Audit Sampling
Give two out of the four bulletpoints that describe the definition of audit sampling
What is:
Selection and evaluation
Less than 100% (of the population of audit)
Be representative of the population
Likely to provide a reasonable basis for conclusions about the population
According to the basic framework outlined, what is the first step when applying sampling to substantive procedures?
Determine the Objectives of the Substantive Procedure
n audit sampling, what does the "population" consist of?
A class of transactions, such as revenue transactions, or an account balance, such as accounts receivable, to be tested
Name one specific factor mentioned in the sources that influences sample size when performing substantive procedures
Tolerable Misstatement, Desired Level of Assurance, or Expected Misstatement
When evaluating sample results from substantive procedures, what must the auditor do with the misstatement found in the sample?
Project the misstatement found in the sample to the audit population
What are two types of sampling risk? Bonus which one is worse?
What is risk of incorrect acceptance and risk of incorrect rejections
Risk of incorrect acceptance is worse
What is the ultimate purpose an auditor aims to achieve when performing a substantive procedure involving sampling?
To obtain reasonable assurance that an assertion is presented fairly in all material respects
What does the term "sampling unit" refer to?
The individual items constituting a population
According to the sources, how does a higher tolerable misstatement affect the required sample size?
The higher the Tolerable Misstatement, the smaller the sample size
Name one of the two acceptable methods mentioned in the sources for projecting misstatements when using nonstatistical sampling
The Ratio Method or the Difference Method
Which of the following is not a reason we would use ADA over audit sampling
a. There is strong internal controls over the reliability of relevant electronic data
b. There is a small audit population
c. The condition of relevant electronic data is clean
d. The evidence is available in electronic form
b
There are two ways we can determine the objectives of a substantive procedure involving sampling. What is the more common approach?
Estimating the dollar amount of misstatement in a population
Describe the systematic random sampling method, including how the sampling interval is determined
The auditor divides the number of items in the population by the sample size to determine the sampling interval, then randomly selects a starting point below the interval and selects every nth item after that
What is the relationship between Tolerable Misstatement (TM) and Performance Materiality, as defined in the sources?
Tolerable Misstatement is the application of performance materiality to a particular sampling procedure, and TM is equal to or less than the performance materiality level set for the class of transactions or account balances being tested
In statistical sampling, what formula is used to calculate the Upper Misstatement Limit (UML)? Define the components of the formula
UML = PM + ASR34.... PM is the projected misstatement, and ASR is the allowance for sampling risk, which measures the uncertainty associated with not sampling the entire population
Give a reason an auditor might reach an erroneous conclusion due to non-sampling risk.
Relying on less persuasive or unreliable evidence focusing on auditing assertions that have low RMM
Give two situations where an auditor is more likely to use sampling instead of auditing the entire population
When professional standards expect the auditor to perform certain audit procedures (e.g., observe inventory or confirm receivables), or when evidence to support the audit procedure is not available in electronic form
Explain the core principle of Probability-Proportionate-to-Size (PPS) sampling and identify what the sampling unit is considered to be under this method
Under PPS, the probability of a particular sampling unit being chosen is proportionate to its monetary size. The sampling unit is considered the individual dollar.
How does expecting a likely material misstatement in the population influence the sample size, and why?
If auditors expect a likely material misstatement, they will increase the sample size to gain a better estimate of the actual misstatement
When evaluating the results of audit sampling, what types of qualitative considerations might an auditor make even if the projected misstatement is less than tolerable misstatement?
Misstatements may be due to differences in principle or judgment, errors, fraud, or ineffective internal controls
What are both consequences of an incorrect rejection
Client disagrees so you perform more procedures
extra unneeded procedures create inefficiency within the audit
What is a key difference between statistical and nonstatistical sampling regarding sampling risk
Statistical sampling allows auditors to quantify sampling risk, while nonstatistical sampling does not; instead, the auditor uses judgment
Differentiate between probabilistic and nonprobabilistic sample selection methods. Provide an example of each type of method
Probabilistic selection means each population item has a known probability of being included in the sample (e.g., Simple random sample selection, Systematic sample selection, Probability proportional to size sample selection) Nonprobabilistic selection uses methods that approximate a random approach but do not allow for quantifying sampling risk (e.g., Haphazard sample selection, Block Sample selection)
For nonstatistical sampling, what is the primary method an auditor uses to determine sample size, unlike statistical sampling which uses mathematical methods?
The auditor utilizes judgment to determine what is appropriate, as there is no formula or specific process
For statistical sampling, describe how the projected misstatement is calculated for a logical unit (like a customer account) with a book value less than the sampling interval, as shown in the example
A tainting percentage (TP) is calculated as (Book value - Audit value) / Book value, and then the projected misstatement (PM) is calculated by multiplying the tainting percentage by the sampling interval