Evaluating Audit Data Analytics and Audit Sampling for Substantive Tests

Question 1

When would audit sampling be a good choice?

Answer 1

1. When certain audit procedures are required by professional standards. Example: select a sample of inventory to observe.
2. When internals controls are weak and reliable data does not exit to support ADA. Example is vouching.
3. When the auditor will need to have data that is relevant to the audit test. Example: Client may have perpetual inventory info, but no the value of each item sold because they use the periodic inventory method. This limits the ADA.
4. It may be more effective and efficient to use then ADA.

Question 2

When would ADA be a good choice?

Answer 2

1. Evidence to support the audit test is available in electronic form.
2. The population is large, and the auditor’s tests are supported by reliable and relevant data in electron form.
3. Relevant data is reliable and internal controls are strong
4. Relevant data is clean or can be cleaned up easily.

Question 3

What is audit sampling?

Answer 3

It occurs when an auditor selects less than 100% of a population that the auditor expects is likely to provide a reasonable basis for drawing a conclusion about an entire population.

Question 4

How does audit sampling relate to audit risk?

Answer 4

Whenever an auditor draws a conclusion about an entire population there is some level of uncertainty about the auditor’s conclusion. The auditor’s conclusion based on the sample may be different than the conclusion drawn if the auditor had audited an entire population. This uncertainty is referred to as sampling risk.

Question 5

What is sampling risk?

Answer 5

It is the risk that the sample chooses by the auditor is not representative of the population of transactions or items within an account balance.

Question 6

What are the two consequences of sampling risk?

Answer 6

1. The risk that the audit will be ineffective (fail to find material misstatements)
2. The risk that the audit will be inefficient (the auditor will do more work then is necessary)

Question 7

What are the types of sampling risk?

Answer 7

1. Risk of incorrect acceptance (the risk that the auditor says that a material misstatement does not exist when it does). The audit is ineffective.
2. Risk of incorrect rejection (the risk that the auditor says that a material misstatement exists when it does not) The audit is inefficient.

Question 8

What is non sampling risk?

Answer 8

It is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.
The auditor relies too heavily on less persuasive or unreliable evidence.

Question 8

What is non sampling risk?

Answer 8

It is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.
The auditor relies too heavily on less persuasive or unreliable evidence.

Question 9

What is statistical sampling?

Answer 9

It is the approach to sampling that involves a random selection of sample items and the use of an appropriate statistical technique to determine sample size and evaluate the sample results, including measurement of sampling risk.

Question 10

What is nonstatistical sampling?

Answer 10

It involves any sample selection and evaluation method for which the auditor does not use a formal statistical technique to select the sample or to evaluate the sample results.

Question 11

What is population?

Answer 11

It consists of the class of transactions of the account balance to be tested.

Question 12

What is a sampling unit?

Answer 12

It is a subset of a population that is the basis for sampling.

Question 13

What is random selection?

Answer 13

It requires that the person selecting the sample does not influence the choice of items.

Question 14

What is stratification?

Answer 14

A process of dividing a population into groups of sampling units with similar characteristics that are more homogeneous.
It can be used prior to random selection to improve audit efficiency.

Question 15

What is systematic selection?

Answer 15

It involves the selection of a sample for testing by dividing the number of items in a population by the sample size, resulting in the sampling interval.

Question 16

Formula for sampling interval and what does it mean.

Answer 16

Population size / Sample size

This means that every “sampling interval” (say 30th) item will be selected for testing.

Question 17

What is haphazard selection?

Answer 17

It involves the selection of a sample by an auditor without using a methodical technique.

Question 18

What is the desired level of assurance?

Answer 18

The level of assurance that the sample is representative of the population. The auditor wants to choose a level of assurance so tolerable misstatement is less likely to be exceeded by the actual misstatement in the population.

Question 19

What is tolerable misstatement?

Answer 19

The max amount of misstatement that an auditor is willing to accept within the population tested, and conclude that the population is presented fairly when performing a substantive test.

Question 20

What is expected misstatement?

Answer 20

The amount of misstatement the auditor expects in a transaction class or account balance when performing a substantive test.

Question 21

What are the factors that influence sample size when conducting substantive procedures?

Answer 21

1. The desired level of assurance
2. The tolerable misstatement
3. The expected misstatement
4. The stratification of the population

Question 22

Why does effective stratification reduce sample size?

Answer 22

When there is a wide range in the monetary size of items in the population, stratification of the population is a way to group the population into more homogenous subgroups, which will result in more efficient sampling and reduce the sample required.

Question 23

What are the steps in planning and executing a statistical or non statistical sample?

Answer 23

Question 24

What is a reciprocal population?

Answer 24

It is a population that is overstated if the population of interest is understated (vice versa).

Question 25

What is Probability-proportioate-to-size (PPS) sampling?

Answer 25

An approach to sampling that uses attribute sampling theory to express a conclusion in dollar amounts; with this sampling technique, the probability that a particular sampling unit will be chosen in the sample is proportionate to the monetary size of the item.

Question 26

Explain PPS sampling.

Answer 26

In PPS sampling, the sampling unit is the individual dollar, and the population is considered a number of dollars equal to the total dollar amount of the population. Each dollar in the population is given an equal chance of being selected in the sample.

Question 27

What is logical sampling unit?

Answer 27

An item snagged by the sampling plan for audit, such as an individual customer or individual sales invoice; auditing procedures are performed on the logical sampling unit.

Question 28

What is upper misstatement limit (UML)?

Answer 28

A statistical estimate of the max misstatement in the population based on the sample