Module 3 - Audit Sampling

Question 1

What is a representative sample?

Answer 1

A sample of items with characteristics approximately the same as the population.

Question 2

What are the two types of risk that auditors face when sampling?

Answer 2

Sampling risk

Sample is not representative of the population

Non-sampling risk

Risk that auditor reaches incorrect conclusion for reason not related to sample pool

Question 3

What are the differences in:

Statistical sampling

Nonstatistical sampling

Answer 3

Statistical sampling

• Allows quantification of sampling risk in planning the sample and evaluating results
• Auditor randomly selects items

Nonstatistical sampling

• Sampling risk not quantified
• Auditor plans and selects items that auditor believes will provide best example

Question 4

What are the available methods of sample section for:

• Nonstatistical Method
• Statistical Method

Answer 4

_Nonstatistical Method**_

1. Haphazard Sample Selection
2. Block Sample selection

Statistical Method

1. Simple random sample selection
2. Systematic Sample selection
3. Probability proportional to size sample selection

_{** Nonstatistical can use all 5 methods}

Question 5

Explain these sample selection methods:

Block Sample Selection

Haphazard Sample Selection

Answer 5

Block Sample Selection

• Auditor selects items in a sequence; “blocks” a segment of selection
• For example, 100 transactions in March

Haphazard Sample Selection

• Auditor randomly selects items without any bias/conscious decision to why
• No regard to size, source

Question 6

Simple Random Sample Selection

• Explain this approach
• Why choose this method?

Answer 6

• Every item has an equal chance of being included in sample
• Use this method when there is no need to emphasize types of population items

Question 7

Systematic Sample approach

• Explain this approach
• How do auditors calculate the “interval”

Answer 7

Auditor calculates an interval and selects items based on the interval (if interval is 20, will be every 20th item)

Interval = population size/sample size

Question 8

Probability Proportional Size

What are the two approaches that can be used during this sampling method?

Answer 8

• Take sample in which probability of selecting item is proportional to recorded amount
• Divide population into subpopulations, by dollar size, and take larger samples from larger subpopulations

Question 9

What is the occurence rate (exception rate)?

What “exceptions” is the auditor looking for?

Answer 9

Estimation of the percent of items in a population containing a certain characteristic

Look for items with these characteristics:

• Deviations from client’s established controls
• Monetary misstatements in populations of transaction/balance data

Question 10

What are the steps auditors take in applying nonstatistical/statistical audit sampling methods?

Answer 10

1) Plan the Sample
2) Select the sample and perform audit procedures
3) Evaluate the results

Question 11

What steps do auditors take when planning the sample (step 1 of applying sample selection methods)?

Answer 11

1. State objectives of audit test
2. Define attributes and exception conditions of items
3. Define population and sampling unit
4. Determine TER then ARO then EPER
5. Determine the sample size

Question 12

Define these terms:

• Tolerable Exception Rate
• Acceptable risk of overreliance

Answer 12

Tolerable Exception Rate

Highest exception rate the auditor will permit and still conclude control is effective

Acceptable risk of overreliance

Risk that true population exception rate is > than tolerable exception rate after auditor concluded control is effective

Question 13

Define this term:

Estimated population exception rate (EPER)

Answer 13

Advanced estimate made by auditor; how many exceptions are within the population as a whole

Question 14

What 3 things does the auditor take into consideration when deciding appropriate sample size?

• How do these items effect sample size?

Answer 14

Acceptable risk of overreliance (ARO)

• Inverse relationship with sample size
• Higher acceptable risk ; Lower sample size

Tolerable Exception rate (TER)

• Inverse relationship with sample size
• Higher acceptable risk ; Lower sample size

Estimated population exception rate (EPER)

• Direct relationship
• Higher estimated exceptions ; Greater sample size

Question 15

Statistical vs Nonstatistical testing

What is the difference when defining Acceptable Risk of Overreliance?

Answer 15

Statistical

Quanitfied; Usually 5-10%

Nonstatistical

Not quantified; Defined as low, moderate, or high

Question 16

Statistical vs Nonstatistical testing

What is a key difference between the two methods when determining the sample size (last step of planning)?

Answer 16

Statistical

Determined using tables based on ARO, TER, and EPER (see pg. 502; table 15-8)

Nonstatistical

Determined with judgement based on ARO, TER, and EPER

Question 17

Select the sample and perform audit procedures

(step 2 of sample methodology)

What steps do auditors take?

Answer 17

Select the sample

Use appropriate method (block, random etc) to pick from population

Perform the audit procedures

Continue with test of controls and substantive tests

Question 18

What are the steps auditors take when evaluating the results of sample procedures (step 3 of audit sample methodology)?

Answer 18

1. Generalize from the sample to the population
2. Analyze exceptions
3. Decide the acceptability of the population

Question 19

Sample exception rate

• Define this term
• How is it used in evaluating the results of audit sampling?

Answer 19

Sample exception rate

Calculation of actual sample results

= (Sample exceptions) / (Sample size)

Used to help generalize from the audit sample to the population

Question 20

Statistical vs Nonstatistical testing

What are the differences when generalizing from the sample to the population (step in evaluating the results)?

Answer 20

Statistical

Use table based on ARO, Sample size, and # of exceptions found to determine CUER (pg. 503; 15-9)

Nonstatistical

Use Sample Exception Rate and Tolerable Exception rate

Question 21

What is CUER (Upper Precision Limit)?

Answer 21

Upper precision limit

Calculation found during statisitical testing to determine the # of exceptions in the total population

Question 22

Explain how Sample exception rate is used to generalize from the sample to the population. in nonstatistical sampling:

Answer 22

Used to determine sampling error:

Sampling error = (Tolerable exception rate) - (Sample exception rate)

Higher Sampling error = more likely true population exception rate is < tolerable exception rate

Question 23

Decide the acceptability of the Population

If the auditor finds Sampling error (TER - SER) to be too small, what actions should be taken?

Answer 23

1) Revise TER or ARO **

_{** Extra precaution in relaxing TER and ARO (if case goes to court)}

2) Expand the sample size

Increasing sample size may saturate the exceptions found within the selected sample

3) Revise assessed control risk

_{Revise control risk upward; increase substantive test of transactions}