Audit Practice and Procedures II
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Questions and Answers

Which term specifically refers to a departure from prescribed controls?

  • Deviation (correct)
  • Auditing
  • Sampling
  • Exception

What is the first phase that an auditor must undertake when applying nonstatistical sampling?

  • Conduct test procedures
  • Select the sample
  • Plan the sample (correct)
  • Evaluate the results

In the context of audit testing, what is the primary objective related to monetary misstatements?

  • Identify exceptions in the control processes
  • Determine if transactions contain monetary misstatements (correct)
  • Assess the effectiveness of internal controls
  • Test the performance of audit procedures

When should audit sampling apply according to the audit program?

<p>When conclusions are to be drawn from a sample about a population (D)</p> Signup and view all the answers

What would typically be included in the objectives of tests of controls during the sales and collection cycle?

<p>Test the effectiveness of internal controls over sales (A)</p> Signup and view all the answers

Which step is NOT part of the planning phase in nonstatistical sampling?

<p>Select the sample (D)</p> Signup and view all the answers

Which of the following is an example of a test of control?

<p>Reviewing sales transactions for large amounts (C)</p> Signup and view all the answers

What should an auditor examine to ensure audit sampling applies correctly?

<p>The audit program and selected procedures (A)</p> Signup and view all the answers

What is the primary objective when an auditor selects a sample from a population?

<p>To obtain a sample that is representative of the population (D)</p> Signup and view all the answers

What is sampling risk in the context of audit sampling?

<p>The risk that a sample does not accurately represent the population (C)</p> Signup and view all the answers

How can auditors effectively control sampling risk?

<p>By adjusting sample size and selecting items appropriately (B)</p> Signup and view all the answers

Which of the following best describes nonsampling risk?

<p>The risk arising from the auditor's inability to recognize exceptions (A)</p> Signup and view all the answers

What is a key differentiation between statistical and nonstatistical sampling methods?

<p>Statistical sampling incorporates quantifiable methods of evaluating samples (C)</p> Signup and view all the answers

What could lead to an incorrect conclusion due to sampling error?

<p>Using an insufficient sample size (A)</p> Signup and view all the answers

What role does careful design play in the sampling process for auditors?

<p>It increases the likelihood of obtaining a representative sample (B)</p> Signup and view all the answers

What is a common misconception regarding audit sampling?

<p>Auditors can always assess the representativeness of a sample after testing (C)</p> Signup and view all the answers

What is a significant drawback of haphazard sample selection?

<p>It may lead to unintentional bias in selection. (D)</p> Signup and view all the answers

Which statement correctly describes block sample selection?

<p>It selects items sequentially after choosing the first in a block. (D)</p> Signup and view all the answers

What does the exception rate indicate in an auditing context?

<p>The percentage of items with a characteristic of interest. (B)</p> Signup and view all the answers

Which of the following is NOT a type of exception that auditors are interested in?

<p>Errors in the population of employee emails. (C)</p> Signup and view all the answers

In the context of sampling, what does the term 'occurrence rate' refer to?

<p>The rate of items in the population with a specified characteristic. (D)</p> Signup and view all the answers

What is the main purpose of conducting tests of controls and substantive tests in auditing?

<p>To increase confidence in the effectiveness of controls and the accuracy of transactions. (C)</p> Signup and view all the answers

How can an auditor estimate the exception rate in a population?

<p>Through random sampling of a sufficient size. (D)</p> Signup and view all the answers

How many blocks can auditors choose from in block sample selection?

<p>An unlimited number of blocks with varying item counts. (A)</p> Signup and view all the answers

How is calculated sampling error determined?

<p>By subtracting the sample exception rate from the tolerable exception rate (D)</p> Signup and view all the answers

If an auditor finds no exceptions in a sample with a tolerable exception rate of 5 percent, what is the calculated sampling error?

<p>5 percent (A)</p> Signup and view all the answers

What does a low calculated sampling error suggest about the true population exception rate?

<p>It is likely less than or equal to the tolerable exception rate. (A)</p> Signup and view all the answers

What is the primary statistical sampling method used for tests of controls?

<p>Attributes sampling (B)</p> Signup and view all the answers

What do sampling distributions allow auditors to do?

<p>Make probability statements about the representativeness of the sample (D)</p> Signup and view all the answers

What is an attribute in the context of attributes statistical sampling?

<p>A characteristic being tested for in the population (C)</p> Signup and view all the answers

What distinguishes attributes sampling from nonstatistical sampling?

<p>Attributes sampling involves the calculation of initial sample sizes using statistical probability tables. (B)</p> Signup and view all the answers

What is the significance of calculating estimated upper exception rates?

<p>To compare sample findings with tolerable exception rates (B)</p> Signup and view all the answers

What is the primary purpose of tracing shipping documents to duplicate sales invoices?

<p>To test the control over invoicing and shipping processes (C)</p> Signup and view all the answers

Which sampling method might be least effective in preventing client alteration of sample items?

<p>Non-probabilistic sampling (D)</p> Signup and view all the answers

What does the Sample Exception Rate (SER) represent?

<p>The proportion of exceptions in relation to the sample size (A)</p> Signup and view all the answers

Which of the following is NOT a recommended procedure when selecting a sample?

<p>Inform the client about the selected sample well in advance (C)</p> Signup and view all the answers

When conducting substantive tests of transactions, how should the auditor compare quantities?

<p>By checking if they are identical on shipping documents and invoices (D)</p> Signup and view all the answers

What is a crucial step after completing audit procedures for a sampling application?

<p>Document the tests and results for review (B)</p> Signup and view all the answers

Which approach is most effective in measuring sampling risk?

<p>Using statistical sampling techniques (D)</p> Signup and view all the answers

How should an auditor respond if they find multiple exceptions in their sample results?

<p>Consider the implications on the overall audit risk (C)</p> Signup and view all the answers

What defines attributes sampling based on the binomial distribution?

<p>It categorizes samples into two possible values. (B)</p> Signup and view all the answers

Which sampling method is mandated for statistical sampling?

<p>Systematic sampling (A)</p> Signup and view all the answers

What is the purpose of calculating an upper precision limit (CUER) in attributes sampling?

<p>To generalize results from the sample to the population. (D)</p> Signup and view all the answers

Which of the following is NOT one of the eight balance-related audit objectives for accounts receivable?

<p>Accurate recording of transactions (B)</p> Signup and view all the answers

Which audit objective focuses on ensuring recorded accounts receivable actually exist?

<p>Existence (C)</p> Signup and view all the answers

What is the first test auditors typically perform according to the balance-related audit objectives?

<p>Testing the aged trial balance for detail tie-in (A)</p> Signup and view all the answers

Which auditing procedure is deemed most important for confirming the existence of recorded accounts receivable?

<p>Confirmation of customers' balances (D)</p> Signup and view all the answers

Which of the following accurately describes the realization value objective for accounts receivable?

<p>Accounts receivable should be adjusted for potential bad debts. (D)</p> Signup and view all the answers

Flashcards

Audit Sampling

Selecting and reviewing less than a complete set of items, aiming for representative results about the larger group.

Representative Sample

A sample that accurately reflects the characteristics of the total group.

Sampling Risk

The risk of making a wrong decision because your small sample group is not fairly representing the bigger group.

Nonsampling Risk

Errors due to the auditor, such as overlooking issues or using bad testing practices, not the sample itself.

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Statistical Sampling

Audit sampling that uses mathematical probability to create the sample.

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Nonstatistical Sampling

Audit sampling not based on mathematical probability; based on the auditor's judgment.

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Sample Size Adjustment

Changing the number of items reviewed to reduce sampling risk.

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Sample Selection Method

The specific way to choose audit items in a sample.

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Nonprobabilistic Sampling

Samples chosen without using mathematical probabilities to ensure representation. This makes it harder to judge how well the sample represents the whole population.

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Haphazard Sampling

Picking items without any conscious bias. It tries to be random, but it's hard to be completely unbiased.

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Block Sampling

Picking items in a continuous sequence, like grabbing every 10 sales transactions in a row. It's efficient, but might not represent the whole population.

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Exception Rate

The percentage of items in a population with a specific characteristic or error. It tells you how often something is wrong.

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Deviations from Controls

Exceptions or errors that are not following the company's own rules and procedures.

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Monetary Misstatements

Financial errors in transactions or account balances, like recording an invoice for the wrong amount.

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Estimating Population Exception Rate

Using the exception rate found in the sample to calculate the likely exception rate for the entire population.

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Sample vs. Population

The sample is a small group representing the larger group called the population. Auditors use the information from the sample to make assumptions about the whole population.

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What are the objectives of audit tests?

Audit tests aim to either assess the effectiveness of internal controls or identify monetary errors in transactions within a specific business cycle.

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What are the three phases of audit sampling?

  1. Planning the sample: defining the objectives and choosing sampling methods.
  2. Selecting and performing procedures: picking items and conducting tests.
  3. Evaluating results: analyzing the findings and drawing conclusions.
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When does audit sampling apply?

Audit sampling is used when the auditor wishes to draw conclusions about a population of transactions or balances based on a smaller sample.

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What is a deviation?

A deviation is a specific instance where prescribed controls have not been followed.

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What is an exception?

An exception can be either a deviation from controls or a monetary inaccuracy, regardless of whether it was intentional or not.

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What is the first step in planning an audit sample?

The first step is to clearly state the objectives of the audit test in relation to the specific transaction cycle being examined.

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What are the objectives of tests of controls?

Tests of controls aim to assess how effectively internal controls are operating to prevent or detect errors.

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What are the objectives of substantive tests of transactions?

Substantive tests of transactions focus on finding monetary errors within the transactions being examined.

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Trace Shipping Documents

Checking if each shipping document has a matching sales invoice to ensure all shipments were properly recorded.

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Compare Quantity on Documents

Verifying that the quantities listed on shipping documents match those on the corresponding sales invoices.

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Sample Exception Rate (SER)

The percentage of items in the sample that have errors or don't follow the rules.

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Generalize from Sample

Using the results from the sample to make an educated guess about the entire group being audited.

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Document Audit Results

Keeping a detailed record of all audit findings, including the sample used and any exceptions found.

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Calculated Sampling Error

The difference between the tolerable exception rate (TER) and the sample exception rate (SER). It helps determine if the true population exception rate is acceptable.

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Tolerable Exception Rate (TER)

The maximum acceptable exception rate that the auditor is willing to tolerate in the population.

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Attributes Sampling (Statistical)

A statistical method used to evaluate the rate of exceptions in a population based on a sample. It uses probability to make inferences.

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Sampling Distribution

A distribution of all possible sample results that could be obtained from a population of a specific size.

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Statistical Inferences

Conclusions or judgments about the population based on the results of the sample.

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Probability Statements

Statements about the likelihood of a specific sample outcome occurring based on the sampling distribution.

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Representativeness of the Sample

How well the sample reflects the characteristics of the population.

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Attributes Sampling

A statistical sampling method used in auditing where each item in the population can be classified as either having or not having a specific characteristic. For example, a control deviation or no control deviation.

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Upper Precision Limit (CUER)

The maximum expected deviation rate in a population, calculated based on the sample results and a specified Acceptable Risk of Overreliance (ARO). It's a statistical estimate of the true deviation rate.

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Detail Tie-in

An audit objective ensuring that the information on an aged trial balance matches the related master file and general ledger, verifying consistency and accuracy across different records.

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Existence (Accounts Receivable)

An audit objective confirming that recorded accounts receivable actually exist, Verifying that the balances are not fictitious or inflated.

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Completeness (Accounts Receivable)

An audit objective ensuring that all existing accounts receivable are included in the records, Verifying that no transactions are missing or omitted.

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Accuracy (Accounts Receivable)

An audit objective verifying that accounts receivable balances are correctly stated, Checking for potential errors in amounts, discounts, or other calculations.

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Classification (Accounts Receivable)

An audit objective ensuring that accounts receivable are appropriately categorized, For example, verifying that each account belongs to the correct customer type.

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Cutoff (Accounts Receivable)

An audit objective ensuring that transactions are recorded in the correct accounting period, Verifying whether revenue or expenses are properly recognized.

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Study Notes

Audit Practice and Procedures II

  • Audit sampling is defined as the selection and evaluation of less than 100 percent of the population to be representative of the entire population. Auditors aim for a reasonable basis for conclusions about the population.
  • A representative sample ensures the characteristics of the sample mirror those of the population.
  • In practice, auditors can't definitively know if a sample is representative, even after testing. The only certainty comes from auditing the entire population.
  • Auditors can increase the likelihood of a representative sample by carefully designing the sampling process, the selection process, and evaluating the sample results.
  • Sampling risk involves the chance that an auditor arrives at an incorrect conclusion because the sample isn't representative of the population. This risk stems from testing less than the full population.
  • Auditors can control sampling risk by adjusting the sample size and using appropriate sample selection methods.
  • Non-sampling risk is unrelated to the sample; instead, it stems from the auditor's human error. This includes failing to identify exceptions or using ineffective audit procedures.

Statistical Versus Nonstatistical Sampling

  • Audit sampling methods fall into statistical and nonstatistical categories. Both follow a three-phase approach: planning, selection and performing the tests, evaluating results
  • In statistical sampling, auditors quantify sampling risk during planning and evaluation, whereas nonstatistical sampling does not.
  • Statistical sampling uses mathematical rules for calculations in both steps, whereas nonstatistical sampling relies on the auditor's judgment.
  • Statistical sampling relies on previously calculated probabilities for reliable results.

Probabilistic Versus Nonprobabilistic Sample Selection

  • Probabilistic sample selection chooses samples where each population item has a known chance of inclusion. Nonprobabilistic methods approximate a random approach.

  • Probabilistic methods include simple random sample selection, systematic sample selection, and probability proportional to size sample selection.

  • Nonprobabilistic methods include haphazard and block sample selection.

Audit Sampling for Exception Rates

  • Auditors use sampling in tests of controls and substantive tests to determine if the rate of monetary errors is within tolerance limits.. They estimate the occurrence rate (exception rate) of attributes of interest.

Applying Statistical and Nonstatistical Sampling

  • Auditing standards allow both statistical or nonstatistical methods, but applying either with due care is essential.
  • When using statistical sampling, the sample selection must be probabilistic.
  • Using nonstatistical evaluations does not necessitate probabilistic sampling.

Plan the Sample

  • Auditors must state objectives in terms of the transaction cycle.
  • Auditors must decide whether audit sampling applies, defining attributes and exception conditions and the population to examine.

Select the Sample and Perform the Audit Procedures

  • Auditors must choose items in the population using probabilistic (statistical) or nonprobabilistic methods. Avoid communicating likely sample selection items to the client too early to minimize potential tampering.
  • The audit procedure verifies the defined attribute in each sampled item. Tracking any exceptions found is essential, and often auditors include a documentation schedule.

Evaluate the Results

  • Auditors analyze sample results to evaluate population results.
  • Analyzing exceptions helps evaluate whether exceptions are acceptable based on tolerable exception rates and acceptable risk of overreliance.
  • Calculated sampling error (tolerable exception rate less the sample exception rate) is a crucial indicator in assessing sample acceptability.

Methodology for Designing Tests of Details of Balances

  • Auditors must satisfy eight specific balance-related objectives when designing tests of details of balances. These objectives are applicable to all accounts.
  • Specific objectives for accounts receivable address detail tie-in (agreeing balances), existence, completeness, accuracy, classification, cutoff, realizable value, and rights.

Confirmation of Accounts Receivable

  • The primary purpose of accounts receivable confirmation is to satisfy objectives related to existence, accuracy, and cutoff.

  • Positive confirmations request confirmation directly from the debtor either regarding the correctness or incorrectness of the balance. This can be a blank confirmation form or one stating the balance.

  • Negative confirmations request a response only if the debtor disagrees with the stated balance.

  • Auditors should confirm as close to the balance sheet date as possible.

  • Auditor must have procedures in place for when confirmation is not received promptly or at all.

Sampling Decisions

  • Key factors in sample size include performance materiality, inherent risk (population size, prior results and expected misstatements), control risk, and achieved detection risk. Type of confirmation (e.g. negative) will typically need a larger sample size.

Timing

  • Confirmation evidence is most reliable when obtained near the balance sheet date,.
  • However, verifying items at an interim date is often necessary for timely completion.

Verification of Addresses and Maintaining Control

  • Auditors must verify addresses (e.g., PO Boxes or email addresses) and control verification procedures before sending confirmation requests by mail.
  • Auditors should control the confirmation process until returned and should monitor for inconsistencies or potential client tampering.

Follow-Up On Non-Responses

  • Treat lack of returned confirmations from customers with caution and proceed only when appropriate.
  • Auditors should follow up on non-responses by re-sending requests or employing alternative methods for those items for which responses were not received.

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Week 6 - Lecture 6 - Audit Sampling - Audit Testing - Sales and Collection Cycle PDF

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Test your understanding of audit sampling and procedures with this quiz. Focus on the importance of selecting a representative sample and the risks associated with sampling in auditing. This quiz will help reinforce your knowledge of effective audit practices.

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