# Shared Flashcard Set

## Details

SU 15
Evidence- Sampling
154
Accounting
06/01/2015

Term
 audit sampling
Definition
 applies an audit procedure to fewer than 100% of the items under audit for the purpose of drawing a conclusion about a characteristic of a balance or transaction class (the population sampled). Sampling may be statistical or nonstatistical.
Term
 judgment (nonstatistical) sampling
Definition
 uses the auditor's subjective judgment to determine the sample size and sample selection.This subjectivity is not always a weakness.
Term
 statistical (probability or random) sampling
Definition
 provides an objective method of determining sample size and selecting the items to be examined.
Term
 sample size
Definition
 # of items examined
Term
 sample selection
Definition
 which items to examine
Term
 effects of judgment sampling
Definition
 The auditor, based on other audit work, may be able to test the most material and risky transactions and emphasize the types of transactions subject to high RMM.
Term
 precision
Definition
 how closely the sample represents the population
Term
 reliability
Definition
 confidence level, which is the % of times the sample will adequately reflect the population
Term
 effects of statistical sampling
Definition
 Unlike judgment sampling, it also provides a means of quantitatively assessing precision and reliability.
Term
 random-based selection
Definition
 primary characteristic of statistical sampling.
Term
 types of random-based selection
Definition
 1. random sampling2. stratified sampling3. monetary-unit sampling4. systematic sampling
Term
 Why do auditors do statistical sampling?
Definition
 It helps the auditor design an efficient sample, measure the sufficiency of the evidence obtained, and evaluate the sample results.
Term
 third standard of field work
Definition
 requires auditors to obtain sufficient appropriate evidence.
Term
 sufficiency
Definition
 measure of the quantity of evidence. Thus, it relates to the design and size of the sample.
Term
 sampling risk
Definition
 Statistical sampling permits the auditor to measure sampling risk and therefore to design more efficient samples.
Term
 Is statistical sampling applicable to tests of controls? Or substantive testing?
Definition
 It is applicable to both.
Term
 tests of controls
Definition
 attribute sampling
Term
 substantive testing
Definition
 variables sampling
Term
 Is audit risk the same as sampling risk?
Definition
 Audit risk includes both uncertainties due to sampling and those due to nonsampling factors.
Term
 sampling risk
Definition
 probability that a properly drawn sample may not be representative of the population. The conclusions from the sample may differ from those made if all the items in the population are examined.
Term
 How is sampling risk related to sample size?
Definition
 Inversely related. As the sample increases, sampling risk decreases.
Term
 How does the auditor control sampling risk?
Definition
 By specifying the acceptable level when developing the sampling plan.
Term
 risk of assessing control risk too low (tests of controls)
Definition
 risk that actual control risk is greater than that indicated by the sample.This risk relates to audit effectiveness and could cause audit failure.. This risk also is termed a Type II error or Beta risk.risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of internal control.
Term
 control risk
Definition
 risk that controls do not prevent or detect material misstatements on a timely basis.
Term
 risk of assessing control risk too high (tests of controls)
Definition
 risk that actual control risk is less than that indicated by the sample.This risk relates to audit efficiency and is likely to result in greater audit effort; could lead to an auditor's overassessment of control risk may lead to an unnecessary extension of substantive procedures.
Term
 Type I error/Alpha risk
Definition
 risk of assessing control risk too high or risk of incorrect acceptance
Term
 Type II error/Beta risk
Definition
 risk of assessing control risk too low or risk of incorrect rejection
Term
 risk of incorrect acceptance (substantive tests)
Definition
 risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated.This risk relates to audit effectiveness and could cause audit failure.
Term
 risk of incorrect rejection (substantive tests)
Definition
 risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not materially misstated. This risk relates to audit efficiency and is likely to result in greater audit effort.
Term
 After an incorrect rejection, what will likely happen?
Definition
 1. The client will assert the fairness of the balance.2. The auditor will perform additional procedures.3. The fairness of the balance will be affirmed.
Term
 When is a high risk of incorrect rejection acceptable?
Definition
 When the cost an effort of selecting additional sample items is low.
Term
 confidence/reliability level
Definition
 complement of the applicable sampling risk factor. If the allowable risk of assessing control risk too low is 5%, the auditor's desired confidence level is 95%.
Term
 nonsampling risk
Definition
 concerns all aspects of audit risk not caused by sampling, such as the auditor's application of inappropriate procedures or his/her inability to recognize misstatements or control deviations.
Term
Definition
 used to decrease nonsampling risk.
Term
 basic steps in a statistical plan
Definition
 1. Determine the objectives of the plan.2. Define the population.3. Determine acceptable levels of sampling risk.4. Calculate the sample size.5. Select the sampling approach.6. Take the sample.7. Evaluate the sample results.8. Document the sampling procedures.
Term
 determine the objectives of the plan
Definition
 1. Test of Controls (ToC)- example is to conclude that a control is reasonably effective.2. Substantive procedure (Sp)- conclude that a balance is not misstated by more than an immaterial amount.
Term
 define the population
Definition
 defining the sampling unit and considering the completeness of the population.ToC- defining the period covered.Sp- identifying individually significant items.
Term
 determine acceptable levels of sampling risk
Definition
 e.g. 5% or 10%.
Term
 calculate the sample size
Definition
 using tables or sample-size formulas.
Term
 stratification
Definition
 In some cases, it is efficient to divide the population into subpopulations or strata.The primary objective of stratification is to minimize variability.B/c variance w/in each subpopulation or stratum is lower than in the population as a whole, the auditor may sample a smaller number of items while holding the allowance for sampling risk and the confidence level constant.
Term
 random sampling
Definition
 each item in the population has an equal and nonzero probability of selection. Random selection is usually accomplished by generating random numbers from a random number table or computer program and tracing them to associated documents or items in the population.
Term
 systematic sampling
Definition
 begins w/selecting a random start and then taking every nth item in the population.
Term
 How do you compute the value of n? (systematic sampling)
Definition
 By dividing the population by the number of sampling units.
Term
 systematic sampling (card 2)
Definition
 The random start should be in the first interval. B/c the sampling technique only requires counting in the population, no correspondence btwn. random numbers and the items in the population is necessary as in random number sampling.
Term
 assumption of systematic sampling plan
Definition
 assumes that the items are arranged randomly in the population. If this is not true, a random selection method should be used.
Term
 block/cluster sampling
Definition
 randomly selects groups of items as the sampling units rather than individual items
Term
Definition
 avoids the needs to assign random numbers to individual items in the population.
Term
Definition
 Variability of items within the blocks may not be representative of the variability within the population.
Term
 take the sample
Definition
 Select items to be evaluated.
Term
 evaluate the sample results
Definition
Term
 document the sampling procedures
Definition
 Prepare appropriate working papers.
Term
 In general, the sample size is dependent upon...
Definition
 1. The population size.2. The acceptable risk.3. The variability in the population.4. The tolerable misstatement for variables sampling or the tolerable deviation rate for attribute sampling.
Term
 population size
Definition
 As population size increases, the sample increases but at a decreasing rate.
Term
 acceptable risk
Definition
 (1 - confidence level). The smaller the acceptable risk, the larger the sample size.
Term
 variability in the population
Definition
 More variability = larger sample size.more variability in the population, measured by the standard deviation for variables sampling or the expected deviation rate for attribute sampling, the larger the sample size.
Term
 tolerable misstatement for variables sampling or the tolerable deviation rate for attribute sampling
Definition
 Smaller acceptable misstatement = larger sample size.
Term
 attribute sampling
Definition
 tests binary, Y/N, error/nonerror questions; used to test the effectiveness of controls (tests of controls) because it can estimate a rate of occurrence of control deviations in a population.
Term
 failure (deviation) rate in the application of the control
Definition
 used to project the failure rate to the whole population.
Term
 By specifying a tolerable deviation rate...
Definition
 a preliminary estimate of the population failure rate, and the risk of assessing control risk too low, the auditor can determine the appropriate sample size by consulting a table.
Term
 variables sampling
Definition
 applies to \$ values or other quantities in contrast with the binary propositions tested by attribute sampling
Term
 mean-by-unit
Definition
 averages the audit amounts of the sample items and multiplies the average by the # of items in the population to estimate the population amount.An allowance for sampling risk is then calculated.
Term
 sampling risk
Definition
 achieved precision at the desired level of confidence based on the normal distribution
Term
 difference estimation (of population misstatement)
Definition
 1. Determines differences between the audit and recorded amounts of items in the sample.2. Adds the differences.3. Calculates the mean difference.4. Multiplies the mean by the number of items in the population.An allowance for sampling risk is then calculated.
Term
 ratio estimation
Definition
 similar to difference estimation except that it estimates the population misstatement by multiplying the recorded amount of the population by the ratio of the total audit amount of the sample items to their total recorded amount.
Term
 monetary-unit sampling (MUS) or probability-proportional-to-size (PPS) or dollar-unit sampling (DUS)
Definition
 uses the dollar or another monetary unit as the sampling unit.MUS is appropriate for testing account balances (typically assets) for overstatement when some items may be far larger than others in the population.
Term
 MUS and stratification
Definition
 MUS stratifies the population because the larger account balances have a greater chance of being selected. MUS is most useful if few misstatements are expected.
Term
 Does MUS require the use of a measure of dispersion?
Definition
 No, it does not require this to determine sample size or interpret the results.
Term
 attribute sampling & evidence
Definition
 Attribute sampling requires the existence of evidence indicating performance of the control being tested.It is most helpful for a large population of documentary evidence. The performance of any task that leaves evidence of its execution is suitable for attribute sampling.
Term
 examples of activities subject to controls that may be tested using attribute sampling
Definition
 BillingVoucher processingPayrollInventory pricing
Term
 steps for testing controls
Definition
 1. Define the objectives of the plan.2. Define the population.3. Define the deviation conditions.4. Determine the sample size.5. Perform the sampling plan.
Term
 define the objectives of the plan
Definition
 The auditor should clearly state what is to be accomplished, for example, to determine that the deviation rate from an approval process for a transaction is at an acceptable level.
Term
 define the population
Definition
 The population is the focus of interest to reach conclusions about all the items in the population.
Term
 define the deviation conditions
Definition
 Careful definition of the attribute is important so that deviations (departures) from the control may be determined and the sample items properly evaluated.
Term
 determine the sample size
Definition
 Four factors determine the necessary sample size:1. Allowable risk of assessing control risk too low.2. The tolerable deviation rate.3. The expected population deviation rate.4. Population size.Tables ordinarily are used to calculate the appropriate sample size based on these factors.1. Allowable risk of assessing control risk too low.2. Tolerable deviation rate.3. Expected popular deviation rate.4. Population size.
Term
 allowable risk of assessing control risk too low
Definition
 Higher allowable risk = smaller sample size.
Term
 tolerable deviation rate
Definition
 maximum rate of deviations from the prescribed control that thee auditor is willing to accept the altering the planned assessed level of control risk
Term
 expected popular deviation rate
Definition
 estimate of the deviation rate in the current population is necessary to determine the appropriate sample size.
Term
 usual risk specified by auditors
Definition
 5% or 10%, though the auditor can specify other levels of risk, but the tables most often presented use only these two.
Term
 deviations
Definition
 increase the likelihood of misstatements in the accounting records but do not always cause misstatements.
Term
 When is sampling inappropriate?
Definition
 When no deviations from controls can be tolerated.
Term
 Should the expected rate be more or less than the tolerable rate?
Definition
 Less than the tolerable rate. Otherwise, tests of controls should be omitted.
Term
 population size
Definition
 The total # of sampling units in the population should be known. However, the sample size is relatively insensitive to size changes in large populations.
Term
 standard table
Definition
 for populations over 5,000. Use of the standard tables for sampling plans based on a smaller population size is a conservative approach b/c the sample size will be overstated. Hence, the risk of assessing control risk too low is not affected.
Term
 change in population compared to sample size
Definition
 A change in the size of the population has a very small effect on the require sample size when the population is large.
Term
 perform the sampling plan
Definition
 A random sample should be taken. Each item in the population should have an equal and nonzero change of being selected. A random number table or a computer program can be used to identify the items to be selected if a correspondence can be established between the random number and the item in the population.
Term
 statistical consideration for sampling plan
Definition
 A statistical consideration is whether to use sampling with or without replacement, which results in a conservative sample size b/c a slightly larger sample size than necessary will be indicated, However, in practice, auditor normally sample without replacement. No additional evidence is obtained by choosing the same item more than once.
Term
 sampling without replacement
Definition
 means that a population item cannot be selected again after it is selected in the sampling process.
Term
 evaluate and document sample results
Definition
 The steps include calculating the sample deviation rate and determining the achieved upper deviation limit.
Term
 sample deviation rate
Definition
 sample deviation rate = # of deviations observed / sample size.This rate is the best estimate of the population deviation rate; not a perfect indicator, but useful in developing a confidence level.
Term
 achieved upper deviation limit
Definition
 based on the sample size and the number of deviations discovered.The intersection of the sample size and the number of deviations indicates the upper achieved deviation level.
Term
 allowance for sampling risk (achieved precision)
Definition
 difference between achieved upper deviation limit determined from a standard table and the sample rate is the allowance for sampling risk
Term
 When does the sample not support the planned assessed level of control risk?
Definition
 When the sample deviation rate exceeds the expected population deviation rare, the achieved upper deviation limit will exceed the tolerable rate at the given risk level.
Term
 When the sample deviation rate does not exceed the expected population deviation rate...
Definition
 the achieved upper deviation limit will not exceed the tolerable rate at the given risk level.
Term
 analyzing deviations
Definition
 Each deviation should be analyzed to determine its nature, importance, and probable cause.
Term
 sampling
Definition
 provides a vehicle for forming a conclusion concerning the overall population
Term
 Can sampling be used a substitute for good judgment?
Definition
 No.
Term
 true state of the population
Definition
 actual rate of deviations in the population
Term
 If the true deviation rate is less than the tolerable rate...
Definition
 the auditor should have an expectation of the effectiveness of the control tested.
Term
 If the true deviation rate exceeds the tolerable rate...
Definition
 the auditor should not have an expectation of the effectiveness of the control tested.
Term
 Auditor's estimate based on the sampling is...
Definition
 the auditor's conclusion about deviation rate.
Term
 Cell I
Definition
 represents a correct decision to have an expectation of the effectiveness of the control tested. The population actually has a deviation rate less than the tolerable rate.
Term
 Cell II
Definition
 represents an incorrect decision not to have an expectation of the effectiveness of control tested.The population has an acceptable deviation rate, but, because of sampling risk, the sample indicates that the pop. deviation rate is greater than the tolerable rate. So, though the control is effective, substantive testing is expanded. Thus, it relates to audit efficiency (Type I error/Alpha risk).
Term
 Cell III
Definition
 represents an incorrect decision to have an expectation of the effectiveness of the control tested. The population has a greater than acceptable deviation rate, but the sample indicates that the deviation rate is less than the tolerable rate. The auditor expects the control to be more effective than it is, audit failure could result (Type II error/Beta risk).
Term
 Cell IV
Definition
 represents a correct decision not to have an expectation of the effectiveness of the control tested. The population has an unacceptable deviation rate, and the sample properly reflects this condition.
Term
 sampling for substantive testing
Definition
 provides evidence about whether a financial statement assertion about an account balance is materially misstated.The amount is expected to represent the true balance of the receivables, which is not known. By taking a sample and drawing a conclusion about the population, the auditor either supports or rejects the reported number.
Term
 steps for mean-per-unit sampling
Definition
 1. Define the objectives of the plan.2. Define the population and the sampling unit.3. Determine the sample size.4. Select the sample, execute the plan, and evaluate and document the results.
Term
 define the objectives of the plan
Definition
 The auditor intends to estimate the carrying amount of the population.
Term
 define the population and the sampling unit
Definition
 This is the balance or class of transactions and the support detail under audit.
Term
 sample size formula
Definition
 2n = [(C * S * N) / A]
Term
 n (sample size formula)
Definition
 sample size
Term
 C (sample size formula)
Definition
 confidence coefficient or number of standard deviations related to the required confidence level (1 - risk of incorrect rejection).Based on the risk of incorrect rejection, though the more important risk is the risk of incorrect acceptance.
Term
 S (sample size formula)
Definition
 standard deviation of the population (an estimate based on a pilot sample or from the prior year's sample)
Term
 N (sample size formula)
Definition
 number of items in the population
Term
 A (sample size formula)
Definition
 allocation for sampling risk. This allowance is total. In some representations, the allowance (precision) is stated in the denominator on a per-item basis (A / N), and N would not be included in the formula.
Term
 allowance for sampling risk/precision or confidence interval
Definition
 interval around the sample statistic that is expected to include the true balance of the population at the specified confidence level.
Term
 When using classical variables sampling...
Definition
 the allowance for sampling risk is calculated based on the normal distribution.
Term
 tolerable misstatement
Definition
 maximum misstatement that may exist without causing the financial statements to be materially misstated. Cannot exceed the auditor's preliminary judgments about materiality.
Term
 Which risk is more important to auditors? The risk of incorrect acceptance? Or incorrect rejection?
Definition
 Risk of incorrect acceptance.
Term
 allowance for sampling risk formula
Definition
 allowance for sampling risk = tolerable misstatement * ratio of desired allowance for sampling risk to tolerable misstatement
Term
 The ratio of desired allowance for sampling risk to tolerable misstatement is based on...
Definition
 allowable risks specified by the auditor.
Term
 select the sample, execute the plan, and evaluate and document the results
Definition
 1. Randomly select and audit the accounts.2. Calculate the average confirmed A/R account.3. Calculate the sample standard deviation.4. Evaluate the sample results.
Term
 best estimate of population balance formula
Definition
 best estimate of population balance = average A/R amount based on sample * # of items in population.
Term
 allowance for sampling risk (A) formula
Definition
 A = [(C * S * N) / (sq. root of n)]
Term
 monetary-unit sampling (MUS) approach to variables sampling
Definition
 hybrid method that uses attribute sampling methods to estimate monetary amounts.
Term
 Poisson distribution
Definition
 used in attribute sampling to approximate the binomial distribution; MUS is based on it.
Term
 What does MUS use as the sampling unit?
Definition
 A monetary unit.
Term
 How does MUS work?
Definition
 MUS gives each monetary unit in the population an equal chance of selection. As a practical matter, however, the auditor does not examine an individual monetary unit but uses it to identify an entire transaction or balance to audit (the logical sampling unit).
Term
 When is MUS appropriate?
Definition
 MUS is appropriate for account balances that may include only a few overstated items, such as may be expected in inventory and receivables.
Term
 Is MUS useful for overstatements? Or understatements? Or both?
Definition
 Only for overstatements because a systematic selection method is applied (every nth monetary unit is selected). Accordingly, the larger the transaction or balance, the more likely it will be selected.
Term
 conclusions drawn from MUS
Definition
 MUS is used to reach a conclusion regarding the probability of overstating an account balance by a specified monetary amount.
Term
Definition
 1. The largest items are selecting for testing.2. It is ideal for testing for overstatement.3. Small sample sizes may be considered, especially when no misstatements are expected.4. It is relatively easy to apply, especially if no misstatements are discovered.5. The sample size and sample evaluation can be calculated without dependence on the estimated variation (standard deviation) of the population.6. The sample selection process may begin even before the complete population is available for testing.
Term
Definition
 1. Items with zero or negative balances have no chance of selection.2. It is useful only for detecting overstatement errors.3. Sample sizes become relatively large if a significant amount of misstatement is expected.4. The calculated allowance for sampling risk tends to be overstated when a significant amount of misstatement is found in the sample. This is an inherent limitation of MUS.
Term
 steps for MUS
Definition
 The steps in MUS are similar to those of other sampling methods:1. Determine the objective of the plan.2. Define the population and sampling unit.3. Determine the sampling interval and sample size.4. Select the sample.5. Execute the sampling plan.6. Evaluate and document the results.
Term
 sample size
Definition
 recorded amount of population / sampling interval (SI)
Term
 sampling interval (SI)
Definition
 SI = TM / CFfunction of the risk of incorrect acceptance and tolerable misstatement (TM). SI is determined by dividing TM by a confidence factor (CF) associated with the risk level.
Term
 systematic sampling
Definition
 discussed in the extension of the example that follows.
Term
 If no misstatements are discovered...
Definition
 the auditor can form the following conclusion: that the auditor is (1 - risk of incorrect acceptance) confident that the recorded A/R balance is not overstated by more than the tolerable misstatement.Also, b/c the sample has no misstatements, it is concluded that the population has no misstatements, but the sampling risk is needed b/c the sample likely imperfectly represents the population.
Term
 When has the objective of the audit test been met?
Definition
 When the allowance for sampling risk is less than or equal to the TM.
Term
 expanded sampling interval (SI) formula
Definition
 SI = [TM - (AM * EF)] / CFAM = anticipated misstatementEF = appropriate for the risk of incorrect acceptance
Term
 use of the SI
Definition
 The SI is used to select logical sampling units from the population. A monetary unit identifies a logical sampling unit.
Term
 cumulative balance & sampling
Definition
 When the cumulative balance is equal to or greater than the dollar selected, the account is selected b/c it contains the sampling unit.
Term
 If an account contains two or more logical sampling units...
Definition
 it is selected but given no special consideration.
Term
 evaluating and documenting the results
Definition
 The evaluation process depends on whether any misstatements are found in sample. Project misstatements from the sample to the population. Determine the allowance for sampling risk. Calculate the upper misstatement limit.
Term
 allowance for sampling risk (final formula; used evaluating and documenting the results)
Definition
 allowance for sampling risk = basic precision (BP) + incremental allowance (IA)
Term
 upper misstatement limit (UML)
Definition
 UML = projected misstatement + allowance for sampling risk
Term
 If no overstatement errors are discovered...
Definition
 the UML equals BP because...The projected misstatement to the population is \$0.The allowance for sampling risk equals BA (IA is \$0).
Term
 basic precision (BP)
Definition
 BP = SI * CFBP is the same as when no misstatements are found (SI * CF).
Term
 If some overstatement errors are discovered...
Definition
 the evaluation process is more involved but follows that presented above.
Term
 tainting
Definition
 Because each selected dollar represents a group of dollars (SI), the % of misstatement in the logical sampling unit (account selected) is the % of misstatement of the SI. This holds when the RA < SI.
Term
 When is tainting not calculated?
Definition
 When the RA of the account selected equals or exceeds the SI, the projected misstatement is the actual misstatement for the SI and no tainting is calculated.
Term
 tainting %
Definition
 tainting % = (RA - AA) / RARA = recorded amountAA = audit amount
Term
 project misstatement
Definition
 SI * tainting %
Term
 incremental allowance (IA)
Definition
 based on projected misstatements related to logical sampling units less than SI.
Term
 ranking projected misstatements
Definition
 Projected misstatements are ranked by size (only when RA < SI). Each projected misstatement is multiplied by a factor that gives greater weights to the larger amounts.
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