Audit Sampling

Question 1

Define “Type 2 Error.”

Answer 1

• Population is bad but sample tells auditor everything is good.
• Risk of over-reliance (assessing RMM too low)
• Incorrect acceptance (sub testing)
• Less effective audit (Beta risk: that sample will have fewer errors than pop causing to accept control as effective when its not)

Question 2

Define “Type 1 Error.

Answer 2

• Population is ok but sample tells auditor don’t rely
• Risk of under-reliance (assessing RMM too high)
• Incorrect rejection (sub testing)
• Less efficient audit (Alpha risk: that sample will have more errors than pop, causing to perform add’t procedures to obtain suff/app evidence)

Question 3

Formula for calculating “sampling interval “ for PPS sampling

Answer 3

Sampling interval = tolerable misstatement (net of expected misstatements)/reliability factor; or alternatively
Sample interval = Population book value/sample size

Question 4

What is the primary advantage of PPS sampling?

Answer 4

Efficiency—If there are few differences between audit and book values, PPS sampling may result in smaller sample sizes than other sampling methods.

Question 5

The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control. In other words…?

Answer 5

the sample tested by the auditor has a higher rate of deviation than the full population does. Based on the testing, the auditor assesses control risk higher than he or she would if the auditor had tested the whole population

Question 6

What is an auditor’s evaluation of a statistical sample for attributes when a test of 50 documents results in three deviations when the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?

Answer 6

Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate
* population deviation rate not needed in calculation!

Question 7

efficiency relates to…

effectiveness relates to…

Answer 7

efficiency- risk of assessing control risk too high, incorrect rejection
effectiveness- risk of assessing control risk too low, incorrect acceptance in the detection of existing MM by not expanding substantive audit tests

Question 8

If the sample results are good and the actual population is good/bad…

Answer 8

Good= Appropriately rely
Bad= Over-rely

Question 9

If the sample results are bad and the actual population is good/bad…

Answer 9

Good= Under-rely
Bad= Appropriately don't rely

Question 10

Calculate the true deviation rate

Answer 10

amount of errors

/ sample

Question 11

Sample size equals (attributes)

Answer 11

[SD x Reliability factor x BV pop]
/ Precision (allowance for sampling risk)
* When precision gets smaller it means we are more precise, so the sample size needs to increase

Question 12

The 9 steps in attributes sampling plan:

Answer 12

1. Determine objective/control being tested
2. Determine tolerable rate
3. Determine reliability, degree of sampling risk
4. Determine expected pop deviation rate (SD)
5. Method for selecting sample
6. Calc sample size
7. Select and test the sample
8. Calc sample deviation rate (errors/sample)
   Deviation rate+- Allowance for sampling risk= upper limit
9. Compare upper limit to tolerable rate to reach conclusion and document

Question 13

Effect to make sample size increase:
Tolerable rate
Confidence level (reliability)
Deviation rate
Population size
Allowance for sampling risk (Precision)

Answer 13

Tolerable rate - decrease
Confidence level - increase
Deviation rate- increase
Population size- increase, but not proportionately
Allowance for sampling risk- decrease (the lower, the more precise, so the more sample we need)

Question 14

What is PPS?

Answer 14

Probability-Proportional to size (or dollar unit)
Sample size=population/SI
Projected misstatement=SI x taint %
Taint %=(book-audited)/book
**SI has to be greater than book; if less then PM=book-audited
* Selection can begin before final population is available

Question 15

Disadvantages to PPS?

Answer 15

Not useful in detecting understated accounts

Special method needed for zero/negative accounts