on objectives and design of the sample.Two types of Sampling:1.
 
Attribute Sampling
Testing for specific characteristics (seeking errors)
Test of Controls (occurrence) (yes/no questions)2.
 
Variable Sampling
Estimating the dollar value of the population
Test of Details and/or Substantive TestsAuditor still needs to use professional judgment regardless of the type of sampling used. Use judgement for:
•
 
Define the population and sampling unit
•
 
Select the appropriate sampling method
•
 
Evaluate the appropriateness of audit evidence
•
 
Evaluate the nature of deviations or errors
•
 
Consider sampling risk
•
 
Evaluate results obtained from sample and project those results of population***Statistical sampling does NOT eliminate the need for auditing judgment!Advantages of Statistical Sampling – allows auditor to:
•
 
Measure the sufficiency of audit evidence obtained
•
 
Provide an objective basis for quantitatively evaluating sample results
•
 
Design an efficient sample
•
 
Quantify sampling risk so as to limit risk to an acceptable levelRule 2
Random sample selection should be used. It gives all population an equal chance to be included in sampleAudit Risk: Risk of giving the wrong opinion. Includes Uncertainties due to sampling and uncertainties due to nonsampling factors
Sampling Risk in Substantive Testing
Variables Sampling:
1.
 
Beta Risk: Risk of Incorrect Acceptance. Sample results say that account balance is good, when in fact it is misstated. Auditor’sConcern! Effectiveness Lost!2.
 
Alpha Risk: Risk of Incorrect Rejection. Sample results say that account balance is bad, when in fact it is not misstated. EfficiencyLost!
 
 Becker Auditing – 2008 Edition Chapter 5 2
Sampling Risks in Tests of Controls
Attribute Sampling:1.
 
Beta Risk: Risk of Assessing Control Risk Too Low. Assessed level of control risk based on sample is less, when the actual control riskis higher. Auditor’s Concern! Effectiveness Lost! Risk of Over-reliance2.
 
Alpha Risk: Risk of Assessing Control Risk Too High. Assessed level of control risk based on sample too high, then the actual controlrisk is lower. Efficiency Lost! = Risk of Under-reliance***Two types of mistakes the auditor can make:
•
 
Fail to identify an existing problem = incorrect acceptance and assessing control risk too low
•
 
Falsely identify a problem where none exists = incorrect rejection or assessing control risk too highEfficiency is always lost with alpha risk = incorrect rejection or assessing control risk too high = auditor does more audit work than neededEffectiveness is always lost with beta risk = incorrect rejection or assessing control risk too high= not detecting an existing misstatementRisk of being ineffective + Confidence Level = 100%Nonsampling Risk: Always present, cannot be measured
•
 
Using wrong audit procedures
•
 
Improperly evaluating evidence/results
•
 
Auditor can
reduce
risk through planning and supervision of audit and quality control of all firm practices
Sampling Risk in Tests of Controls
Attributes Sampling:
Used to estimate the rate (%) of occurrence (exception) of a characteristic (attribute)Samples to test the operating effectiveness of controlsDeals with yes/no questions (are time cards properly authorized – to assure recorded hours were worked)The Nature, Extent, and Timing of substantive tests are used to determine the sampling risk of tests of controlsPlanning Considerations:
 
Relationship between sample to the objective of tests of controls
 
Tolerable deviation rate (tolerable mistakes) – risk of misstatement. Maximum rate of errors auditor will tolerate without modifyingplanned reliance on internal control
 
Risk of assessing control risk too low = Beta Risk
 
Characteristics of populationAs conservative auditors, we are concerned with the worst case scenario. The top end of the range is known as “upper deviation rate”Deviation Rate in the sample is the auditor’s best estimate of the deviation rate in the population from which it was selectedIf auditor concludes that sample results do not support the planned assessed level of control risk for an assertion, the NET of substantiveprocedures should be re-evaluated.Steps for Attribute Testing (testing of controls)1.
 
Define the objective of the test2.
 
Define the population (including defining the time period. Ex. Entire year, first quarter)3.
 
Define the sampling unit (consider completeness of sampling unit
4.
 
Define the attributes of interest. Deviations are where the control was not properly applied (i.e. missing credit approval, oritems that cannot be located are considered deviations)
5.
 
Determine the sample size:a.
 
Risk of Assessing Control Risk too Low – Sample size
Inverse relationshipb.
 
Tolerable Deviation (error) Rate – Sample size
inverse relationshipc.
 
Expected Deviation (error) Rate – Sample size
direct relationshipd.
 
Population size is not an issue
Factor Sample Size
Risk of Assessing Control Risk Too Low Want less risk MoreAccept more risk LessTolerable Deviation (error) Rate Want less deviation MoreAccept more deviation Less
 
 Becker Auditing – 2008 Edition Chapter 5 3
Expected Deviation (error) Rate Expect less deviation LessExpect more deviation MorePopulation size n/a n/a6.
 
Select the Sample: there are two types alloweda.
 
Random selectionb.
 
Systematic selection (every nth item)c.
 
Block sampling is NOT acceptable7.
 
Evaluate the Sample results:
Sample deviation rate + Allowance for sampling risk (the cushion) = Upper deviation rate
8.
 
Form conclusionsa.
 
Upper deviation rate is LESS THAN OR EQUAL to the tolerable deviation rate, the auditor may rely on the controlb.
 
Upper deviation rate EXCEEDS the tolerable deviation rate, the auditor would not rely on the controli.
 
Select and test compliance with other internal accounting control, ORii.
 
OR, modify the NET of the substantive tests to reflect the reduced reliance*****it is the upper deviation rate (and not the rate found in the sample) that is compared to the tolerable rate9.
 
Document the Sampling ProcedureDiscovery Sampling: used for detecting fraud (critical items). It is a special type of attribute sampling appropriate when the auditor believesthe population deviation rate is zero or near zero.Stop or Go Sampling: designed to avoid oversampling for attributes by allowing the auditor to stop an audit test before completing all steps.Used when few errors are expected in the population.Sampling in Substantive Tests: Variable Sampling (known as “Estimation Sampling”)Estimate the numerical measure, like the dollar value, of the populationObjective: obtain evidence about the reasonableness of monetary amountsEstimates the true value of population by computing a point estimate of population and computing a precision interval around this pointestimate.Planning considerations:1.
 
The relationship of sample to relevant audit objective2.
 
Preliminary estimates of materiality levelsa.
 
Tolerable misstatement = auditor’s desired precision = materiality. It is the maximum monetary misstatement in thepopulation the auditor is willing to accept. Variable = misstatement attribute = deviation (“errors”)3.
 
Auditor’s allowable risk of incorrect acceptance (use the audit risk model)4.
 
Characteristics of the populationCertain items may be individually examined, such as those for which potential misstatements could individually exceed tolerablemisstatement. 100% of such items are examined and they are not considered to be part of the sample.Stratication: items subject to sampling may also be separated into relatively homogeneous groups. Each group is treated as a separatepopulation. Results in a reduced sample size. Used when a population has highly variable recorded amounts.Rule 4: Variability = uncertainty = larger sample sizeStratification
reduces variability
smaller sample sizeRule 3: Auditor projects the misstatement results of the sample to the population.The auditor uses professional judgment when evaluating whether the projected misstatement is less or higher than the tolerablemisstatement.Three variables sampling plans:1.
 
Mean-Per-Unit Estimation: uses the average value of the items in the sample to estimate the true population valuea.
 
Example: estimate = average sample value x number of items in populationb.
 
MPU does not require the book value of the population to estimate true population value$250 (audited items avg value) x 2000 items = $500,000 (point estimate)
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06 / 06 / 2010This doucment made it onto the Rising List!
danielbalian_2009

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reply10 / 23 / 2009
Future CPA

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11 / 07 / 2009
yunyachang4925

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reply05 / 15 / 2009
mahesh zalavadiya

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reply04 / 09 / 2009
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