Audit and Assurance > Chapter 3: Section 4 > Flashcards

Chapter 3: Section 4 Flashcards

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1
Q

What does ISA 530 say about Audit Sampling in para.4?

A

‘The objective of the auditor, when using audit sampling, is to provide a reasonable basis for the auditor to draw conclusion about the population from which the sample is selected.’

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2
Q

Define audit sampling.

A

Applying audit procedures to less than 100% of items within an account balance or class of transactions in such a way as to draw a conclusion on the account balance or class of transactions as a whole

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3
Q

Define statistical sampling

A

Approach to sampling that involves random selection of the sample items; and the use of probability theory to evaluate sample results including measurement of sampling risk (the risk of selecting a non-representative sample)

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4
Q

Define sampling units

A

Individual items constituting a ‘population’ (account balance or class of transaction) e.g., a single receivable balance within total receivables or an individual sale within total revenue

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5
Q

What is the key rule of audit sampling in regard to ‘sampling units’?

A

All ‘sampling units’ must have an equal change of being selected for testing.

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6
Q

What is sampling closely connected with?

A

Risk and materiality

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7
Q

Why does sampling affect detection risk?

A

Put simply, the more items within a population that are tested, the higher the chance of the auditor finding a misstatement

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8
Q

What will happen if the auditor does not test every single sampling unit in the population?

A

Is a risk that misstatements will not be detected

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9
Q

What is possible however carefully the sample is selected?

A

Possible the sample will not be representative of the population as a whole.

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10
Q

What does sampling always carry?

A

A level of detection risk.

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11
Q

What do auditor’s have to do to obtain the benefit of sampling and what is this benefit?

A

Determine appropriate level of risk
Benefit is that the auditor does not have to test everything

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12
Q

What will happen to detection risk, the larger the sample tested is?

A

The larger the sample tested, the lower the detection risk

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13
Q

What is non-statistical sampling?

A

The use of judgement to select a sample instead of a statistical technique

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14
Q

In some instances, rather than select a random sample, what may the auditor want to do?

A

Exercise judgement and test specific items

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15
Q

What is an example of why auditors will want to exercise judgement and test specific items rather than selecting a random sample?

A

Already observed that auditors should test all material items therefore, if the receivables’ ledger contains debts that are themselves material to the financial statements, they should be selected

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16
Q

Why are items selected based on materiality not statistical sampling?

A

Items have been selected with bias

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17
Q

Since items selected based on materiality are biased, what can the auditor not do and what should they do?

A

Not project the results of testing on these items to the rest of the population

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18
Q

What kind of approach is auditors selecting samples not randomly but using their professional judgement?

A

Non-statistical sampling - subjective approach

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19
Q

What is another example of non-statistical sampling?

A

Where auditor believes there is a greater risk of cut-off errors around year-end and therefore, focuses audit testing on the sales transactions just before, and just after, the year end

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20
Q

Define stratification

A

Dividing a population into smaller sub-populations, each of which is a group of sampling units, usually by value

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21
Q

When testing non-statistically, how must the remainder of the population be tested and what is this known as?

A

Should be sampled in a non-biased way - known as stratifying a population

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22
Q

Give an example of stratifying a population using receivables?

A

Instead of testing receivables as a whole, auditor might test 2 populations of receivable balances, individually material receivables balances and individually non- material receivable balances (total of which might well be material)

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23
Q

Using the receivables examples for stratification, how would sampling procedures work?

A

First material population - no sampling procedures - would test all material balances

Second non-material balances - apply sampling procedures and select balances for testing

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24
Q

In the receivables stratification example, what would then happen once tested only sampled balances from second population?

A

Results from sampled population could be projected onto rest of that sub-population to assess if total misstatements are likely to be material

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25
In the receivables stratification example, why would you not project results for the first population?
Everything has been tested in the material population so there is nothing to project errors against - all errors in that population should have been found
26
What may be common regarding testing in some audit areas?
Might be more appropriate to test 100% of items or a very high percentage of items
27
Why might it be appropriate to test 100% or very high percentage of items in some areas of the audit?
So errors in the remaining balance could not possible be material
28
What is an example of an audit area where it might be more appropriate to test 100% or a very high percentage of items and why is this the case for this example?
Often additions to PPE where only 1 or 2 material additions may have been made in the year and no need to select a sample, merely to test these items
29
What is the most important rule for determining how to pick the sample?
Important that any item in the population has a chance of being picked so in general terms, the auditor should not bias the sample
30
Give an example of what would be putting an unreasonable bias on the sample selection.
E.g., if a company has 2 factories, one 20 miles from auditor and other 120 miles from audit - easier for auditor to physically verify closer one exists = unreasonable bias
31
In order to avoid ways, what is present?
Several common ways to selecting samples
32
What are the 5 common ways of selecting samples in order to avoid bias?
1. Random selection 2. Systematic selection 3. Haphazard selection 4. Money Unit Sampling (MUS) 5. Block selection
33
What is random selection?
Auditor uses a computer program or table to (mathematically) randomly select the sample
34
What is systematic selection?
Auditor randomly selects the first item then selects all others systematically after that
35
Give an example of systematic selection.
Auditor might pick the 5th receivables on the list of trade receivables and then every fifth or tenth after that
36
What can systematic selection be described as?
Interval sampling
37
What is haphazard selection?
Method by which an auditor picks a sample with no structured technique (is what we could call 'at random' but human bias may reduce mathematical randomness of choice)
38
(to not) What is crucial to understand about haphazard selection?
The difference between this type of sampling and 'random' sampling
39
What is haphazard approach to selection most likely to allow?
Audit bias to creep in
40
What is MUS?
Value-weighted selection
41
Example of MUS
In trade receivables, every nth £ is selected, rather than every nth receivable
42
What is MUS also known as?
Interval sampling
43
What is block selection?
Involves selecting a block of continuous items
44
Example of block selection
April's invoices out of a population of the year's invoices
45
Using the example for block selection, explain why this is rarely an appropriate sample technique?
April's invoices may have different characteristics from the rest of the year and are not therefore representative of the whole population e.g., were posted by a different staff member due to holiday
46
What is tolerable misstatement for tests of control?
Maximum rate of deviation from a control that auditors are willing to accept in the population and still conclude the preliminary assessment of control risk is valid
47
What is the tolerable misstatement for tests of details (or substantive testing)?
The maximum monetary error in an account balance or class of transactions that the auditor is willing to accept and still conclude that the financial statements are true and fair.
48
When using a sample, what does the auditor have to be sufficiently confident about?
That the results given by a sample reflect the results that would be given by testing the whole population
49
Why is sampling necessary in many areas of the population?
Is the only cost-effective way an audit can be performed as testing everything would take too long and be too expensive
50
What will the size of samples selected be affected by?
Auditor's assessment of the tolerable misstatement
51
When does the auditor need to be very confident that results from a sample reflect results that would come from the whole population?
If overall risk of misstatement is high
52
If overall risk of misstatement is high, what needs to consequently happen to detection risk?
Needs to be reduced to an acceptably low level
53
What would reducing detection risk to an acceptably low level after an high overall risk of misstatement do to sample size?
Would increase the size of the sample the auditor tests
54
What is the decision on risk of misstatement, confidence in results, detection risk and sample size all a matter of?
Matter of audit judgement based on risks of misstatements arising and materiality levels
55
When is auditor based on risk of misstatements arising and materiality levels taken place at and when is it amended, if necessary? Who is this judgement taken by and approved by?
Judgement taken at planning stage and amended, if necessary, as audit progresses and more facts come to light Taken by a senior member of audit team and approved by audit partner
56
What do auditing standard on audit sampling, ISA 520, outline?
Factors that impact on sample sizes
57
(not sure if need to memorise) What are the various factors on sample sizes for tests of control?
Increase: 1. In extent to which auditor intends to rely on controls 2. In tolerable rate of deviation 3. In expected rate of deviation 4. In auditor's desired level of assurance that actual rate deviation is less than or equal to tolerable rate of deviation 5. Of number of sampling units
58
What does the increase in extent to which auditor intends to rely on controls do to sample size for tests of controls?
Increase - more reliance auditor intends to place on controls, greater the assurance they are operating effectively needs to be
59
What does the increase in tolerable rate of deviation to do sample size for tests of controls?
Decrease
60
What does increase in expected rate of deviation do to sample size for tests of controls?
Increase - if auditors expect errors to exist, they need to test more as they need to be satisfied that actual misstatement is lower than tolerable misstatement
61
What does the increase in the auditor's desired level of assurance that actual rate of deviation is less than or equal to tolerable rate of deviation do to sample size for tests of controls?
Increase - the more assurance the auditor needs, the more items they need to test
62
What does the increase of number of sampling units do to sample size for tests of controls?
Negligible effect
63
What are the various factors on sample sizes for substantive testing (test of detail) as per ISA 530?
Increase: 1. in auditor's assessment of risk of material misstatement 2. in use of other procedures at the same assertion 3. in auditor's desired level of assurance that actual misstatement does not equal tolerable misstatement 4. In tolerable misstatement 5. In expected misstatement 6. Stratification of population 7. Number of sampling units in population
64
what effect does the increase in auditor's assessment of risk of material misstatement have on sample size for tests of details?
Increase- higher inherent and control risk is, the lower detection risk needs to be (hence more tests)
65
What effect does the increase in the use of other procedures at the same assertion have on sample size for tests of details?
Decrease- auditor is obtaining assurance from the other procedures e.g., analytical procedures
66
What effect does the increase in auditors desired level of assurance that actual misstatement does not equal tolerable misstatement have on sample size for tests of details?
Increase - more assurance the auditor needs, more items they need to test
67
What effect does the increase in tolerable misstatement have on sample size for tests of details?
Decrease - there is more chance of it being found in the sample
68
What effect does the increase in expected misstatement have on sample size for tests of details?
increase - if auditors expect more errors to exist, they need to test more as they need to be satisfied that actual misstatement is lower than tolerable misstatement
69
what effect does the stratification of the population have on the sample size for tests of details?
Decrease
70
What effect does the number of sampling units in population have on sample size for tests of details?
Negligible effect
71
Advantages and disadvantages of block sampling method
Advantage: Useful if interrogating a defined group of date Disadvantage: But ignores characteristics of data from outside that block
72
Advantages and disadvantages of haphazard sampling method
Adv: Non-statistical technique is good for targeting your sample Disadv: but can still generate a biased and non-represenative sample
73
Advanatages and disadvanatages of judgemental sampling method
Adv: Also good for targeting specific areas of the population Disadv: but again can lead to selection of non-rep sample through some form of bias
74
Advantages and disadvantages of random sampling method
Adv: Eliminates bias by relying on a mathematically selected sample Disadv: Requires IT expertise or use of specialist maths tables to generate the sample
75
Advantages and disadvantages of stratified sampling method
Adv: Allows a broad range of items to be tested within the sample Disadv: can lead to larger or more complex samples being selected which in turn may take longer to complete
76
Advantages and disadvantages of systematic sampling method
Adv: Ignores patterns and treats every item of the population the same way, eliminating bias Disadv: Still requires some judgement to determine the starting position and sampling interval so still may not be fully representative
77
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