Gay7e Irm Ch10

Chapter 10
Audit sampling
Learning objectives
Note: For ease of understanding we have divided this chapter into two sections, the first being the
theory of sampling (learning objectives 10.1 to 10.6), the second a more detailed consideration of
current sampling techniques (learning objectives 10.7 to 10.9).
Because there are some concerns
Sampling theory
10.1 Define audit sampling and its objectives and describe the requirements that apply to all audit
samples—statistical and non-statistical.
10.2 Identify the various means of gathering audit evidence.
10.3 Identify planning and design considerations for sampling, including defining audit objectives
and the appropriate population, the potential use of stratification and potential alternative
definitions of the sampling unit, including dollar-unit sampling.
10.4 Identify factors influencing the determination of sample size.
10.5 Understand the appropriate methods of selecting sample items.
10.6 Appreciate the application of audit procedures to a selected sample, and the evaluation of
sample results.
Sampling techniques
10.7 Consider sampling approaches to tests of controls, in particular attribute sampling.
10.8 Consider sampling approaches to substantive tests, in particular dollar-unit sampling.
10.9 Consider other statistical sampling approaches to substantive tests.
Instructor Resource Manual t/a Auditing and Assurance Services in Australia 7e by Gay & Simnett
© McGraw-Hill Education (Australia) 2018
Chapter 10 1
Major chapter sections
Definition and features
Various means of gathering audit evidence
Planning and designing the sample
Determining sample size
Selecting the sample
Performing the audit procedures and evaluating sampling results
Sampling for tests of controls: in particular attribute sampling
Sampling for substantive tests: in particular dollar-unit sampling (DUS)
Other statistical sampling approaches
Lecture plan
The audit sampling chapter is important. While students have learned about the appropriate evidence
collection techniques for audit testing and their relationships to assertions at risk, they are still
missing some key knowledge. Audit sampling provides guidance on the following three questions:
1. How many items (transactions or balances) should the auditor select to achieve their
objectives?
2. Which specific items should the auditor select?
3. After the auditor has undertaken their testing on the selected items, how does the auditor
extrapolate their results back to the population and reach an appropriate conclusion?
The extent to which audit sampling is viewed as important in an auditing course differs between
instructors. Some see it as one of the most important topics, while others give it lesser importance. It
has been argued that there is less sampling undertaken in practice, consistent with the business risk
approach, and also more recently as a result of the increased use of advanced data analytics
Chapter 10 2
To cater for this difference in views, we break the chapter into two sections. In the first section,
which covers learning objectives 1 to 6, we cover sampling theory, which includes sampling theory
and an introduction to sampling techniques. These objectives contain knowledge that all assurance
providers require. Learning objectives7 to 9 take the student deeper into sampling techniques. Some
instructors who believe that sampling is of less importance today still like to supplement sampling
theory with a detailed coverage of sampling techniques, in particular statistical sampling techniques.
We suggest that this supplementation emphasises attribute sampling for tests of controls and dollar-
unit sampling for substantive tests of balances.
You should outline the learning objectives for this chapter, and walk the students through how this
chapter fits into the flowchart of audit sampling for a financial report audit.
[Use slides 10-1 to 10-4]
LO 10.1: Definition and features

Instructors should work through this section carefully as it establishes the purpose of sampling and
defines critical terms. Instructors should spend some time here so that students are clear on the
questions that are answered by considering audit sampling that haven’t been addressed in the
evidence-gathering chapters or the course to date.
LO 10.2: Various means of gathering audit evidence

Some students have problems with the detail of this section. In particular, selective examination,
where the auditor selects a subset of a population, compared with audit sampling is a major area of
confusion. It is common in practice to undertake selective examination to direct the auditor’s
attention to areas of risk or materiality. But it should be emphasised that results from this approach
cannot be extrapolated to the rest of the population, and while it might be a valid auditing approach,
it is not a valid sampling approach.
LO 10.3: Planning and designing the sample

It is important to link the objectives of the audit test with the relevant population. Here it is useful to
point out the ease of testing the assertion of existence (sampling from the list comprising the
population) but the difficulty of testing the assertion of completeness (trying to identify items that
should be, but aren’t, on the list). It also allows the instructor to introduce the concept of
stratification, and the definition of sampling unit allows the instructor to introduce the unique audit
sampling technique of dollar-unit sampling.
Chapter 10 3
LO 10.4: Determining the sample size
This section introduces the factors that influence the determination of sample size.
Some instructors will find it beneficial to illustrate this by using a sample technique such as attribute
sampling. In this case they should introduce attribute sampling (slide 10-27) and work through
determination of sample size for attribute sampling (slides 10-32 and 10-33), referring to Tables 10.3
and 10.4.
LO 10.5: Selecting the sample

This section outlines the three major techniques for selecting the sample items, illustrates systematic
sampling and outlines the potential biases from haphazard sampling.
LO 10.6: Performing the audit procedures and evaluating sampling results

These steps are outlined on slides 10-24 and 10-25, with the approach of projecting misstatements
from the sample to the population contained on slide 10-26. In evaluating sample results, instructors
might again find it useful to illustrate using attribute sampling. In this case, look ahead to slide 10-35.
[Use slides 10-24 and 10-26]
LO 10.7: Sampling for tests of controls: in particular, attribute sampling

In this section, students are taken through the stages of applying sampling to tests of controls.
Chapter 10 4
Students are instructed through audit sampling with a particular focus on attribute sampling.
The section explains that the results of attribute sampling can be used to support or refute an initial
assessment of control risk.
The section explains that in planning and designing samples for tests of controls, auditors should
consider issues such as audit objectives, tolerable deviation/misstatement, allowable risk of over-
reliance and expected deviation/misstatement.
The first two slides outline the concept of sampling for tests of controls, and what the auditor should
consider at the planning and design phase. In particular, it is useful to link the qualitative levels of
control risk (low, medium, high) to tolerable deviation rate (TDR).
 Low:0 to 5 %
 Medium: 6 to 10%
 high—no tests of controls.
This allows students to link their assessments of control risk to sample sizes.
In the book we provide detailed tables for 10% ARO (90% confidence) (Table 10.3), and 5% ARO
(95% confidence) (Table 10.4), at which different levels of tolerable deviations/misstatements can be
assessed.
A useful way of leading students through the major steps of attribute sampling is with an example.
(Example 10.3 from the chapter appears on slide 10-32.)
Another example for the determination of sample size:

 auditor wishes to be 90% confident (ARO = 10%)
 control risk is low, equates to 5% tolerable deviation rate
 zero expected deviations.
Ninety per cent confidence takes us to 10% ARO, thus as per Table 10.3, 5% TDR, 0 expected
deviations gives us a minimum sample size of 45.
If CR is evaluated as medium (that is, TDR = 10%) for the same ARO and expected deviation rate,
we find a sample size of 22. (In practice, this assessment commonly approximates to 20.)
The main way of evaluating sample results, in accordance with the auditing standards is shown on
slide 10.35, where the best estimate of population deviation rate is sample deviation rate.
Chapter 10 5
LO 10.8: Sampling for substantive tests: in particular, dollar-unit sampling (DUS)
This section of the book concentrates on statistical sampling for tests of balances using dollar-unit
sampling. This sampling technique is unique to auditing and allows the instructor to reinforce a lot of
the auditing concepts taught in earlier chapters.
The slides concentrate on dollar-unit sampling’s main advantages and disadvantages compared with
traditional sampling techniques. It includes a selection of sample items using systematic sampling
techniques.
The approach to sample evaluation reflects the approach allowed in standards and used in practice. It
can be argued that this approach has limitations, as it does not take into account sampling risk.
LO 10.9: Other statistical sampling approaches

An overview of other sampling approaches is also included in the textbook, with more detail on
calculation methods for these approaches on the website accompanying this textbook.
[Use slide 10-43]
Summary
We provide a summary slide of the main learning takeaways in this chapter.
[Use slide 10-44]
Chapter 10 6
Chapter 10 7
SOLUTIONS
10.1 ASA 530.5(c) (ISA 530.5(c)) outlines that sampling risk refers to the probability that the auditor has
reached an incorrect conclusion because audit sampling was used rather than 100% examination. What
this risk measures is the risk that a sample that was appropriately selected is not representative of the
population. While sampling risk can be reduced to an acceptably low level by using an appropriate
sample size and selection method, it can never be eliminated.
Non-sampling risk arises because the auditor uses inappropriate audit procedures or misinterprets
evidence and/or fails to recognise an error. Therefore, it is any risk, other than the risk that a sample
that was appropriately selected is not representative of the population, which may result in an incorrect
conclusion being reached. This arises because most audit evidence is persuasive rather than conclusive.
10.2 ASA 530.5(g) (ISA 530.5(g)) defines statistical sampling as any approach to sampling that has both of
the following characteristics:
(a) random sample selection
(b) use of probability theory to evaluate sample results and measure sampling risk.
‘Non-statistical sampling’ refers to all sampling approaches that do not have both the characteristics of
statistical sampling that are outlined above.
10.3 This is not an example of audit sampling. It is an example of selecting specific items in a population.
The results of procedures applied to items selected in this way cannot be extrapolated to the
population, as the sample items are not representative of the population. It is still a valid auditing
technique; the auditor just needs to realise that the items not tested are not covered by any auditing
procedure, which might be appropriate if the auditor believes that there is collectively a low risk of
material misstatement for these items.
10.4 The concept of big data and the capability of advanced data analytics to test 100% of a population
means that 100% testing is now more likely to be used, but it does not mean that sampling is not still
applicable. Even in circumstances where advanced data analytics are capable of analysing large
populations, and identifying many transactions or account balances that need the auditor’s attention,
the auditor may have to sample from these risky items to be able to reach a conclusion on the extent of
misstatement in a population.
10.5 Stratification means dividing a population into discrete sub-populations that have an identifying
characteristic, such as dollar value. Stratifying an audit population may improve audit efficiency, as it
allows greater audit effort to be directed to the large-value items, which have the greatest potential for
monetary misstatement in terms of overstatement. Thus, for example, the audit might sample 20% of
accounts with a balance over $20 000 (one stratum), and 5% of accounts with a balance less than or
equal to $20 000 (a second stratum).
Chapter 10 8
10.6 Audit sampling is generally a more appropriate evidence-gathering procedure for the existence
assertion than it is for the completeness assertion. In testing the existence assertion, the auditor needs to
select from the accounting records and check back to the assets. For completeness, it is much harder to
sample, as it is more difficult to define the appropriate population of what should be there.
10.7 As per Appendix 2 to ASA 530 (ISA 530), factors that influence sample sizes for tests of control
include:
 an increase in the extent to which the auditor’s risk assessment takes into account relevant
controls
 an increase in the tolerable rate of deviation
 an increase in the expected rate of deviation of the population to be tested
 an increase in the auditor’s desired level of assurance that the tolerable rate of deviation is not
exceeded by the actual rate of deviation in the population
 an increase in the number of sampling units in the population, for small populations.
10.8 Risk, precision and expected error in population will all affect sample size. The greater the risk faced
by the auditor, the greater the precision required. Further, the greater the risk faced by the auditor or
precision (confidence) required by the auditor, the greater the required sample size. The greater the
expected error in the population, the greater the sample size needs to be. Refer to ASA 530 (ISA 530),
Appendices 1 and 2.
10.9 ASA 530 (ISA 530) requires the following when selecting samples.
1 When designing an audit sample, the auditor shall consider the purpose of the audit procedure
and the characteristics of the population from which the sample will be drawn (paragraph 6).
2 The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably
low level (paragraph 7).
3 The auditor shall select items for the sample in such a way that each sampling unit in the
population has a chance of selection (paragraph 8).
10.10 Random sampling is a sampling method where every item in the population has a chance of
selection; often an equal chance of selection. The person selecting the sample cannot bias the
selection of items either consciously or unconsciously. Therefore, some form of impartial selection
process is used to make the sample truly random, such as a computerised random number generator
or random number tables.
Random sampling is appropriate for both non-statistical and statistical sampling, as the sample is
selected on a basis that allows the auditor to measure the probability of selecting the combination of
sampling units actually chosen.
10.11 If the sample suggests a material misstatement in the population, the auditor needs to take one or more
of the following actions.
Chapter 10 9
 Request that management investigate identified errors and the potential for further errors and
make any necessary adjustments.
 Modify planned audit procedures. For example, in the case of a test of controls, the auditor
might test an alternative control or reduce reliance on controls and increase related substantive
procedures.
 Consider the effect of any unadjusted material misstatement on the auditor’s report.
10.12 Attribute sampling is a statistical sampling technique that reaches a conclusion about a population in terms
of a rate of occurrence (such as authorisation of a transaction). Attribute sampling is therefore mainly used
for tests of controls, to estimate the frequency of deviations from prescribed internal controls (attributes).
10.13 Dollar-unit sampling is most useful for testing accounts where the auditor is interested in testing for
overstatement. Therefore, it would be more likely to be used for testing asset accounts such as
inventory and accounts receivable, and less likely to be used for testing liability accounts, such as
accounts payable. In the same way, it would be more likely to be used for testing sales transactions
where the auditor is normally more concerned with overstatement (although such overstatements may
be tested by examining the related receivables accounts) and less likely to be used for testing expense
accounts where the auditor is normally more concerned with understatement.
10.14 The mean-per-unit estimation technique requires that the auditor select sample items from the
population and determine the audited value of each item selected. The auditor then calculates the
average value or mean of the items and multiplies the average value by the number of items in the
population to obtain a point estimate of the population. The audit sample provides assurance to the
auditor that the point estimate plus or minus the precision limit at a specified reliability percentage
includes the true value of the population.
DISCUSSION PROBLEMS AND CASE STUDIES

10.15 (Easy)
The objective of the auditor when using audit sampling is outlined at ASA 530.4 (ISA 530.4) as being
‘to provide a reasonable basis for the auditor to draw conclusions about the population from which the
sample is selected’.
Audit sampling is the application of an audit procedure to less than 100% of items within a population
in order to obtain audit evidence about particular characteristics of the population. With the evolution
of large business entities, and numerous routine transactions flowing through well-defined accounting
systems, audit sampling has become an efficient means of obtaining sufficient appropriate audit
evidence on which to base an opinion.
Conceptually, the use of sampling in auditing is also consistent with the auditor having a reasonable
basis for expressing an opinion on financial information rather than providing an absolute
‘certification’. The use of sampling has developed so that account balances can be substantiated
without examining every item, which is usually not cost effective and is often impractical.
This may change with advanced data analytics now allowing 100% of a population to be tested.
Chapter 10 10
10.16 (Easy)
Sampling could be applied to situations a, b, c and f.
Sampling is not appropriate for situations d and g, as these involve scrutinising or scanning a
population looking for all items with a specific characteristic (for example, all credit notes issued after
year-end that relate to transactions that occurred before year-end). Therefore, you need to look at all
items in the population, not a sample.
Sampling is not appropriate for e, as in this situation you are checking a specific item, the
documentation that records the docket numbers of the last goods received to check for cut-off.
10.17 (Medium)
(a) Yes, this is an acceptable audit approach, although the proposed plan does not involve sampling.
This is an example of stratification of the population by dollar value. Normally the auditor plans
to apply an audit procedure to all of the individually significant items in a balance because for
such items no sampling risk is acceptable. An item is usually regarded as individually
significant because of its size or nature.
It is assumed that the beginning balance was examined in the prior period. The decision as to
whether it was necessary to undertake a sample of the remaining additions would be based
primarily on the materiality of the $140 000 in relation to the financial report taken as a whole,
and the persuasiveness of the evidential matter produced by the analytical procedures. The
important point to recognise is that the materiality of the $140 000 should be considered in
relation to the financial report and not to the total additions of $300 000.
(b) Yes, there is detection risk associated with the application of any auditing procedure.
(c) No, there is no sampling risk because audit sampling is not being used—the top stratum of the
account balance is being 100% examined and the lower stratum is being tested analytically.
10.18 Key factors to consider in designing a sample for Alpha Engine’s accounts receivable include:
 whether to stratify the sample
 the likelihood of a response from the 10 customers that make up 70% of the balance
 how to select the sample from the remaining 30% to ensure that the results can be extrapolated.
10.19 (Medium)
(a) For the existence assertion, the population would be the accounting records, the items recorded
on the stocksheets. The auditor would select the sample from the stocksheets and trace to actual
stock on hand.
For the completeness assertion, the population would be the actual inventory on the floor of the
various locations. The auditor would select the sample from the inventory that is on the floor
and trace it back to the stocksheets.
Chapter 10 11
(b) As an asset, inventory is more likely to be overstated than understated. Therefore, existence is at
greater risk than completeness and greater audit effort would normally be expended on the
existence assertion.
10.20 (Easy)
In determining sample size, Kaela should consider:
 the recorded balance—determined through reference to Turbo’s accounting records
 the risk of incorrect acceptance—determined through the use of the audit risk model and prior
assessments of audit risk
 the tolerable error—determined judgmentally by Kaela after considering the recorded balance of
the account balance and class of transactions as well as the relationship between the account
balance and class of transactions with important financial statement subtotals (such as total
assets, total sales, and net income)
 the expected error—based on prior experiences of Kaela with Turbo.
10.21 Tolerable deviation rate = $300 000/5 000 000 = 6%
Rate of expected error = $100 000/5 000 000 = 2%
Risk of incorrect acceptance = 5%
Required confidence level (%) = 95%
Referring to Table 10.4, the sample size should be 127.
Sampling interval = Recorded balance / Sample size = $5 000 000 / 127 = $39 370 (rounded).
10.22 (Easy)
Otto has used block selection. The problem with this selection method as applied under these
circumstances is that the sampling unit is a period of time, rather than an individual transaction. You
have selected 4 units in a population of 52 units and appear to have done so judgmentally, which
introduces bias and means that the results cannot be extrapolated to the rest of the population, as they
are not representative.
10.23 (Medium)
(a) Situation 1
Chapter 10 12
The audit procedures do not provide sufficient appropriate audit evidence. The sample has been
taken from a list of trade payables provided by clients and would not enable the auditor to test
the completeness of accounts payables (the principle assertion at risk in relation to accounts
payables, a liability account). Subsequent payments testing should also be performed to ensure
there are not amounts otherwise owing and not recognised at balance date, paid subsequent to 30
June 2018. For example, the auditor would select from cash payments recorded in the
subsequent period and trace them to the schedule of accounts payable outstanding at the balance
date, identifying those payments which pertain to the period under audit. They would also
review any unmatched receiving reports and suppliers’ invoices received by the balance date
and post-balance date. Finally, the auditor would review minutes, contracts, correspondence etc
to detect any recorded liabilities.
Situation 2
The audit procedures do not provide sufficient appropriate audit evidence as the materiality of
errors is irrelevant in relation to tests of controls. The auditor needs to compare the number of
errors found (3) to the tolerable deviation rate (5%) set for the test. The fact that the sample
deviation rate (6%) exceeds the tolerable deviation rate of 5% indicates that the test of control
cannot conclude that the controls are reliable. In order to obtain sufficient appropriate audit
evidence regarding the tests of controls, the auditor must perform further audit procedures.
(b) Ignoring the fact that the procedure will not provide sufficient, appropriate audit evidence by
itself, the auditor would identify the accounts payable balances selected in the audit
documentation by recording their source, the starting point and the sampling interval. The
auditor would also document the detailed vouching tests performed on the balances selected,
and the results of those tests and conclusions drawn.
10.24 (a)
 11 Feb 2018: The lack of approval is an exception, as the control did not operate effectively.
 13 May 2018: The control is still operating effectively, as the CFO reviewed and approved
the payroll report in Faith’s absence.
The exception does not exceed the tolerable rate of deviation. Therefore, you would conclude that the
payroll control is operating effectively. As the control is operating effectively, the planned
substantive tests can remain unchanged.
(b) The number of exceptions would now exceed the tolerable rate of deviation of 0%. Therefore, you
would conclude that the control is not operating effectively. Therefore, more reliance will be placed
on substantive procedures, particularly on tests of details.
10.25 (Easy)
Chapter 10 13
Pam’s conclusion is not supported from the evidence she has obtained. In order to use statistical
sampling, and thus use statistical sampling tables, to evaluate sample results the sample must be
selected randomly. The assistant has used block sampling to select the sample. This approach to sample
selection is not recognised as a random sampling approach. The difficulty with block sampling is that it
can concentrate testing in areas with particular patterns (for example, end of month processing) and
thus not indicate whether the control is operational for the entire period for which the auditor wishes to
rely on the control.
10.26 (Medium)
(a) Sample sizes are determined as follows:
(1) 3.00/0.05 = 60 (Reliability factor from Table 10.2, compared to sample size of 59 from
Table 10.4)
(2) 5.33/0.08 = 67 (Reliability factor from Table 10.2)
(b)
Control Number of Sample Sample Tolerable SDR > or < TDR
deviations size deviation deviation rate
found rate (SDR) (TDR)
(1) 4 60 0.07 0.05 SDR > TDR
(2) 2 67 0.03 0.08 SDR < TDR
Chapter 10 14
From the above results, the auditor cannot rely on control (1) but can rely on control (2).
10.27 (Medium)
(a) The starting point of the sample selection is $23 700. This dollar value is contained in invoice
A1003, so that is the first invoice that will be selected. The sampling interval is $30 098, so the next
invoice selected must come from one containing the $53 798 cumulative dollar value. The next
invoice to contain this amount is invoice A1006 (that is, the total dollar value of invoices A1001–
A1005 is $45 000, while invoice A1006 contains $45 001–$55 000). The next invoice selected will be
the $83 896 value. Invoice A1009 contains this value (invoices A1001–A1008 total $81 000, so
invoice A1009 contains $81 001–$92 000). The next invoice selected will be the one containing the
$113 994 value. Invoice A1010 contains $92 001–$124 000 and so will be selected.
(b) Invoice A1010 is $32 000, which is greater than the sampling interval of $30 098. When you use
dollar unit sampling, any item larger than the sampling interval must be selected at least once, and
very large items may be selected more than once (that is, they may represent a number of sample
selections). Consequently, the actual number of invoices selected may be less than the sample size, as
one large invoice could contain more than one sample dollar.
10.28 (Medium)
(a) The auditor is more likely to be concerned with testing for overstatement of accounts receivable.
The risk profile of accounts is that asset accounts are more likely to be overstated than
understated, given that an overstatement of assets has the potential to increase profit.
(b) Sampling interval =
Dollar of interest = 14 320 + 16 000 = 30 320
This dollar is contained in population item number 7, which will be the second item to be
selected.
(c) Four possible courses of action in these circumstances are as follows.
 Increase sample size, especially if the upper error limit only just exceeds the tolerable
error.
 Increase audit testing in specific areas as suggested by the errors identified.
 Discuss with management and correct the identified errors.
 Consider modification of the auditor’s report on the financial report.
10.29 (Easy)
Difference estimation is a sampling approach where the auditor calculates the difference between the
audited value and the book value of each item in the sample. The average of the differences is
calculated and then multiplied by the number of items in the population to obtain an estimated total
projected difference. The population value is then estimated as the total book value plus or minus the
total projected difference.
Chapter 10 15
Continuous case study
10.30 (a) The starting point of the sample is $31 959. This dollar value is contained in invoice 19053, so
that is the first invoice that will be selected. The sampling interval is $80 505, so the next invoice
selected must come from one containing the $112 464 cumulative dollar value. The next invoice to
contain this amount is invoice 19059 (that is, the total dollar value of invoices 19051–19058 is $109
591, while invoice 19059 contains $109 592–$124 525).
(b) Using the following formula to calculate projected error = (errors found in items tested/total value
of items tested) x population value
the discovered debts that should have been written off establish a projected error of $199 083 (($40
775 ÷ $1 088 237) × $5 313 309). Since the projected error is significantly above the tolerable
misstatement amount of $103 775, this test currently does not establish that accounts receivable is not
materially misstated. Therefore, further substantive testing is required to establish more firmly the
extent of the misstatement.
Chapter 10 16

Gay7e Irm Ch10

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Gay7e Irm Ch10

Uploaded by

Copyright:

Available Formats

Chapter 10

[Use slides 10-1 to 10-4]

LO 10.1: Definition and features

[Use slides 10-5 to 10-7]

LO 10.2: Various means of gathering audit evidence

[Use slides 10-8 to 10-12]

LO 10.3: Planning and designing the sample

[Use slides 10-13 to 10-16]

[Use slides 10-17 to 10-19]

LO 10.5: Selecting the sample

[Use slides 10-20 to 10-23]

LO 10.6: Performing the audit procedures and evaluating sampling results

[Use slides 10-24 and 10-26]

LO 10.7: Sampling for tests of controls: in particular, attribute sampling

Another example for the determination of sample size:

[Use slides 10-27 to 10-35]

[Use slides 10-36 to 10-42]

LO 10.9: Other statistical sampling approaches

[Use slide 10-43]

[Use slide 10-44]

(a) random sample selection

 an increase in the tolerable rate of deviation

 an increase in the expected rate of deviation of the population to be tested

DISCUSSION PROBLEMS AND CASE STUDIES

Sampling could be applied to situations a, b, c and f.

 whether to stratify the sample

In determining sample size, Kaela should consider:

 the recorded balance—determined through reference to Turbo’s accounting records

 the expected error—based on prior experiences of Kaela with Turbo.

10.21 Tolerable deviation rate = $300 000/5 000 000 = 6%

Rate of expected error = $100 000/5 000 000 = 2%

Risk of incorrect acceptance = 5%

Required confidence level (%) = 95%

Referring to Table 10.4, the sample size should be 127.

(2) 2 67 0.03 0.08 SDR < TDR

(b) Sampling interval =

Dollar of interest = 14 320 + 16 000 = 30 320

(c) Four possible courses of action in these circumstances are as follows.

 Increase audit testing in specific areas as suggested by the errors identified.

 Discuss with management and correct the identified errors.

 Consider modification of the auditor’s report on the financial report.

You might also like