Podcast
Questions and Answers
Which term specifically refers to a departure from prescribed controls?
Which term specifically refers to a departure from prescribed controls?
What is the first phase that an auditor must undertake when applying nonstatistical sampling?
What is the first phase that an auditor must undertake when applying nonstatistical sampling?
In the context of audit testing, what is the primary objective related to monetary misstatements?
In the context of audit testing, what is the primary objective related to monetary misstatements?
When should audit sampling apply according to the audit program?
When should audit sampling apply according to the audit program?
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What would typically be included in the objectives of tests of controls during the sales and collection cycle?
What would typically be included in the objectives of tests of controls during the sales and collection cycle?
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Which step is NOT part of the planning phase in nonstatistical sampling?
Which step is NOT part of the planning phase in nonstatistical sampling?
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Which of the following is an example of a test of control?
Which of the following is an example of a test of control?
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What should an auditor examine to ensure audit sampling applies correctly?
What should an auditor examine to ensure audit sampling applies correctly?
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What is the primary objective when an auditor selects a sample from a population?
What is the primary objective when an auditor selects a sample from a population?
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What is sampling risk in the context of audit sampling?
What is sampling risk in the context of audit sampling?
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How can auditors effectively control sampling risk?
How can auditors effectively control sampling risk?
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Which of the following best describes nonsampling risk?
Which of the following best describes nonsampling risk?
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What is a key differentiation between statistical and nonstatistical sampling methods?
What is a key differentiation between statistical and nonstatistical sampling methods?
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What could lead to an incorrect conclusion due to sampling error?
What could lead to an incorrect conclusion due to sampling error?
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What role does careful design play in the sampling process for auditors?
What role does careful design play in the sampling process for auditors?
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What is a common misconception regarding audit sampling?
What is a common misconception regarding audit sampling?
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What is a significant drawback of haphazard sample selection?
What is a significant drawback of haphazard sample selection?
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Which statement correctly describes block sample selection?
Which statement correctly describes block sample selection?
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What does the exception rate indicate in an auditing context?
What does the exception rate indicate in an auditing context?
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Which of the following is NOT a type of exception that auditors are interested in?
Which of the following is NOT a type of exception that auditors are interested in?
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In the context of sampling, what does the term 'occurrence rate' refer to?
In the context of sampling, what does the term 'occurrence rate' refer to?
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What is the main purpose of conducting tests of controls and substantive tests in auditing?
What is the main purpose of conducting tests of controls and substantive tests in auditing?
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How can an auditor estimate the exception rate in a population?
How can an auditor estimate the exception rate in a population?
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How many blocks can auditors choose from in block sample selection?
How many blocks can auditors choose from in block sample selection?
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How is calculated sampling error determined?
How is calculated sampling error determined?
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If an auditor finds no exceptions in a sample with a tolerable exception rate of 5 percent, what is the calculated sampling error?
If an auditor finds no exceptions in a sample with a tolerable exception rate of 5 percent, what is the calculated sampling error?
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What does a low calculated sampling error suggest about the true population exception rate?
What does a low calculated sampling error suggest about the true population exception rate?
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What is the primary statistical sampling method used for tests of controls?
What is the primary statistical sampling method used for tests of controls?
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What do sampling distributions allow auditors to do?
What do sampling distributions allow auditors to do?
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What is an attribute in the context of attributes statistical sampling?
What is an attribute in the context of attributes statistical sampling?
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What distinguishes attributes sampling from nonstatistical sampling?
What distinguishes attributes sampling from nonstatistical sampling?
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What is the significance of calculating estimated upper exception rates?
What is the significance of calculating estimated upper exception rates?
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What is the primary purpose of tracing shipping documents to duplicate sales invoices?
What is the primary purpose of tracing shipping documents to duplicate sales invoices?
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Which sampling method might be least effective in preventing client alteration of sample items?
Which sampling method might be least effective in preventing client alteration of sample items?
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What does the Sample Exception Rate (SER) represent?
What does the Sample Exception Rate (SER) represent?
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Which of the following is NOT a recommended procedure when selecting a sample?
Which of the following is NOT a recommended procedure when selecting a sample?
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When conducting substantive tests of transactions, how should the auditor compare quantities?
When conducting substantive tests of transactions, how should the auditor compare quantities?
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What is a crucial step after completing audit procedures for a sampling application?
What is a crucial step after completing audit procedures for a sampling application?
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Which approach is most effective in measuring sampling risk?
Which approach is most effective in measuring sampling risk?
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How should an auditor respond if they find multiple exceptions in their sample results?
How should an auditor respond if they find multiple exceptions in their sample results?
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What defines attributes sampling based on the binomial distribution?
What defines attributes sampling based on the binomial distribution?
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Which sampling method is mandated for statistical sampling?
Which sampling method is mandated for statistical sampling?
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What is the purpose of calculating an upper precision limit (CUER) in attributes sampling?
What is the purpose of calculating an upper precision limit (CUER) in attributes sampling?
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Which of the following is NOT one of the eight balance-related audit objectives for accounts receivable?
Which of the following is NOT one of the eight balance-related audit objectives for accounts receivable?
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Which audit objective focuses on ensuring recorded accounts receivable actually exist?
Which audit objective focuses on ensuring recorded accounts receivable actually exist?
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What is the first test auditors typically perform according to the balance-related audit objectives?
What is the first test auditors typically perform according to the balance-related audit objectives?
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Which auditing procedure is deemed most important for confirming the existence of recorded accounts receivable?
Which auditing procedure is deemed most important for confirming the existence of recorded accounts receivable?
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Which of the following accurately describes the realization value objective for accounts receivable?
Which of the following accurately describes the realization value objective for accounts receivable?
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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
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Probabilistic sample selection chooses samples where each population item has a known chance of inclusion. Nonprobabilistic methods approximate a random approach.
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Probabilistic methods include simple random sample selection, systematic sample selection, and probability proportional to size sample selection.
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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
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The primary purpose of accounts receivable confirmation is to satisfy objectives related to existence, accuracy, and cutoff.
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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.
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Negative confirmations request a response only if the debtor disagrees with the stated balance.
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Auditors should confirm as close to the balance sheet date as possible.
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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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Description
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.
