Term

Definition
Because examining 100% of accounts is too costly and not a timely action. An auditor needs an efficient and effective way to reach a judgment about a population that is too large to examine completely. 


Term
Timeline/Trends in Sampling 

Definition
1970s/80s  Stat sampling tech's for auditing were refined and applied widely 1990's  competitive fee pressures led to lower sample sizes and cutting corners SOX  stat sampling rebounded in importance 


Term
Pros and Cons of Nonstatistical Sampling 

Definition
Pros: doesn't require add. software, can be based on auditor's prior expectations about errors, less time to plan, select and evaluate the sample.
Con  requires audit judgment to determine app. sample size, doesn't provide an objective way to control sapling risk 


Term
Pros and Cons of Statistical Sampling 

Definition
Pros  Helps the auditor design an efficient sample, measure sufficiency, evaluate results by providing an objective measure of sampling risk, efficiencies through computerized selection, sample inferences based on stat theory.
Cons  Requires knowledge of stat sampling methods or special sampling software, training costs, requires definitions of acceptable risk and sample objectives to be made in advance. 


Term

Definition
Population  all of the sampling units make up the population
Sample  the individual items to be tested
Duh 


Term
Attribute Sampling b. Substantive sampling of balances 

Definition
Attribute  commonly used to test Internal Controls
Substantive  Direct test on accounts and F.S. 


Term

Definition
The risk of concluding that the controls are effective when they are not effective. Often set the same as audit risk because the auditor's assessment of internal controls determines the nature and extent of other testing. The auditor tests only significant controls. 


Term
Risk of incorrect acceptance vs Risk of Incorrect rejection 

Definition
Incorrect Acceptance  offers clean opinion when there is a misstatement  MOST SERIOUS
Incorrect Rejection  Saying there is a mistake but there isn't 


Term
How is Statistical Intuition Poor? 

Definition
Sampling risk goes DOWN as the sample size goes UP and ALL people tend to have a poor intuitive feel for this relationship....ex: 40/50 students and 4/5 students usually mean the same thing to people where as they have completely different confidence levels in terms of being representative of a population. 


Term
Auditors intuition for sampling... 

Definition
tend to select sample sizes that are too small to provide the desired level of assurance because of costs and meeting budgets. Therefore  they should used software to determine sample sizes. 


Term
Statistical Fallacy and Fact 

Definition
Fallacy  Just cover the biggest items and skip the rest.. OBVIOUSLY NOT TRUE!
FACT  It is a good idea to test individually significant items, but a valid sample should include a representative CROSSSECTION of ALL items  send confirmations to some customers of the client having low balances too (a lot of low balances can add up to a lot) 


Term
Attribute Sampling asks What kind of Questions? 

Definition
"Yes/No"  does the control work, or not? (IC Testing) EX/ Was Authorization documented? Were customers billed before goods were shipped? Was there compliance laws, regulations, or policies? 


Term
What helped Attribute sampling increase in importance again? 

Definition
Implementation of SOX 404 and PCAOB Auditing Standards. 


Term
3 Parameters needed for an effective attribute sample: 

Definition
1. Sampling risk (risk of concluding controls are effective when they aren't AND risk of assessing control risk too low)  Risk that it doesn't represent population.
2. Tolerable failure Rate "Tolerable Deviation Rate"
3. Expected Failure rate  How frequently do you expect to see control fail? 


Term
Tolerable failure/deviation rate: 

Definition
The level at which the control's failure to operate would change the auditor's planned assessment of control risk in performing tests of account balances. Must be set in advance in order to determine sample size. 


Term

Definition
It is likely that there are times a control may failr or be bypassed  if people are in a hurry or careless or not competent. An auditor has evidence on the rate at which a particular control fails based on past experience. 


Term
Attribute Sample Size Tables 

Definition
there is 5% and 10% charts for sampling risk
Expected deviation rate is the range of numbers vertical on the left...
The tolerable deviation rate is the percentage at the top going horizontal
the sample size is the number in the chart
The (#) is the number of times you should expect to see it fail 


Term
When looking for upper bound of the deviation rate.. 

Definition
USE the attribute estimation sample evaluation table... Find the sample size on the left vertical column.. (but sure to look at the table with the right confidence level/sample size) then find the number of control deviations (fails) found.. and then you will find the percentage. EX  you will then be 95% confident that the control won't fail ___% of the the time. 


Term
How you know if the deviation rate is acceptable/Unacceptable  

Definition
Unacceptable  if the upper bound exceeds maximum tolerable deviation rate. Auditors should then test a compensation control or adjust the nature, timing, and/or extent of the related substantive testing of the F.S. accts as the controls aren't working at a satisfactory level. 


Term
Problems with Isolated Exceptions in sample testing 

Definition
1. It can be tempting to rationalize away isolated errors in a sample 2. SAMPLING ERRORS MUST BE PROJECTED TO THE POPULATION 3. Auditor certainly should investigate reasons for detected errors (qualitative evaluation) 


Term

Definition
When control failures are found, they should be analyzed qualitatively as well as quantitatively  auditor should try to determine whether the failures were 1) Intentional/Unintentional 2) Random/Systematic 3) Had a direct dollar effect on the account balance 4) were of such magnitude that a material dollar amount of errors could occur and not be detected. 


Term

Definition
Every item in the population has an equal chance of being selected. Unpredictable is desired. 


Term
Systematic Sample with Random Start 

Definition
Selecting groups of students from a class  take every 5th student in the class (usually has a pattern) 


Term
Probabilityproportionaltosize (PPS)/monetary unit Sampling (MUS) 

Definition
Gives all clients the chance of being selected, BUT it is more likely a bigger client is chosen. 


Term
3 Types of Stat Sample Selection Methods 

Definition
1. True Random Sample 2. Systematic sample with random Start 3. PPS/MUS 


Term

Definition
Does NOT measure or control for sampling risk! But, can project detected misstatements. Does not have statistical confidence, test samples from all populations. Test all sig. items and other randomly selected items with particular characteristics. 


Term
Example of projecting nonstatistical results.. 

Definition
take the amount of misstatements of the sample for a category.. divide by the total amount tested in the sample... and then multiply that number by the total amount for that category in the populations  this gives you the projected total misstatement! 


Term

Definition
IR (inherent Risk) * CR (chance that internal controls won't work and auditors will miss it) * DR (detection risk 

