crarevewscHoo.orneruurpnes | AT-8608 Menita | suns ron | conten ‘AUDIT SAMPLING | 1. “Audit Sampling” Involves the application of audit procedures to less than — wat an atcour bare Gas of wancaens. i 2. ‘Sampling may be statistical or nonstatistical. 1. STATISTICAL SAMPLING means any approach to sompling that Has the following characteristics: a) Random selection ofa sample; and ) Use of probability theory to evaluate sample results. 1. NONSTATISTICAL SAMPLING ~ A sampling approach that does not have characteristics (2) and (0). ‘AUDIT SAMPLING PLAN refers to the procedures an auditor applies to aocomplsh a sampling ‘application. Tt aids an autor in forming conclusions about one oF more characteristics of ether {2 parocular dass of transactions or a particular account balance. 4. ATTRIBUTE SAMPLING ‘= Roplcable to tests of contro. ‘Used to test an entity’ rate of deviation (aso called rate of cocurrence) from a prescribed ‘contro! procedure. 2, VARIABLES SAMPLING = Applicable to substantive txts ‘+ Most commonly used to test whether recorded account balances ere fatty stated. ‘SAMPLING RISK 1, “Sampling risk” arises from the possibilty thet the auditor's condusion, based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedures. 2. ‘The confidence level (also called relatilty eve) is the mathematical complement of the, applicable sampling risk factor. 3. Sampling risk is to be measured and controlled. The auctor controls sampling risk by specifying the acceptable evel wien developing the sampling plan. 4, For tests of contra, samping isk has the following aspects: 2. Risk oF assessing contol risk too law (Risk oF overrelianceyBeta rsk/Type II rsk) ‘©The risk that the auctor wall condude tat contol risk slower than it actually is, . 2 aes ae arenes fo rs ety tm ha a per opi b,. Ribk of assessing contro ssh too high (Risk of Underreiance/Alpha risk/Type T risk) ‘= The risk that the auditor will conclude that control risk is higher than it actually is. ‘+ affects audit efficiency as it would usualy lead to additional work to establish that Initial conctusions were 5. For substantive tt, sempling sk hab the flowing aspects {8 R6K of Incorrect acceptance (Beta jsk/Type Tsk) fet e0roSpanaway re + Thess hte autor wl once tha mater enor doesnot ext when nfo! Wobes ‘+ It affects audit effectiveness and is more likely to lead to an inappropriate audit ooien, 1b. Risk of incorrect rejection (Alpha risk/Type I risk) Ther ht te audtor wl conde ata material evr eds when infact does ee + Tafa aust eficeny as woud us lad to actions wok to estab that inal orcs were meore NONSAMPLING RISK ‘Nonsampiing risk arises from factors that cause the auditor to reach an erroneous conclusion for {any reason nek related to the sizeof the sample. For example, most audt evidence is persuasive rather than condusive, the auditor might use Inappropriate procedures, or the auditor might misinterpret evidence and fall to recognize en error. ‘STEPS IN AN ATTRIBUTE SAMPLING PLAN 1. Define the objectives ofthe plan, ‘The auditor should clearty state what isto be accomplished. 2. Define the poputation, For example, if en auditor's objective Is to test controls designed to assure that all shipped ‘goods are invoiced, the population would be defined as all shipping documents issued during the period, not all Sales invoices. 3. Define the attribute and deviation conditons. i An attributeis a charactesisbc ofa control, For example, the supervisor's signature of approval | ‘ona document. A devigton's the absence ofan attribute. ' 4. Determine the sample size, ‘The sample size Is determined by considering the following factors: 2. isk of assessing contro rsk too low . Tolerable deviation rate © Expected population deviation rate Rsk of assessing Contre nsk too fow ‘+ There is an ‘averse relationship beoween this risk and the sample size. The higher the acceptable risk, the smaller the sample size. Because the risk of assessing control risk too low relates tothe effectiveness of the audit, itis kept at a relatvely ow level by the auctor. Tolerable devation rate (tolerable eran) Tiss the maximum deviauon rate that the auditor is wing to accept. * The lower the rate of deviation thatthe auditor i willing to acnept, the lager the sample ‘Size needs to be. Expected poputation deviation rate (expected error) ‘+ The rate of deviation from the prescribed control procedure the auditor expects to find in the population, ‘+The higher the rate of deviation that the auditor expects, the larger the sample size needs tobe so as to be in a pcaition to make a reasonable estimate of the actual rate of deviation, *+ Factors relevant to the a xdtor’s consideration ofthe expected error rate indude: +The audit's understanding of the business (in particular, procedures undertaken to ‘obtain an understanding of the accounting and internal contol systems); + Ghenges in personnel orn the accounting and internal control systems; +The results of aust procedures apivied in prior periods; and >The resuits of other aust procedures Page 2c 10 PopesSPAR MANILA arses 8. Determine the method of sample selecton, : ‘Some commonty used methods are: | ‘Random number sampling ‘+ Each tem in the population has an equal chance and nonzero probabilty of selection. TR usually accomplished by generating random numbers from a random number table or computer program and trecing them to associated documents or items inthe population. i ‘+ Tt is appropriate for both statistical and nonstatistical sampling. | | | b. Systematic selection | * The number of sampling units in the population Is cvided by the semple sie to give 2 sempling interval, for example 50, and having determined the sterng point within the first 50, each 50* sampling unit is thereafter selected. ‘+ Although the starting point may be determined haphazardly, the sample is more likely ‘tp be buly random if it is determined by use of a computerized random number ‘generator or random number tables. ‘+ When using systematic selection, the auditor would need to determine that sampling Units within the population are not structured in such a way that the sampling interval ‘corresponds with @ particular pattem in the popultion. Block selection (or cluster sampling) + Teinvolves selecting a block(s) of contiguous items from within the population. *Ttcannot ordinarily be used In audit sampling because mast populations are structured such thet items in sequence can be expected to have similar characteristics to each ‘other, but different characteristics from items elsewhere in the population. ‘+ Athough in some circumstances it may be an appropriate aut procedure to examine 2 block of items, it would rarely be an appropriate sample selection technique when ‘the auditor intends to draw valid inferences about the entire population based on the sample. 4. Mapbazard selection The auctor selects the sample without folowing a structured technique. © Ttls not appropriate when using statistical sampling. ° Stratification ‘This involves subdividing a population Into subpopulations or strata, ie. a group of sampling units which have similar characteristics (often monetary value). 4 The strata must be explity defined so that each sampling unit can belong to only ‘one stratum. ‘+ This method enables the auditor to direct his efforts towards the items he considers ‘would potentially contain the grester monetary errr. 6. Perform the sampling plan. “The sompling units selected should be examined for the atbutes of Interest and deviations should be documented in the working papers. 7. Evaluate and document results “These inode: a Determining the sample deviston rete. ‘Semple Deviation Rate = Number of deviations chse-ved 7 Sample sae . Determining the madmum population deviation rate (achieved upper deviation limit) and the allowance for sampling rik (achieved precision). ‘© Thre maximum deviation rate Is based on the sample site and the numberof deviations discovered. There are standard tables that yield maximum population deviation rates. at Speatfied risks of assessing contro isk too low. 3 of 10 Pagesgpaewamyy az ‘+ Atowance for sempling risk = Maximum Devition Rate — Sample Deviation Rate (© Considering qualitative information. ‘The auditor considers each ofthe devitio’s nature, importance, and prabable cause. 4. Reaching an overall conclusion. Jn atsezng contr the aor constr a vate quate and untae ation, (COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES 1, Attrbute estimation samping | ‘+ A statistical sampling plan for hsts of contro. | ‘Appropriate when an auditor wishes to estate a rue but unknown population deviation | rate. Uses a fe sampling pla, Le, the auctor tess a single sample. 2. Sequential sampling (also called stop-orgo sampling) ‘The sampling pian is performed in seveva sta * Following each step the auctor decides whether to stop orto go onto the next step. ‘Appropriate when the auditor expects 22r0 or very few deviations, 3. Ciscovery samoing * Appropriate when the expected devation rete is near zero and when the aucito’s| ‘objective is to find at least ane devazton in a sample if the actual population deviation rate exceeds or equals a predetermined critical rate (tolerabve devistion rate). : ‘STEPS IN A VARIABLES SAMPLING PLAN 1. Determine the objectives ofthe test ‘The auditors objecive Isto test the reasonableness of a recorded account balance, called hypothesis testing, 2. Deine the populate ent semplng unt | For example, the population might consis of 1,000 accounts recevle with a repeted book value of P1,500,000. | i 3. Coase an audit samping technique. &. Statistical vs Norsxatsical 1. Classical Varlales Sampling vs Probabilty-Proportonal-To-Size Sampling 4. Determine the sample size ‘The auctor considers the folowing: | Variation within the population 1+ Semple size vanes in the same direction asthe variation in population amounts. AS population variation increases, so does the sample ie. + An estimate of population variation is made by determining @ population standard ‘deviation, b._ Acaeptatie risk of inccrrect rejection & Accepkable risk ofincorect acceptance 4, Tolerable erur = the maximein monetary error that. may exist in an account balance without causing the financial statements to be materially misstated. 5, Determine the metho of sample ssecton. Perform the sampling plan 2. Evaluate the sample resus. Ps Page 4of 10 Pagesopagmanaya tcc ‘The folowing procedures are performed: {Projecting the sample error tothe population 'b. Considering sampling risk © Considering qualitative information «d._ Reaching an overall concusion ‘CLASSICAL VARIABLES SAMPLING TECHNIQUES 1a. MEAN-PER-UNIT ESTIMATION ~ A classical varlables sampling technique that projects the ‘sample average tothe total population by muitipiying the sample average by the number of items inthe population. i. DIFFERENCE ESTIMATION ~ A classical varables sampling technique that uses the average difference between audited amounts and indlvidual recorded amounts to estimate the total ‘audited amount of @ population and an allowance for sampling risk. _ RATIO ESTIMATION — A classical varlables sampling technique that uses the ratio of audited ‘amaunts to recorded amounts in the sample to estimate the total amount of the population {and an allowance for sampling risk. (Conditions for using difference and ratio estimation 1, Each population item must have a recorded book value. 2. Total population book value must be known. 3. Expected differences between aucited and recorded book values must nt be too rare. (Choosing between difference and ratio estimation ‘Ratio estimations more appropriate when the differences are nearly proportional to book values. Difference estimation is more appropriate when there Is lite or no relationship between the ‘absolute amounts of the differences and the book values. ‘PROBABILITY-PROPORTIONAL-TO-SIZE SAMPLING (PPS) ‘PPS uses a peso as the sampling unt ‘PPS sampling gives each individual peso inthe population an equal chance of selection. ‘© PPS s onty useful for TESTS OF OVERSTATEMENTS (e.9., assets) since the sample selection ‘method cicates that the larger the transaction or amount, the more likly that it wil be selected. ‘+ PPS is inappropriate for testing labiies because understatement i the primary aut ‘consideration. Examples of Factors Influencing Sample Size for Tests of Contro! Effect on Enctor Sample Size 'An increase in the audit's intended reliance on accounting and internal contol systems. Increase ‘An increase in the rate of deviation from the presabed control proce thet the auditor i wiling to accept (tolerable rer) Decrease ‘an ierease inthe rate of deviation from the presrbed contol procedure thet the auditor expects to find inthe population (expected errr} Increase ‘an increase in the autor’s required conidence level (or conversy, 3 ecrease in the rsk thatthe auctor wil condude that the cova isk Is lower than the actual contra riskn the population) Increase 'An increase in the number of sampling unis inthe population Negligible effect Pages of 10 Pagesar Examples of Factors Influencing Sample Size for Substantive Procedures Effect on Factor ‘Sample Size ‘An increase in the auditors assessment of inherent risk Increase An increase inthe audlto’s assessment of contol risk Increase ‘An increase n the use of other substantive procedures directed at the same financial statement assertion Decrease ‘An increase inthe aucitr’s required confidence evel (or conversely, 2 decrease inthe risk thatthe auditor wil conclude that a material error does not exist, when in fact it does exst) Increase [An increase in the total error thatthe aueltor is wing to accept (tolerable eror) Decrease {An increase in the amount of error the auctor expects to find in the population (expected errr) Increase ‘Stratification ofthe population wien appropriate Decrease ‘The numberof sampling units inthe population Negligible MULTIPLE CHOICE QUESTIONS 1, Audit sampling involves the ‘A. Selection ofall items over a certain amount. Applicaton of aucit procedures to less than 100% of tems within a cass of transactions, cor an account balance such that ail tems have a chance of selection. C Application of audit procedures to all tems that comprise a cass of transactions or an ‘account balance. . Applicaton of audit procedures to all items over a certain amount and those that are Unusual or have a history of error. 2. Population, as defined in PSA 530, means the entire set of data from which 2 sample Is selected and about which the aucltor wishes to draw conclusions. Tes Important for the ‘udtor to ensure thatthe population Is 1L_ Appropriate tothe objective of the audit procedure. TL. Compete. A Tonty Both Land 11 B. Tony, D. Nether I nor 1 3. An advantage of statistical over nonstatistical sampling methods in tests of contro’ s that the statistical methods ‘A. Afford greater assurance than a nonstatstical sample of equal sie. 'B. Provide an objective basis for quantitatively evaluating Sampling risks, CC. Can more easly convert the sample into 2 dual-purpose test useful for substantive testing. Eliminate the need to use judgment in determining appropriate sample sizes, 4. The risk of incorrect acneptance and the likelinoad of assessing control rsk too low relate tothe A. Effectiveness of the auc. B. Efficency of the audit. . CC. Preliminary estimates of materiality levels. . Tolerable misstatement. 5. The tkelinond of assessing control risk too high Is the risk thatthe sample selected to test controls ‘A. Does not support the auditor's planned assessed level of contro risk when the tue ‘operating effectiveness of intemal control justifies such an assessment. Page 6of 20 Pages(AA % a 2. Contains mistatements that could be meter to the franca statements when aggregated wih misatemert in thes account balances of transactions Cases © Conia proportional fener devains from prescribed intemal consol than @cst In the balance or dass as 0 whole. Does nek suppor the tolerable misstatement for some oral of manapement's assertions. Wile performing a test of deals during an audit, the auditor determing that the sample results supported the conclusion that the recorded account balance was materially ‘misstated. It was, n fact, nck materially misstated. This stuation illustrates the risk of ‘A. Incorrect rejection CC. Assessing control risk oo low B, Incorrect acceptance D._ Assessing contro isk to high Which of the fellowing sample planning factors would influence the sample size for & ‘substantive tet of detals for a spectic aocount? Expected Exo ‘Tolerable Er a No No B Yes Yes c No Yes cy Yes No ‘An underlying feature of random-based selection of tems is that each |. Stratum of the accounting population be given equal representation In the sample. 8 Ttem in the accounting population be randomly ordered. C_Ttem in the accounting population should have an opportunity to be selected. ©. Item must be systematically selected using replacement. Which ofthe fellowing best itustrates the concept of sampling risk? ‘A. A\randomly chosen sample may not be representative ofthe population as a whole on the characteristic of interest 18. An auditor may select audit procedures that are not appropiate to achieve the specific objective. CC. An auctor may fal bo recognize errrs in the documents examined forthe chosen sample. The documents related to the chosen semple may not be availabe for inspection. 1. Which ofthe following statistical selection techniques is least desirable for use by an auctor? A. Systematic selection C. Block selection Stratified selection 1, Sequential selection The expected population deviation rate of dient biling errs Is 3%. The auditor has ‘esablished a therable rate of 3%. In the review of cient invoices the auctor should use ‘A. Stratified sampling Discovery sampling B. Vanable sampling 1. Atiibute samping . Which of the following sampling methods would be used to estimate @ numerical measurement ofa popuation, such 3s a peso vale? ‘A. Atibutes sampling Tc. Variables sampling 1B Stop-or-go sampling |. Random-rumbersamping Which ofthe folowing ates cect conceing Statistal samp in tess of cone? | [A Deviations from control procedurbs ata given rate usuely resutt in misstatements at @ higher ee. 1. Asthe popuaton size doutes, the sample size shout also double The qualtatve aspects of devlaons are nt considered by the ator. D, Taegan mere rears ten fe same sade rae te feof 10gGemma 14, Which of the folowing statistical sampling plans does not use a fixed sample sie for tests of controls? A. Attributes samping C. PPS sampling Sequential sampling . Variables serping 15, certain forms are not consecutively numbered ‘A. Sclection of random sample probably is rot possble, 8B, Systematic sampling may be appropriate. C. Strafied sampling should be used. . Random number tables cannot be used. 16. When performing a test of a control with respect to control over cash receipts, an auctor ‘may use a systematic sampling technique with 9 stat at any randomly selected iter. The biagest disadvantage ofthis type of sampling is thatthe items inthe population ‘A. Must be systemaccallyrelaced inthe population after sampling. 1B May systematically occur more than once inthe sample. © Must be recorded in a systematic pattern before the sample can be drawn. . May occur ina systematic pattem, thus destroying the sample randomness. 17, In testing accounts receivable, an auditor sends out positive confirmation requests to 100 Tandomly selected customers. A customer retuns the confirmation indicating that the balances corect when, in fact, the baience is overstated. Tis an example of: ‘A. Projected misstatement. (C Standard error. B. Sampling error. 1B. Nonsampiing err. 416. An auditor i testing internal contrat procedures tat are evidenced on an entty’s vouchers! by matching random numbers with voucher numbers. Fa random number matches the umber of voided voucher, that voucher ordinarily shouldbe replaced by another voucher” In ehe random sample ifthe voucher A. Constitutes a dovition, 8, Has been property voided. Cannot be locstad, Represents an irmmatsrial peso amount. 419, An auctor plans to examine a sample of 20 purchase orders for proper approvals as resorbed by the certs intemal coil procedures. One of the purchase orders inthe: Chosen sample cannet be feund, and the audior Is unatle to use alternative procedures to test whether that purchase wes property enproved. Te auditor shoud A. Chonse aris purchase order to rence tne mising purchase order in the sample. B. Consider ths test cf con invalid and proceed wi substance tests Since itera control cennct be rete’ upon, (C. Treat the missng purchase order asa dewstion forthe purpose of evaluating the sarsple D. ‘Selec complensy new set of 20 purchase orders 20, ‘The tolerant rate of devistions fora test of cunttol i generaly A. Lower than the expected rate of errs inthe related escounting record. 8. Higher than the eqpected rate of errors Inthe related accounting record, G Tdentics to the exnectrd rata of errors in the rested accounting records, D. United tothe exrected rete of aro in the relzed accourtng records, 21. I the auditor is concemed that 8 population may contain exceptions, the determination of <2 sample sie suicent fo include at last ane sun exception is a characteristic of A. Discovey sampling . Ranriom sampling B. Variables sermping ©. PPS sampling 22. Which of the folowing conse of acton woud an auditor mot Hl follow in planning 2 sample of cash disbursements if the auditor iy aware of several unusually large cash Asbursemerits? ty ive ‘A. Sette toleranle rate of deviation at a lowe level than originally planned. Page of 10 PagesPe ) 1B. Statty the cash disbursements population so that the unusually lege disbursements are selected, C. Increase the sampe size to reduce the effect of the unusually large dlsbursements. . Contowe to draw new samples uni l he unusuy e Sebursemts appear in 23. While performing a test of details during an audit, an auditor determined that the somple results supported the conclusion that the recorded account balance was materially misstated. It was, in fect, not materially misstated. This stuation ilustrates the risk of ‘A. Assessing control risk too high 1B. Assessing contro! risk too low | | G Incorrect rejection \ ——. | 24. For which of the folowing aut tests would an auctor most likely use atribte sampling? ‘A. king an independent esomate ofthe amount of FIFO inventory. 8. Examining invoices in support ofthe valuation of fied asset addi . Selecting accounts receivable for confiration of account balances. Inspecting employee tine cards for proper approval Dy SUDeNSes. | 25, ‘The diagram below depicts the auditor's estimated maximum deviation rate compared with the tolerable rate and also depicts the true population deviation rate compared with the tolerable rate. “True State of Population Auditor's Estimate Deviation Rate Deviation Rate Based on Isless than Exceeds ‘Sample Results Tolerable Rate Tolerable Rate Meximum Deviation Rate L mm. Is Less then Tolerable Rate Maximum Deviation Rate a. Mv. Beoeeds Tolerable Rate {As 2 resut of tests of controls, the auditor assesses contol risk higher than necessary and thereby increases substantive testing. Ths Is Mlustrated by At cm Bo a Questions 26 and 27 are based on the following information. ‘an auctor desired to test credit approval on 10,000 sales invoices processed during the year. The aucitor designed a statistical sample that would provide 11% risk of assessing Control risk too low (998% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1296 of the sales ‘nvolces lacked approval. sample of 200 invoices was examined and seven of them were lacking approval. ‘The auditor then determined the achieved upper precsion limit to be 89%. 26, Inthe evaluation ofthis sompl, the auctor decide to increase the level ofthe preliminary assessment of corr isk because 1K. Tolerable rate (7%) was less than the achieved upper precision iit (8%). Expected deviation rate (7%) was more than the percentage of eros in the sample (3 6). C. Achieved upper precision limit ($96) was more than the percentage of errors in the ‘sample (2 V5), noahSAAN 2. 3. 32 2. 1, Expected deviation rate (2 ¥4%) was less than the tolerable rate (796). ‘The aliowance for sampling risk was AS 1%, c 31% B 4K, D. 1%, i {In ation to evaluating the frequency of devon in tests of contos, an auctor shoul 250 consider certain quatatve aspects ofthe deviations. ‘The autor most likely Would ‘9Ne broader consideration to the implications of @ deviation It was ‘A. The only deviation discovered inthe sample, 8. Identical to a deviation discovered during the por year’s aut. C. Caused by an employee's misunderstanding of nsvuctons. . Initially concealed by 2 forged document \Whenthe autor goes through 2 popuatcn an selects temstor the sample wa rear {thet size, source, or other dictinguishing characteristic, Ie Is called A. Block selection B. Systematic selection ©. Haphazard selection 1B. Random selection When an auditor has chosen @ random sample and is using nonstatstical att sampling, that auctor ‘A. Need not consider the risk of asseaing contra risk too low. | 8. Has committad a nonsampling ere. | C Wil have to use discovery sampling to evaluate the results. | Should compere the deviation rate ofthe semple to the tolerable devietion rate. ‘An error that arses from an islated event that has not recurred other than on speciclly ‘dentable occasions and is therefore not representative of similar errs inthe " tsayan ‘A. Boomalous eror | B. Isolated eror | ©. Individual eror D. Nen-recuring ero {If all other factors specified In 27 attributes sampling pan remain constant, decreasing | tolerable rate and decasing the rok of assessing conto risk too fw would have wha effect on same ize? 1 ireease. & Reman te same. C Decrease 1. Indetesinste, depends upon exact change beng made. Which of the folowing siaements is corect about the sample size in statistical sampling when testing internal controls? A. The auctor shculd concider the tolerable rate of deviation from the controls being tested in determining sample sve. B. As the likely rate of deviation. decrenses, the auditor should increase the planned sample size. C. The allonable risk of assessing control nik to low hs mo effect on the planned sample size. D. Ofall the factors to be considered, the population size nas the greatest effect on the sample size. END Page 10030 Pages