Audit Sampling 2

Question 1

What is the Allowable Risk of Over-reliance?

Answer 1

• Risk of Assessing Controle Risk too low
• Has an inverse effect on sample size
• Gives you the Sampling Risk

Question 2

Attributes Sampling relationship to sample size

Answer 2

• Inverserelationship to sample size
  
  • ↑ Risk of assessing control risk too low ⇒↓ Sample size
  • ↑ Tolerate rate ⇒ ↓ Sample size
• Direct relationship to sample size
  
  • ↑ Expected population deviation rate ⇒ ↑ Sample size
  • ↑ Population ⇒ ↑ Sample Size (have a very small effect)

Question 3

What is Systematic Sampling?

Answer 3

• Method of selecting the sample - attribute sampling
• Every nth (poplulation/sample size) item is selected after a random start
• Provides every sampling unit in the population an equal change of being selected
• Primary advantage is that population doesn’t require pre-numbering
• One problem is that population may be systematically ordered

Question 4

How does Block Sampling compare to other sampling methods?

Answer 4

Easy to implement- but is the worst method of sampling

Question 5

Random number sampling

Answer 5

• Numbered documents or transaction are selected through the use of random number tables or computer software
• Every sampling unit has the same probability of being selected

Question 6

What is Sequential Sampling / Stop or Go Sampling?

Answer 6

• Also called Stop or Go sampling
• Appropriate when expected population deviation rate is low
• Each audit step determines the next step
• Form of attributes sampling
• No fixed sample size may result in lower sample if few or no error detected
• Stop-or-go and random number sampling are sampling methods, i.e., the way in which items are selected for the sample. These methods can be used with either variables or attribute sampling.

Question 7

What is Discovery Sampling?

Answer 7

• Audit is testing an area that is so crucial that zero population errors can be tolerated - Any phony employees on payroll?
• Discovery samplet sizes is constructed to measure the probability of at least one error occuring in a sample, if the error rate in the population exceeds the tolerable rate
• any error in the sample results in rejection
• sample large enough to detec at least 1 error if it exist

Question 8

Calculation of sample deviation rate

Answer 8

Deviation sample rate = nb of observed deviation / sample size

Question 9

Planning Variable sampling

• Determine the sample size -

Answer 9

In planning for Variable sampling, the auditor should

1) considered the Variation within the population—Increases in variation (standard deviation in classical sampling) re­sult in increases in sample size.
2) dertermine the Acceptable level of risk/ Allowable risk of incorrect acceptance
3) establish Tolerable misstatement — As tolerable misstatement increases, sample size decreases.
4) determine the Expected amount of misstatement or expected variation — As expected misstatement increases, a larger sample size is required.
5) determine Population Size
6) Calculate the Sample Size

Question 10

Variable Sampling relationship to sample size

Answer 10

INVERSE

• ↑ Risk – Incorrect Acceptance ⇒↓ Sample size (inverse)
• ↑ Risk – Incorrect Rejection ⇒↓ Sample size (inverse)
• ↑ Tolerate Misstatement (error) ⇒ ↓ Sample size (inverse)

DIRECT

• ↑ Expected Misstatement (error) ⇒ ↑Sample size (direct)
• ↑ Population ⇒ ↑ Sample Size (direct)
• ↑ Variation (standard deviation) ⇒ ↑ Sample Size (direct)

Question 11

What are the characteristics of Probability Proportionate to Size (PPS) sampling?

Answer 11

• A form of dollar unit /variable Sampling
• Advantages over classical variable sampling

• Standard deviation not needed
• Items with larger dollar amount have a greater probability of being selected
• Disadvantages of PPS
• Understated items have a lower probability of being selected
• Items with zero or negative balances are not generally included in the sample
• PPS is most effective when
• Few or no errors are expected
• The auditor is concerned about overstatement of the account

NOTE: The risk of incorrect rejection is not typically controlled when using PPS sampling, but is controlled when using classical methods.

Question 12

Calculation Projected Misstatement PPS

Answer 12

• Misstatement = Book amount - Audited amount
• Tainting Factor = Misstatement/Book amount
• Projected misstatement
  
  • if SI> Book amount
    
    • PM=TF x SI
  • if SI< Book amount
  • PM = Misstament

Question 13

What is Classic Variable Sampling?

Answer 13

Classical variable sampling models use normal distribution theory to evaluate selected characteristic of a population on the basis of a sample of the items constituting the population

Variations of classical variables sampling

• Mean per estimation
• Difference estimation
• Ratio estimation - can not be used when there is no book value to make a comparaison, appropriate when testing a population for which a large number of errors of this nature is expected
• Regression estimation
• Difference and ration estimation - used as an alternative to mean per unit estimation

Question 14

Comparison of PPS Sampling to Classical Variables Sampling

Answer 14

a. Advantages of PPS sampling

(1) Generally easier to use.
(2) Size of sample not based on variation of audited amounts.
(3) Automatically results in a stratified sample.
(4) Individually significant items are automatically identified.
(5) Usually results in a smaller sample size if no misstatements are expected.
(6) Can be easily designed and sample selection can begin before the complete population is available.

b. Advantages of classical variables sampling

(1) May result in a smaller sample size if there are many differences between audited and book values.
(2) Easier to expand sample size if that becomes necessary.
(3) Selection of zero and negative balances does not require special sample design considerations.

Question 15

Calculation of Sampling Interval and Sample Size - PPS

Answer 15

• Sampling Interval = Tolerable misstatement / Reliabity factor from table (or population amount / sample size)
• Sample size = Population amount / Sampling Interval

Question 16

Ratio estimation

Answer 16

Ratio estimation is a classical variables sampling technique that uses the ratio of audited amounts to recorded amounts in the sample to estimate the total dollar amount of the population and an allowance for sampling risk.

Ratio estimation sampling technique is based upon comparing the ratio of the book value to the audited value of the sampled items

Ratio estimation = (Sample AV/Sample BV) × Population BV

Question 17

Difference estimation and ratio estimation

more efficient because the differences between audit and book values are expected to vary less than the actual items in the population.

Answer 17

• Difference estimations and ratio estimations are classical variables sampling techniques
• Difference estimations and ratio estimation are used as alternatives to mean-per-unit estimation. The auditor should use these approaches when applicable because they require a smaller sample size (i.e., they are more efficient than mean-per-unit estimation).

(a) One factor in the calculation of sample size for classical variables sampling models is the estimated standard deviation. If the standard deviation of differences or ratios is smaller than the standard deviation of audit values, these two methods will produce a smaller sample size.

• *1] Difference estimation** will be used if the differences between sample audit values and book values are a relatively constant dollar amount, regardless of account size.
• *2] Ratio estimation** will be used if the differences are a constant percentage of book values.

(b) In order to use either difference or ratio estimation, the following constraints must be met:

1] The individual book values must be known and must sum to the total book value.
2] There must be more than a few differences (20 is often suggested as a minimum) between audit and book values.

(c) These two methods will usually be more efficient than mean-per-unit estimation when stratification of the population is not possible.

The regression approach is similar to the difference and ratio approaches. This approach has the effect of using both the average ratio and the average difference in calculating an estimate of the total amount for
the population.