Chapter 10 — Selecting Items for Testing and Audit Sampling CHAPTER 10 SELECTING ITEMS FOR TESTING AND AUDIT SAMPLING ——— eo eeoon_'.C Chapter Overview and Objectives: ee This chapter discusses the concepts and application of sampling in audits of financial statements. At the end of this chapter, readers should be able to discuss the following: 1. 2. 3. Pnawe The means available to the auditor for selecting items for testing The objective of the auditor when using audit sampling The risks involved when obtaining evidence through sampling and managing such risks accordingly The general approaches to audit sampling The audit sampling plans and the necessary procedures Factors that affect the determination of appropriate sample size Various methods or techniques used to select samples Evaluation of the results of audit sampling Relevant references: PSA 500 — Audit Evidence PSA 530— Audit Sampling — Aim... Believe... Claim. Page 377Chapter 10 — Selecting Items for Testing and Audit Sampling During the eadence gathering phase of the audit, appropriate Means shoug applied by the auditor to execute the engagement procedures on effec, and efficient manner. The method of examination of items would high) net on the specific circumstances present in the engagement and the APPlication ® the auditor of his professional judgment. There may be circumstances that the auditor may judge that a fi of items under audit is appropriate. Other instances may also I examination of those items that exhibit specific characteristic hand, despite the advances in tools and technologies used by ti are circumstances that testing all items under audit is u Performing a full test is not always cost-efficient. With this, ull examinat, lead to a pans S. ON the othy the auditor, there NWorkable, i, the auditor may lusions regardig SELECTING ITEMS FOR TESTING PSA requires the auditor to obtain sufficient appropriate audit evidence tote able to draw conclusions on which to base the overall audit opinion on the fairness of preparation and Presentation of financial statements, To do this, the auditor shall determine the appropriate means, or combination of means, of selecting items for testing that are effective in Meeting the purpose of the audt Procedure when designing tests of controls and tests of details, In selecting items for testing, the means available to the auditor for selecting items for testing are: 2. Selecting all items (100% exa b. Selecting specific items; and ©. Audit sampling, The application of a depending on the mination); ate ny one or combination of these means may be appropri! fe eri ‘ances, for example, the risks of mat A. SELECTING ALL ITEMS (100% The auditor may decid, Population of ite: {or a stratum wit EXAMINATION) ane the entife le that it will be most appropriate to examine tr” ice ms that make up a class Of transactions or account hin that Popula: Believe... Claim.Chapter 10 — Selecting Items for Testing and Audit Sampling 100% examination is commonly used when performing tests of details. However, it is unlikely to be used in tests of controls because of impracticability. 100% examination may be appropriate when, for example: Y The population constitutes a small number of large value items; ¥ There is a significant risk and other means do not provide sufficient appropriate audit evidence; or ¥ The repetitive nature of a calculation or other process performed automatically by an information system makes a 100% examination cost effective. B. SELECTING SPECIFIC ITEMS (ITEMS FOR SPECIFIC TESTING) The auditor may decide to select specific items from a population. In making this decision, factors that may be relevant include the auditor's understanding of the entity, the assessed risks of material misstatement, and the characteristics of the population being tested. Specific items selected may include: Y High value or key items. The auditor may decide to select specific items within a population because they are of high value, or exhibit some other characteristic, for example, items that are suspicious, unusual, particularly risk-prone or that have a history of error. Y All items over a certain amount. The auditor may decide to examine items whose recorded values exceed a certain amount so as to verify a large proportion of the total amount of a class of transactions or account balance. Y Items to obtain information. The auditor may examine items to obtain information about matters such as the nature of the entity or the nature of transactions. Y Items to test procedures. The auditor may use judgment to select and examine specific items to determine whether or not a particular procedure is being performed. While selective examination of specific items from a class of transactions or account balance will often be an efficient means of obtaining audit evidence, it does not constitute audit sampling. The results of audit procedures applied to items selected in this way cannot be projected to the entire population; accordingly, selective examination of specific items does not provide audit evidence concerning the remainder of the population, Simply stated, the conclusion reached from the items tested is limited only to those items. If the auditor wants to conclude on the untested items, performance of additional procedures is necessary. ‘Aim... Believe... Claim... rap A a a i a isChapter 10 - Selecting Items for Testing and Audit Sampling DIT SAMPLING c AU 5 the application of audit procedures to Tew a | ing involve: Audit sampling a population of audit relevance such that all san, in lin | 100% of items within units have a chance of selection. jon means the entire set of data from which a sample is Selected : ng Populati 7 wishes to draw conclusions. about which the auditor Example: All of the items in an account balance or a class of transac constitute a population. A population may be divided into strata, ors, populations, with each stratum being examined separately. Sampling unit refers to individual item constituting a population, Samplig units might be physical items (for example, checks listed on deposit sigs credit entries on bank statements, sales invoices or debtors’ balances) monetary units. Audit sampling vs. Selecting specific items The primary difference between these two approaches lies on the selection of items for testing. When selecting specific items is used, items are selected by setting criteria that will only be met by some, but not all, units in the population. On the other hand, when audit sampling is used, all units shal have a chance or opportunity of being selected. Moreover, because of the difference in the process of selecting items for testing, the conclusion reached from the testing will also be affected. selecting specific items, conclusion reached shall be limited only to itess tested; whereas, in sampling the conclusion reached will be projected tot entire population. In summary, we can refer to the following table. Objective of the auditor The objective of the auditor when using the audit sampling is to desié" ns select the audit sample, perform audit procedures on the sample item Spraeinc bar i nn the sample in a manner that will prov! 'e basis for the auditor to dra ‘ the popu! from which the sample is drawn, w conclusions about SimPWy stated, audit sampling fs designed to enable conclusions 1° bea an entire population on the basis of testing a sample draw" fromChapter 10 - Selecting Items for Testing and Audit Sampling Applicability of sampling Sampling is essential throughout audit as auditors attempt to gather sufficient evidence in a cost-efficient manner. Sampling is used for both test of controls and for substantive tests provided the following conditions are met: a. For test of controls = the control to be tested leaves documentary evidence or audit trail. b, For substantive tests - the auditor applies test of details (either test of transactions and events or test of balances is used) Conversely, the following do not involve sampling: Inquiry and observation Analytical procedures Procedures applied to every item in a population Test of controls where application is not documented Procedures from which the auditor does not intend to extend the remaining items in the account ¥ _Untested balances KqNNKK Conclusion reached When sampling is used, the auditor aims to conclude on the entire population by testing just a portion of it. The following conclusions are the end result when applying audit sampling. a. For test of controls — the decision whether controls are effective or ineffective. b. For substantive tests — the decision whether the account balance tested is fairly stated or additional procedures are required to be performed. RISKS INVOLVED WHEN OBTAINING EVIDENCE A. SAMPLING RISK AND ITS POSSIBLE EFFECTS Definition Sampling risk refers to the risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. ‘The mathematical complement of sampling risk is known as confidence level or reliability level. The main reason why sampling risk exists is because there is no guarantee that the auditor will always be able to draw representative samples each time, he or she selects items to be tested. Representative samples are set sampling units which possess the characteristics of the population. Aim... Believe... Claim... Page 381ting and Audit Sampling ter 10 — Selecting Items for Tes! n ni ikon risk can lead to the following types of erroneous Conclusions. Risk of assessing contro) Tsktgy high (Type 1 Risk/Alpha gy)” Asa test of controls ) low (Type 2 Risk/Beta Risk) Sampling SS Risk Risk of incorrect rejection (Type 1 Error/Alpha Error) Asa substantive test procedures Risk of incorrect acceptance (Type 2 Error/Beta Error) Le For tests of control 1, Risk of assessing control risk too high This pertains to the possibility that the auditor concludes that contros are less effective than they actually are. ‘Auditor's judgment True condition Control risk Maximum level Below maximum level | assessment | Reliance placed | None Controls may be relied) to controls upon* | Extent. of More procedures | Less procedures ate | Substantive tests | willbe performed | required to | performed This is also known risk of under-reliance because such risk will lead te auditor not to rely on the controls tested when the true condition ene the preliminary assessment of control risk thatis!&* an high. Other names for this risk include Type 1 risk and Alpha risk. 2. Risk of assessing control risk too low This pertains to the possibiti vat Possibility i ot are more effective t that the auditor concludes th han they actually are. so ees | tion Control risk sean! ‘Aament ae | i Zt e assessment level. ‘maximum | Maximum level | Reliance placed | meal onto were relied | Controls are unrell® Extent of Le: 7 3 casas SS Procedures will | More proce rere LBeperformed | required tobe peo, Aim... Believe... Claim,Chapter 10 ~ Selecting Items for Testing and Audit Sampling This is also known risk of over-reliance because such risk will lead the auditor to rely on the controls tested when the true condition of controls does not support the preliminary assessment of control risk that is less than high. Other names for this risk include Type 2 risk and Beta risk. For substantive test 3. Risk of incorrect rejection This refers to the possibility that the auditor concludes that a material misstatement exists when in fact it does not. The auditor will then extend the audit procedures on the account to support his or her conclusion just to find out that the account is fairly presented. Other names for this risk include Type 1 error and Alpha error. 4. Risk of incorrect acceptance This refers to the possibility that the auditor concludes that a material misstatement does not exist when in fact it does. In this case, the auditor concludes that the account is fairly presented. No further procedures will be performed. Other names for this risk include Type 2 error and Beta error. IMPORTANT NOTES: Y Risk of assessing control risk too high and risk of incorrect rejection (items 1 and 3) affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect. ¥ Risk of assessing control risk too low and risk of incorrect acceptance (items 2 and 4) affects audit effectiveness and is more likely to lead to an inappropriate audit opinion. Y Risks affecting audit effectiveness are greater concern by the auditor. Managing sampling risk Sampling risk can be either eliminated or controlled. Examination of the entire population (100% examination) or selecting specific items would eliminate sampling risk. This means that the auditor will only be exposed to sampling risk when applying audit sampling. On the other hand, auditors control sampling risk by: a. Increasing the sample size The level of sampling risk that the auditor is willing to accept affects the sample size required, The lower the risk the auditor is willing to accept, the greater the sample size will need to be. Aim... Believe... Claim. Page 383Chapter 10 — Selecting Items for Testing and Audit sameling b. Using an appropriate sample selection metho Application of appropriate sample selection method increases i possibility that the auditor will be able to draw representative Samp, Below are the principal methods that may be used by the auditor When selecting samples. 1. Random-number selection Y Under this method, every sampling unit has probability of being selected, Y Applied through random number generators, for random number tables or computer programs Y Documents must be pre-numbered the Same example, Example: During the current year, a particular control had Processed a total of 10,000 documents. To obtain sufficient appropriate evidence, the auditor decided to examine 500 (out of 10,000} documents, Applying random number selection, the auditor performs the following: * Auditor generates 500 random numbers using random number generator. Auditor selects the samples by matching the random numbers with document numbers (this condition requires the documents tobe Pre-numbered). 2. Systematic selection Y Applied through calculati Population with the sam, Using the calculated selected after a rando1 items in the populatio Must be applied on a Using the sam following: . ion of sampling interval by dividing the ple size , Sampling interval, every nth vane m start. A random starting point ives n an equal opportunity to be selected. Surprise basis . the 'e data in number 1, the auditor performs v v Auditor calculates a sampling interval, Population = 10000 = 20 Desired sample size 500 ie * Auditor randomly selects a starting point (ex. The si Selects 11 as the random start). This procedure will give ‘ " aN Opportunity to be selected. J * Ghuitor selects the 11° document within the fst 203 document thereafter (31%, sas), Believe... Ciai; metChapter 10 - Selecting Items for Testing and Audit Sampling (IMPORTANT NOTES: Y The items in the population do not have to be consecutively numbered, 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 a particular pattern in the population. v 3. Haphazard selection Under this method, the auditor selects the sample without following a structured technique. Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or predictability (for example, avoiding difficult to locate items, or always choosing or avoiding the first or last entries on a page) and thus attempt to ensure that all items in the population have a chance of selection. Other sampling methods discussed in PSA 530 1. Value-weighted selection Under this method, each monetary unit (e.g. peso) comprising the population is considered as one sampling unit. The main benefit of this method is the audit effort is directed to the larger value items because they have a greater chance of selection, and can result in smaller sample sizes. Example: An entity’s account receivable balance at the end of the period amounted to P5,000,000. A customer with a balance of P750,000 has a 15% (750,000/5,000,000) chance of being selected. This approach is generally used when performing tests of details and may be used in conjunction with the systematic method of sample selection and is most efficient when selecting items using random selection. 2. Block selection (otherwise known as cluster sampling) Block selection involves selection of a block(s) of contiguous items from within the population. When using block selection, the auditor is exposed to high sampling risk since there is lower possibility that the auditor will be able to draw representative samples. ‘Aim... Believe... Claim... Page 385ji for Testing and Audit Sampling chapter 30" tection ay not ordinarily be used in audit samplin mat populations are structured such that items ina seque os be expected to have similar characteristics to each othe, : different characteristics from items elsewhere in the Popul This is the main reason why this method is considered tobe the leg desirable sample selection method. B. NON-SAMPLING RISK Definition , Non-sampling risk pertains to the risk that the auditor reac! Conclusion for any reason not related to sampling risk. hes an erroneous It is also defined as the possibility that the auditor misstatements or deviations included in the sample fo! arises from factors that cause the auditor to reach an ei for any reason not related to the size of the sample. does not recognize | r what they are, | Froneous condusn, To simplify, non-sampling risk may be associated to human-type errors thet will lead to erroneous conclusions, Examples The following are exam, ples of non-sampling risk: Y Inappropriate selection of audit Procedures v Misinterpretation of results of audit tests Failure to recognize misstatements or deviations in sample tested Managing Aon-sampling risk puthfoughout the audit, the auditor is expected to exercise profes errors Each time the auditor exercises judgment, he or she may com TOFS or mistakes, thus, &xPosing him or her to non-sampling risk. srninatel nclude that Non-sampling risk can never be eliminat minimized through the following: Adequate Planning ® e Proper direct} Adherence t With this, we can co However, it may be ion, supervisi ion and review of audit team 0 firm’ S quality contro} standards eeChapter 10 — Selecting Items for Testing and Audit Sampling SUMMARY OF CONCEPTS Presented below is a summary of basic concepts related to selecting items for testing. 100% examination saci ae ‘Audit Sampling tems Allitems Less than Less than 100% | examined 100% of items | of items but all items will have an equal chance of selection. Applicability | Appropriate when: Specific items | May be applied of procedures | © Population constitutes | selected may | when to population | a small number of large | include: performing: value items © High value | Tests of * Both inherent and or key items | controls, control risks are high | « All items provided there and other means do over a isa trail of not provide sufficient certain documentary appropriate audit amount evidence evidence ¢ Items to © Substantive © Repetitive nature of a obtain tests using test calculation or other information | of details of process performed ‘@ Items to test transaction and automatically makes a | procedures | balances 100% examination cost approach effective Applicability | Limited to items Limited to May be projected of conclusions | examined items to all items reached examined Risks exposed | Non-sampling risk ‘Non-sampling | Both non- risk sampling and sampling risks Aim... Believe... Claim... hae. 387Chapter 10 ~ Selecting Items for Testing and Audit Sampling GENERAL APPROACHES TO SAMPLING ( | Approach { Plan | Methog Attribute (For TOG; Nonmonetary) Statistical (Random; applies laws of probability) Variable (For ST - TOD; Monetary) Attribute (For TOC; Nonmonetary) Nonstatistical (Residual Defintion; ‘based on professional Judgment) Variable (For ST- TOD; Monetary) “may be applied but consid able method of sear coal lered to be the least desirable method of Sa infl gram shows an overvie enable t} ion of eral 0 sampling ‘ermination of s the ge approaches t lable the a ‘ample size and selecting the sample whichChapter 10 - Selecting Items for Testing and Audit Sampling In determining the sample size, selecting the sample, and evaluating the results, the auditor can use either a statistical or a non-statistical approach. Both involve judgment in planning, executing the sampling plan, and evaluating the results of the sample; and both can provide sufficient appropriate evidence. 1. Statistical sampling Statistical sampling is an approach to sampling that has the following characteristics: a. Random selection of the sample items; and b. The use of probability theory to evaluate sample results, including measurement of sampling risk. Using the laws of probability, it allows the auditor to measure or quantify the following: Y Sample size Y Sampling risk Y Samples reliability (reliability or confidence level) 2. Non-statistical sampling A sampling approach that does not have characteristics of statistical sampling is considered non-statistical sampling. Under this approach, in identifying sample size, selecting the sample, and evaluating results, the auditor relies heavily on his or her professional judgment. The primary distinguishing feature between these two approaches is the manner of determining the sample size, selecting the sample, and evaluating the results. Statistical sampling applies the laws of probability and uses mathematical tools. On the other hand, non-statistical sampling exclusively relies on auditor's judgment. AUDIT SAMPLING PLANS . ; There are two sampling plans commonly used by auditors when rendering audit of financial statements, the attribute and variable sampling plans. A. ATTRIBUTE SAMPLING PLAN This is a sampling plan used to estimate the rate or ‘frequency of occurrence of a certain characteristic in a population. This is performed during test of controls to estimate the rate of deviations from prescribed internal control policies or procedures, which should leave @ trail of documentary evidence. Aim... Believe... Claim... Page 389hapter 10 Selecting Items for Testing and Audit Sampling Chapter 10 - lan ibute sampling p! Procedures Ir athe objective of the test and the specific Procedures 1. Dete performed should clearly state what is to be accomplisheg T secie objectives to be attained. In addition, the auditor shay be, on, audit procedures appropriate to the particular audit objective on tx, i ted. ; tn ample (Below example will be used for the first three steps The auditor wishes to determine whether procedures rel billing of shipments are effective. The auditor may set th objective and apply the following procedures. lated 1, e beloy, Objective: To determine whether all shipments during the peg were billed Procedures: Match shipping documents with their corres sales invoice Direction of testing: Shipping document to sales invoice Pong 2. Determine the attribute and deviation conditions An auditor should identify characteristics or attributes that woul indicate operations of the internal control is operating effectively. 4 deviation is the absence of an attribute, Example: Using the same data in the first Procedure, the appropriate attribute the auditor will be looking for would be: Attribute: Each shipping document should have a corresponding sales invoice. Absence of sales invoice wil general Constitute as deviation. consideration of the acne) the test, defining the sampling unit 2 n of the completeness of i cent Of the population. Using the same data in a the fi - sampling unit are; St Prose, the pope Sema Allshipping documents processed during the period peied. unit: Each shipping document processed duriné Sample size the After determining th, je st should be determined Population of items to be tested, sam? a ‘Pe~~ Chapter 10 - Selecting Items for Testing and Audit Sampling To quantify the sample size, the auditor may use statistical or non- statistical approach. When statistical sampling is used, the auditor determines the sample size using statistically based formula, whereas, with non-statistical sampling, sample size is determined relying primarily on the auditor’s judgment. Furthermore, sample size is determined by considering the following qualitative factors: Risk of material misstatement (specifically, the control risk) Anincrease in the extent to which the risk of material misstatement is reduced by the operating effectiveness of controls will increase the required sample size. When the auditor’s assessment of the risk of material misstatement at the assertion level includes an expectation of the operating effectiveness of controls, the auditor is required to perform tests of controls. Other things being equal, the greater the reliance the auditor places on the operating effectiveness of controls in the risk assessment, the greater is the extent of the auditor's tests of controls (and therefore, the sample size is increased). RELATIONSHIP: Decrease in CR; Decrease in ROMM; Increase in sample size NOTE: The relationship is not necessarily an inverse relationship. If CR is assessed at a high level, no reliance will be placed on the control. Thus, no tests of control will be performed and the auditor will rely heavily on substantive tests. Acceptable level of sampling risk, particularly the risk of assessing control risk too low ‘An increase in the auditor's required confidence level, or conversely, a decrease in the risk that the auditor will conclude that the risk of material misstatement is lower than the actual risk of material misstatement in the population (risk of assessing control risk too fow) will result to an increase in sample size. The greater the level of assurance that the auditor desires that the results of the sample are in fact indicative of the actual incidence of deviation in the population, the larger the sample size needs to be. RELATIONSHIP: Increase in Confidence level; Decrease in sampling risk; Increase in sample size. Aim... Believe... Claim... Page 391 PeChapter 10 — Selecting Items Testing and Audit Sampling IMPORTANT oe level and sampling risk: INVERSE (rey be these two items are mathematical complements) ", ¥ Sampling risk and sample size: INVERSE (one Of the any reduce sampling risk is to increase sample size) to Y Confidence level and sample size: DIRECT c. Tolerable deviation rate (TDR) ; ; TOR is the rate of deviation from Prescribed internal contr, procedure set by the auditor in respect of which the Auditor seq to obtain an appropriate level of assurance that is not exceeded the actual rate of deviation. The determination of TOR is & matter of professional judgment. When the auditor sets TDR at a lower level, this means that the auditor is stricter and only willing to accept lower deviation rate, Because the auditor has stringent requirements fi rom the control, More items must be tested; thus, increasing the sample size, RELATIONSHIP: INVERSE — Decrease in TDR; Increase in Sample size Expected population deviation rate (EDR) EDR is the rate of deviation the auditor expects to find in the Population prior to testing. This should not exceed tolerable deviation rate before testing, Factors relevant to the auditor's consideration of the EDR include the auditor’s under standing of the business (in particular, risk assessment procedures undertaken to obtain an understanding of internal control), changes in Personnel or in internal control, te results of audit pr cedures applied in prior periods and the resuts Of other audit procedures, The higher the EDR, the la i sotht , er th to be the auditor is in a ger the sample size needs ai it : sition to make a reasonable estimate oft actual rate of deviation, roan expected control deviation rates ordinarily warrant litle 2% ction of the assesseq risk of material misstatement. REt 5 e ‘LATIONSHIP: DIRECT ~ increase in EDR; Increase in sample SH Sampling Units in the Population 7 For large Populati ration little, if any, effect othe actual size of the popul “ct on sample size (NEGLIGIBLE EFFECD- Believe... Cigi paseChapter 10 ~ Selecting Items for Testing and Audit Sampling Y For small populations, audit sampling may not be as efficient as alternative means of obtaining sufficient appropriate audit | evidence. | Insummary, below are factors perceived to have an effect in sample size. Effect on Fa tor Sample Size An increase in the extent to which the risk of material misstatement is reduced by the operating| Increase effectiveness of controls. An increase in the auditor's required confidence level {or conversely, a decrease in risk of assessing | Increase control risk too low) An increase in the tolerable deviation rate Decrease An increase in the expected deviation rate Increase An increase in the number of sampling units in the | Negligible population. effect 5. Determine the method of selecting the sample and select the sample When selecting the sample, all items in the population should have an opportunity to be selected. The items to be selected should be representative of the population. Moreover, the methods are available to the auditor when selecting samples is also influenced by the sampling approach used by the auditor. Statistical Non-statistical Random-number selection v v Systematic selection v v Haphazard selection x ¥, NOTE: Haphazard selection is not used in statistical sampling because the auditor selects sample by using professional judgment and does not measure the probability of an item being selected. 6. Test the sample item The auditor shall apply the appropriate audit procedures to all items in the sample to determine if there are any deviations from the prescribed controls procedures. Deviations may be an isolated or recurring type of ‘occurrence. However, if in the early stage of the sampling process enough deviations had been found, the auditor need not continue the tests. The following are the conditions that may be observed by the auditor during testing. Aim... Believe... Claim. Page 393i id Audit Sampling — Selecting Items for Testing ani it s r Chapter 10 sania possesses the attribute. This is an indication thay 7 . control may be relied upon. b, Sample lacks the attribute. This is generally treated as deviatio, However, the auditor should consider that, while deviations f, control procedures increase the risk of material misstatements, sug, deviations do not necessarily result in errors. Also, the auditor shall ¥ investigate the nature and cause of any deviations identified, ¥ evaluate their possible effect on the purpose of the aud procedure and on other areas of the audit; and consider the qualitative aspect of the deviation (eg. the deviation was initially concealed by fraud). v Voided, unused, or inapplicable documents selected as sample. In case of properly voided, unused, or inapplicable documents selected as samples can be replaced. Otherwise, such sample will be treated as deviation. Yes |-+} Repl it Was it properly f! prace the Item treated? No_|->| Treat the item as a deviation d. Sample selected is missing. In case of missing documents, the auditor shall determine if there are alternative procedures available to test whether that purchase order was properly approved. Inthe absence of alternative Procedures, the missing document shouldbe considered as a deviation, Perform the alternative procedures to determine whether the document was properly approv' Are there alternative Procedures available? Treat the item as 2 deviation Sample selecte, d rey is an error that oh eft an anom . Anomalous arises from lalous error. At red other thay an isolated event that has not (°° rating Pet Hicaly identifiable occasions and is there"Chapter 10 - Selecting Items for Testing and Audit Sampling Evaluate the sample results Once audit procedures have been performed on all samples, the auditor shall evaluate: & a the results of the sample; and b. whether the use of audit sampling has provided a reasonable basis for conclusions about the population that has been tested. The procedures to be performed on this stage are dependent on the sampling approach used by the auditor. Statistical Calculate the sample deviation rate (SDR). This rate represents the auditor's best estimate of the deviation rate in the entire population and is calculated by dividing the number of deviations with the sample size. ‘SDR = Number of deviations observed/Sample size When testing the controls, an unexpectedly high sample deviation rate may lead to an increase in the assessed risk of material misstatement, unless further audit evidence substantiating the initial assessment is obtained. Simply stated, if SDR is higher than the tolerable deviation rate (TOR), control risk will be assessed at a high level since it exceeded the rate of deviation the auditor is willing to accept. Otherwise, allowance for sampling risk would be considered. Summary: Y If SDR > TDR, auditor assesses control risk at maximum level Y If SDR < TDR, auditor proceed to step (b). Determine the estimated maximum rate of deviation (EMRoD) and the allowance for sampling risk (achieved precision). EMRoD represents the upper limit of the range of possible rates of deviation consistent with the auditor's planned reliance on internal controls. EMRoD is also called upper deviation rate, Upper limit, and upper precision limit. EMROD is equal to the sum of sample deviation rate and allowance for sampling risk. EMRoD =SDR + *Allowance for Sampling Risk *Allowance for sampling risk may be determined by getting the difference between TOR and EDR. Aim... Believe... Claim. Page 395and Audit Sampling aloe Set TOR specified in designing the Sam, c Feninelie maximum rate of deviation is higher than the tole, deviation rate, control risk will be assessed at a high iene Otherwise, the auditor will conclude that the controls are erty and may be relied upon. Summary: | ; Y IfEMRoD > TOR, auditor assesses control risk at Maximum leve Y If EMRoD < TDR, auditor concludes that controls are effecti and ultimately assess control risk below maximum level, d. Consider the qualitative aspects of the deviation. e. Reach an overall conclusion. The main objective of this procedure is to for the auditor to conclude whether controls are effective or ineffective. Non-statistical When non-statistical sampling is used, TDR is compared with SDR to arrive at the conclusion. TDR must be significantly higher than SDR for the auditor to conclude that controls are effective, For example, the auditor tests a control for a Particular engagement. The auditor sets a TOR of 10% and had observed a 5% SDR. This scenario can lead the auditor to conclude that controls are effective. However, as SDR nears the set TDR, the greater possibility that the auditor might conclude that controls are ineffective. Moreover, items (d) and {e) in statistical shall also be performed in nor statistical approach, Document the sampling procedure The following items should be documented in the engagement’s workit Papers. ¥ each of the above al f Procedures performed; Y the evidence obtained that will serve as basis for Conclusions; and the overall conclusion, OTHER ATTRIBUTES, SAMPLING 1. SEQUENTIAL SAMPLING THNQUES Aim... Believe. Claim. JChapter 10 — Selecting Items for Testing and Audit Sampling If the auditor believes the evidence obtained is not sufficient and appropriate, the auditor examines additional samples to obtain more information. On the other hand, if the auditor believes the evidence obtained is sufficient and appropriate, the auditor stops evaluating samples and a conclusion is made. This characteristic is the main reason why this method is also known as stop or go sampling. This method is used when the auditor expects zero or very few deviations within the population. 2. DISCOVERY SAMPLING The objective of discovery sampling is to decide whether to accept or reject an audit population for which acceptance is appropriate only if the occurrence rate of serious errors is very low or when the auditor expects near zero deviations. When applied as a test of control procedure, a discovery of one deviation may lead the auditor to conclude that the controls are ineffective. B. VARIABLE SAMPLING PLAN This is a sampling plan used to estimate numerical measurement of a Population such as peso value. This plan is performed during substantive testing particularly when the auditor applies test of details, regardless whether the auditor uses tests of transactions or test of balances. Also, it is important to note that sampling is not applicable when performing substantive testing through analytical procedures. When using this plan, the auditor aims to estimate the amount of misstatements in the financial statements of the entity under audit. Procedures in variable sampling plan 1. Determine the objective of the test and the specific procedures to be Performed. The auditor should clearly state what is to be accomplished or the Specific objectives to be attained. When performing audit sampling, the auditor's objective is to test the reasonableness of a recorded account balance in the financial statements. In addition, the auditor shall perform audit procedures appropriate to the particular audit objective on each item selected. Example: (Below example will be used for the first two steps.) The auditor would like to establish the existence of the balance of accounts receivable as of the reporting date. The auditor may set the below objective and apply the following procedures. Aim... Believe... Claim... Page 397Chapter 10 - Selecting Ite > ms for Testing and Audit Sampling Objective: To determine whether the accounts receivable as of the reporting date is existing. Procedures: The auditor may perform the following to establish, existence of accounts receivable: the Y Send confirmation requests to selected Samples, ¥ Examine source documents such as sales inyo;, shipping documents and sales orders. balan Woices, Define the population Population is the class of transactions being tested. This would involve defining the period covered by the test, defining the sampling unit, and consideration of the completeness of the population. Example: Using the same data in the first procedure, the population ang sampling unit are: Population: The entire accounts receivable balance. Sampling unit: The following may be considered as sampling unitfor the above example: Y Each customer included in the balance being tested. Y ach peso balance comprising the accounts receivable balance (this is an application of value-weighted selection method). Define what constitutes “fair presentation” The auditor defines “fair presentation” by using the materiality s during planning phase for the account balance being examined. variable sampling, this materiality level is termed as tol misstatement and is an application of performance materiality * defined and discussed in PSA 320. Tolerable misstatement pertains to a monetary amount set bY auditor in respect of which the auditor seeks to obtain an approP level of assurance that the monetary amount set by the auditor exceeded by the actual misstatement in the population. Determine the sample size es st After determining the population of items to be tested, sample should be determined, To quantify the sample size, on the auditor may use statistic! statistical approach (same co i ncepts with attribute sampling). Aim... Believe... Claim. reChapter 10 — Selecting Items for Testing and Audit Sampling Furthermore, sample size is determined by considering the following qualitative factors: a. Risk of material misstatement and its components (inherent and control risk) Risk of material misstatement (RoMM) is composed of both the inherent risk (IR) and control risk (CR). The higher the auditor's assessment of the risk of material misstatement, the larger the sample size needs to be. For example, if the auditor does not perform tests of controls, the auditor's risk assessment cannot be reduced for the effective operation of internal controls with respect to the particular assertion. Therefore, in order to reduce audit risk to an acceptably low level, the auditor needs a low detection risk and will rely more on substantive procedures. The more audit evidence that is obtained from tests of details (that is, the lower the detection risk), the larger the sample size will need to be. RELATIONSHIP: DIRECT — Increase in either IR or CR; Increase in RoMM; Increase in sample size b. Use of other substantive procedures directed at the same assertion An increase in the use of other substantive procedures directed at the same assertion reduces the sample size. The more the auditor is relying on other substantive procedures (tests of details or substantive analytical procedures) to reduce to ' an acceptable level the detection risk regarding a particular Population, the less assurance the auditor will require from t sampling and, therefore, the smaller the sample size can be. RELATIONSHIP: INVERSE — Increase in use of other substantive ' procedures directed at the same assertions; Decrease in sample size. c. Acceptable level of sampling risk, particularly the risk of incorrect acceptance An increase in the auditor’s desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population (or conversely, a decrease in the risk that the auditor will conclude that a material error does not exist, when in fact it does exist - risk of incorrect acceptance) will increase the sample size. The greater the level of assurance that the auditor requires that the results of the sample are in fact indicative of the actual amount of misstatement in the population, the larger the sample size needs to be. Alm... Believe... Claim... ——i d Audit Sampling = Selecting Items for Testing ani maprera0 RELATIONSHIP: Increase in Confidence level; Decrease in « i ampli risk; Increase in sample size. ing IMPORTANT NOTES: Y Confidence level and sampling risk: INVERSE (remem, these two items are mathematical complement) , ¥ Sampling risk and sample size: INVERSE (one of the reduce sampling risk is to increase sample size) Y Confidence level and sample size: DIRECT Ways ty d. Tolerable misstatement (TM) When the auditor sets TM at a lower level, this means that the auditor is stricter and only willing to accept lower misstatemen, Because the auditor has stringent requirements, more items must be tested; thus, increasing the sample size. RELATIONSHIP: INVERSE — Di Jecrease in TM; Increase in sample sie e. Expected population misstatement (EM) EM pertains to the amount of misstatement the auditor expects to find in the population. Factors relevant to the auditor’s consideration of the expected misstatement amount include the extent to which item values determined subjectively, the results of risk assessment procedures the results of tests of control, the results of audit procedures apple! in prior periods, and the results of other substantive procedures. The greater the amount of misstatement the auditor expects to fi in the population, the larger the sample size needs to be in order"? make a reasonable estimate of the actual amount of misstatem= in the population. RELATIONSHIP: DIRECT — Increase in EM; Increase in sample si? Stratification of the Population Definition and objective b Stratification is the process of dividing a population ito * populations, each of which is a group of sampling units which similar characteristics (often monetary value). Stratification re ; ed 2 ‘quires that thi licitly defin that each samp the strata must be explicitly ling unit can belong to only one stratum. The objective of stratificati sability of i ication i variability © | ced within each stratum an is to reduce the red ; id therefore al le size to be without increasing sampling ris allow samp!Chapter 10 - Selecting Items for Testing and Audit Sampling Effects to audit Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-populations which have an identifying characteristic. This allows greater audit effort to be directed to the larger value items, as these items may contain the Greatest potential misstatement in terms of overstatement. Effects to sample size When a population can be appropriately stratified, the aggregate of the sample sizes from the strata generally will be less than the sample size that would have been required to attain a given level of sampling risk, had one sample been drawn from the whole population. RELATIONSHIP: INVERSE ~ Stratification leads to lower variability in the population thus decreasing the sample size 8. Sampling units in the population ¥ For large populations, the actual size of the population has little, if any, effect on sample size (NEGLIGIBLE EFFECT). Y Forsmall populations, audit sampling may not be as efficient as. alternative means of obtaining sufficient appropriate audit evidence. Insummary, below are factors perceived to have an effect in sample size. Factor Effect on ‘ Sample Size ‘An increase in the auditor’s assessment of risk of | ‘ ada : Increase s material misstatement (inherent and control risks) An increase in the use of other substantive | 5.00.00 rocedures directed at the same assertion An increase in the auditor's required confidence | | o¢0 level (or conversely, risk of incorrect acceptance) : An increase in tolerable misstatement Decrease An increase in expected misstatement Increase Stratification of the population when appropriate Decrease The number of sampling units in the population Negligible Effect 5. Determine the method of selecting the sample and select the sample (Same concepts with attribute sampling) 6. Test the sample itemChapter 10 — Selecting Items for Testing and Audit Sampling The auditor shall apply the appropriate audit procedures to aft; the sample to determine if there are misstatements from the balance tested. tems i, BCU ns The following are the conditions that may be observed by the Audit, during testing. ; a. Sample is adequately supported by appropriate information, This is an indication that the sample tested is fairly presenteg, b. Sample is not adequately supported by appropriate information, This could generally represent a misstatement. IMPORTANT NOTES: For the treatment of the following items, use the concepts discussed in attribute sampling plan. Y Voided, unused, or inapplicable documents selected as sample Y Sample selected is missing. Y Sample selected represents an anomalous error. Treatment of misstatement identified When a misstatement is observed, the auditor shall analyze th misstatement identified. In analyzing the misstatements identified, the auditor may observe th many havea common feature, for example, type of transaction, location, Product line or period of time. In such circumstances, the auditor my decide to identify all items in the population that possess the como. feature, and extend audit procedures to those items. In addition, 5 misstatements may be intentional, and may indicate the possibilty fraud. 7. Evaluate the sample results Once audit procedures have been performed on all samples, the aus shall evaluate: a. the results of the sample; and b. whether the use of audit sampling has provided a reasonable D* for conclusions about the Population that has been tested- Aim... Believe... Claim... pi /Chapter 10 — Selecting Items for Testing and Audit Sampling This step would include the following: 1, Project the misstatements to the Population When performing sampling as part of tests of controls, there is no explicit projection of deviations is necessary since the sample deviation rate is also the projected deviation rate for the population as a whole, However, for tests of details, the auditor shall project misstatements found in the sample to the population. The purpose of this is for the auditor to obtain a broad view of the scale of misstatement but this projection may not be sufficient to determine an amount to be recorded. When projecting misstatements, the auditor may use either statistical or non-statistical sampling. If statistical is used, classical variable or probability-proportional-to-size sampling (PPS) techniques are appropriate. (See discussion in the latter part of the discussion portion of this chapter.) 2. Compare the projected misstatement (PM) and anomalous misstatement (AM) with the tolerable misstatement (TM) For tests of details, the sum of PM and AM, if any, is the auditor’s best estimate of misstatement in the population. Anomalous misstatement (AM) When a misstatement has been established as an anomaly, it may be excluded when projecting misstatements to the population. However, the effect of any such misstatement, if uncorrected, still needs to be considered in addition to the projection of the non- anomalous misstatements. PM + AMis less than TM This condition indicates that the account balance tested is fairly presented. PM + AMis greater than TM ; When the PM plus AM, if any, exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested. The closer the sum of PM and AMis to tolerable misstatement, the more likely that actual misstatement in the population may exceed tolerable misstatement. Aim... Believe... Claim... Page 403a i 10 ~ Selecting Items for Testing and Audit Samp he Chapter If the auditor concludes that audit sampling. as not Pro. easonable basis for conclusions about the population that hase! rea d, the auditor may: / tes juest management to investigate misstatements th, , been identified and the potential for further misstate, to make any necessary adjustments; or «Tailor the nature, timing and extent Of those furti procedures to best achieve the required assurance, ave Tents ay her ute 3. Consider qualitative information 4. Reach an overall conclusion ; ; The main objective of this procedure is to for the auditor t © conclude whether the account balance is fairly presented or additiony procedures are required to be performed. 8. Document the sampling procedure The following items should be documented in the engagement’s working Papers. Y each of the above Procedures performed; v the evidence obtained that will serve as basis for over conclusions; and v the overall conclusion. CLASSICAL VARIABLE SAMPLING (CVs) TECHNIQUES CVS is a statistical sampling method for estimating: Y the total audited value of an account or class of transactions Y the total amour int of monetary misstatement in an account or class transactions Classical variables sampling works best with financial data that has the followint characteristics: expectation of moderate More of the items are mi Y existence of either overstatements or understatements. When using classical Variable determined by or to larger number of misstatements (e.g. 5* stated); and boo! mov k value of the population. The * calculated may represent Over an rstatement it of the balance being examin, . or understatemen To project the miss 0 itateme, i ing 25 Variable sampling, MS, the following may be used when applyYN Chapter 10 - Selecting Items for Testing and Audit Sampling 1, Ratio Estimation is a classical variables sampling technique that uses the ratio of audited amounts to be recorded amounts in the sample to estimate the total peso amount of the population and an allowance for sampling risk. Ratio estimation is more appropriate to use when the difference is nearly Proportional to book values. Formulas: 2 AV (Pop’n)= AV(SS) x BV (Pop'n) BV (SS) PM =_|AV (Pop'n) - BV (Pop’n)| 2. Difference Estimation is a classical variables sampling technique that uses the average difference between audited amounts and individual recorded amounts to estimate the total audited amount of a population and an allowance for sampling risk. Difference estimation is more appropriate when there is little or no relationship between the absolute amounts of the differences and the book values. Formula: PM = AV(SS)- BV (SS) x Pop’n ss 3. Mean-per-unit Estimation is a classical variables sampling technique that projects the sample average to the total population by multiplying the sample average by the number of items in population. Formulas: ‘AV (Pop'n)= AV (SS) x Pop'n ss eM = AV (Pop'n) - BV (Pop’n)| For the above formulas, the following are appropriate representations of items: PM : Projected misstatement ‘AV (Pop'n): Audited value of the population AV (Ss) : Audited value of the sample size BV (Pop'n): Book value of the population BV (Ss): Book value of the sample size ss : Sample size Pop'n : Number of units of the population faim. Page 405Chapter 10 — Selecting Items for Testing and Audit Sampling IMPORTANT NOTES: For ratio estimation and ference estimation to be applicable, the following conditions must be present be known Y The total book value of the population must n i Y The book value, on a per item basis, for all items in the population i be known. Y Total population book value must be known Y Expected difference between audited and recorded book values mus, not be too rare. ILLUSTRATION ; Assume that the auditor would like to establish the existence of the Fecorded accounts receivable of a particular client. The following were the details relate to the examination performed. Book values Nam ber of Aualted Misstatements Population 2,000,000 325 2 ” I Sample size 250,000 40 225,000 **25,000 *Projected misstatement **Sample misstatement The projected misstatement is calculated using the above methods. Ratio estimation AV (Pop'n) = (225,000 / 250,000) x 2,000,000 = P1,800,000 PM = | (P1,800,000 — P2,000,000) | = p200,000 Difference estimation PM = (225,000 - 250,000) / 40 x 325 = 203,125 Mean-per-unit estimation AV (Pop'n) = (225,000 / 40) x 325 = P1,828,125 PM = | ( P1,828,125 - 2,000,000) | = P171,875 Simply stated, the possibilit ; ample 5 higher when the amount of sama = ornount il be selected 5 @ ont ling unit is higher. This is the main reas ; PPS is primarily applicable j In testing account bal: transect pn lances an overstatement or verifying the “existence” assertion, This method uses attriby ton it angen, lutes sampling theory to express a conclusion Aim... Believe... Clai; pas? jChapter 10 ~ Selecting Items for Testing and Audit Sampling CHAPTER 10: SELF-TEST EXERCISES Dis¢ 1 - ¥ 7. 8. 9. 10. CUSSION QUESTIONS What are the available means available to the auditor in selecting items for testing? When is audit sampling apy population? When is audit sampling suitable to be us: What are the various types of sam) possible effects? How are sampling and non-sampling risks managed? Differentiate the statistical approach from non-statistical approach to sampling. When is an attribute sampling plan used? When is a variable sampling plan used? What are the various methods or techni selecting samples? How are the results of audit sampling evaluated? plicable in performing audit procedures to a ‘ed when selecting items for testing? ipling and non-sampling risks and their iques that an auditor may use in 10-1 TRUE OR FALSE Indicate whether the below statements are true or false. 1. When sampling is used by an auditor, an element of uncertainty is present in the auditor’s conclusions. Audit sampling is highly useful when identifying plausible relationships between account balances and classes of transactions. When evaluating the results of specific items selected for testing, its effects must be projected to the whole population. Audit sampling refers to the application of audit procedures to less than 100% of the items in an account balance or class of transactions for the Purpose of evaluating some of its characteristics. Confidence level is the complement of reliability level, When audit sampling is used in performing test of controls, a beta risk arises when the auditor concludes that a non-reliance approach shall be taken even if controls are actually effective. Auditors often place greater emphasis on addressing Type Il risks a s they relate to audit effectiveness. To reduce the sampling risk at an acceptably low level, the auditor may opt to test the whole population or select only specific items. Systematic selection provides chance to all items in the population to be selected. Al Believe... Clair Page 407Chapter 10 - Selecting Items for Testing and Audit Sampling 10. A disadvantage of value-weighted selection is that it leads audit 4 larger value items. on, 10 - 2 TRUE OR FALSE 1. Cluster sampling is the least desirable sample selection method as itred the possibility of selecting representative samples. hc, 2. Non-sampling risk is eliminated when audit sampling is not utilized, 3, Statistical sampling allows the quantification of sampling risk for Purposes teaching a statistical conclusion about the population. 4. Non-statistical sampling relies on auditor's professional judgment wiy statistical sampling exclusively relies on the laws of probability. 5. Attribute sampling plan is used to determine the part of a population ty possesses a particular characteristic. 6. The desired confidence level has a direct relationship with the sample sie while the tolerable deviation rate has an inverse relationship. 7. The expected population deviation rate is the mathematical complementd tolerable deviation rate. 8. Missing documents during the performance of test of controls dent deviations. 9. The expected maximum deviation rate can be determined by adding difference between the tolerable deviation rate and expected deviation to the sample deviation rate. 10. As variable sampling plans estimate numerical measurement of pom a statistical approach in obtaining samples must be used. ® 11. When the auditor performs substantive analytical procedures t© ee same assertion relating to an account balance, the auditor may dec sample size required to perform test of details. rot? 12. Stratifications leads to multiple subpopulations and thus increase the sample size required to test a population. 13. To determine the amount to be proposed as an adjustment in west records, the misstatements found must be projected t0 " population. d ; val! 14, Mean-per-unit estimation is a technique that estimates th population by extending the sample audited mean as the true mea Aim... Believe... Claim...Chapter 10 — Selecting Items for Testing and Audit Sampling 15. Monetary unit sampling (MUS) is a subset of probability-proportional-to-size sampling that is based on attribute sampling theory but expresses conclusions in monetary terms. 10-3 MULTIPLE CHOICE QUIZZERS 1. Which of the following approaches of gathering evidence is considered as most effective? A. 100% examination C. Audit sampling B, Items for specific testing D. Test of reasonableness 2. Inwhich of the following situations would the auditor perform 100% testing (choose the exception) A. The population constitutes a small number of large volume items. B. When both inherent and control risks are high and other means do not provide sufficient appropriate audit evidence. C. The population constitutes a large number of small volume items. D. The repetitive nature of a calculation or other process performed automatically by an information system makes a 100% examination cost effective. 3. Which of the following statements about specific item testing is false? A. Itis selective. B. It does not constitute sampling. C. It can be an efficient means of gathering audit evidence. D. The results of audit procedures applied to items selected in this way can be projected to the entire population. 4. Audit sampling involves the A. Selection of all items over a certain amount B. Application of audit procedures to all items that comprise a class of transactions or an account balance C. Application of audit procedures to all items over a certain amount and those that are unusual or have a history of error D. Application of audit procedures to less than 100% of items within a class of transactions or an account balance such that all items have a chance of selection 5. According to PSA 530, selecting specific items may include selecting the following, except: ; A. Allitems over a certain amount _C. Items to obtain information B. Low value or non-key items D. Items to test control TS Aim... Believe... Claim... Page 409Chapter 10 - Selecting Items for Testing and Audit Sampling 6. Which of the following statements related to sampling isin A. Population is the entire set of data from which a sample is ‘tly about which the auditor wishes to draw conclusions, Chey B. Sampling unit pertains to individual items constituting ve €. Random sample is a sample in which every possible ¢o, Boy items in the population has an equal chance of constituting thes D. A statistical sample in which the characteristics in the sample same as those of the population. COrrect ny ate y, 7. The population from which samples will be drawn: A. Should be appropriate to the objective of the audit Procedure, Which include consideration of the direction of testing. Wit B. Should be complete. C. May be stratified. D. Allof the above. 8. Which of the following involves audit sampling? A. Testing controls that leave no audit trail B. Risk assessment procedures C. Analytical procedures D. None of these 9. Which of the following does not involve audit sampling? A. Test of details of transactions applied as a substantive test. B. Test of details of transactions applied as a test of control. C. Test of details of balances, D. Substantive analytical Procedure. 10. Which of the following is included as Part of the definition of audit samp? A. Inquiry and observation procedures, B. Evaluation of some characteristic, C. Documentation evidence. D. Statistical techniques. 11. - The risk that the auditor's from the conclusions reach same audit procedure. A. Audit risk C. Sampling risk B. Control risk D. Information risk conclusion based on a sample may be or ed if the entire population were subjectChapter 10 ~ Selecting Items for Testing and Audit Sampling 12. Which of the following best illustrates the concept of sampling risk? A. Arandomly chosen sample may not be representative of the population as a whole on the characteristic of interest. B. An auditor may select audit procedures that are not appropriate to achieve the specific objective. C. Anauditor may fail to recognize errors in the documents examined for the chosen sample. D. The documents related to the chosen sample may not be available for inspection. 13. The consequence of incorrect rejection and assessing control risk too high relates to the A. Efficiency of the audit B. Effectiveness of the audit C. Allowable risk of tolerable error D. Preliminary estimates of materiality levels 14. The consequence of incorrect acceptance and assessing control risk too low relates to the A. Efficiency of the audit B. Effectiveness of the audit C. Allowable risk of tolerable error D. Preliminary estimates of materiality levels 15. The likelihood of assessing control risk too low is that the sample selected to test controls ‘A. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes. B. Contains proportionately fewer deviations from prescribed internal controls structure policies or procedures than exist in the balance or class as a whole. C. Supports the auditor’s planned assessed level control risk when the true operating effectiveness of the control structure does not justify such an assessment. D. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control structure justifies such an assessment. 10 - 3 MULTIPLE CHOICE QUIZZERS 1. Both the risk of incorrect rejection and the risk of assessing control risk too high relate to A. Audit efficiency C. Sample Selection B. Audit Effectiveness D. Quality Controls Nee ee Aim... Believe... Claim... Page 411