AUDITING CHAPTER 9
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Transcript of AUDITING CHAPTER 9
AUDITINGCHAPTER 9Audit SamplingByDavid N. Ricchiute
GBW 8th ed., Ch. 92
TOPICSUse of sampling in audit engagementsRole of sampling, nonsampling risk
Risk of assessing control risk too high, too low Risks of incorrect rejection, acceptance
Distinction between statistical, nonstatistical samplingAudit sampling for tests of controls and substantive tests of details
Attribute estimation, sequential sampling Probability-proportional-to-size (PPS)
GBW 8th ed., Ch. 93
SAMPLING:Definitions
Sampling: examining less than 100% of items in a populationPopulation: all items within a class of transactionsSampling plan: procedures to test a sampleAttributes sampling: tests rate of deviation from a prescribed control procedureVariables sampling: tests whether recorded account balances are fairly stated
GBW 8th ed., Ch. 94
AUDIT RISKRisk that auditor may unknowingly fail
to modify opinion on materially misstated financial statements
2 parts Risk that errors will occur: uncontrollable
Inherent risk & control risk Risk that material errors will not be
detected: controllable Detection risk
GBW 8th ed., Ch. 95
UNCERTAINTIESSampling risk Risk that sample may contain
disproportionately more/less error than exists in population
Nonsampling risk Aspects of audit risk not attributable
to sampling such as human error
GBW 8th ed., Ch. 96
CONTROL RISK ASSESSMENT: Too HighInefficient
Assessing control risk at maximum when it should be lowerConcluding control not effective when it is
GBW 8th ed., Ch. 97
CONTROL RISK ASSESSMENT: Too LowIneffective
Lowering control risk when should be set at maximumConcluding control is effective when it isn’t
GBW 8th ed., Ch. 98
STATISTICAL SAMPLING
Apply the laws of probability to Design efficient sample Measure sufficiency of sample Evaluate sample resultsMeasures sampling risk quantitatively
GBW 8th ed., Ch. 99
NONSTATISTICAL SAMPLING
Relies exclusively on judgment to Determine sample size Evaluate sample resultsCannot measure sampling risk quantitatively
GBW 8th ed., Ch. 910
(NON)STATISTICAL SAMPLING CHOICE
Choice based on relative costs & benefitsIndependent of audit procedures
GBW 8th ed., Ch. 911
ATTRIBUTES & DEVIATIONSAttribute
A characteristic of controlDeviation
Absence of the attribute
GBW 8th ed., Ch. 912
ATTRIBUTE ESTIMATION SAMPLINGUsed to test controls that leave an
audit trail1Determine objectives, attributes,
deviation conditions2Define population3Define sample size4Perform sampling plan5Evaluate sample results
GBW 8th ed., Ch. 913
ATTRIBUTE ESTIMATION SAMPLING: Objectives
Whether controls for class of transactions sufficiently effective to lower control risk below maximum Trail of observable & documented
evidence Does not rely primarily on
segregation of duties
GBW 8th ed., Ch. 914
ATTRIBUTE ESTIMATION SAMPLING: Sample Size
Sample size components Acceptable risk of assessing control
risk too low Inverse relationship with sample size
Tolerable rate of deviation Maximum population rate of deviation
from control Expected population deviation rate
Estimated from prior year or pilot sample
GBW 8th ed., Ch. 915
SAMPLE SELECTION METHODSARandom-number samplingBSystematic samplingCBlock samplingDHaphazard samplingEStratified
GBW 8th ed., Ch. 916
SAMPLE SELECTION METHODS: Random Number
Uses computer-generated numbers to select sampling unitsMatch number to prenumbered documentsAppropriate for both statistical & nonstatistical sampling
GBW 8th ed., Ch. 917
SAMPLE SELECTION METHODS: Systematic Sampling
Selecting every nth item from population of sequentially ordered itemsUseful when identification numbers lackingAppropriate for both statistical & nonstatistical sampling
GBW 8th ed., Ch. 918
SAMPLE SELECTION METHODS: Block Sampling
A group of items arranged contiguously within a larger grouping Inefficient & not generalizableShould not be used for statistical or nonstatistical sampling without care in controlling sampling risk
GBW 8th ed., Ch. 919
SAMPLE SELECTION METHODS: Haphazard Sampling
Sampling units selected without special reason or conscious biasInappropriate for statistical samplingUseful for nonstatistical sampling
GBW 8th ed., Ch. 920
SAMPLE SELECTION METHODS: Stratified Sampling
Subdivide population into homogeneous strataSelect separate sample for each strata by one of prior methods
GBW 8th ed., Ch. 921
OTHER TECHNIQUES: Sequential Sampling
Stop-or-go Performed in stages Auditor decides to stop or continue
sampling after each stage
GBW 8th ed., Ch. 922
OTHER TECHNIQUES: Nonstatistical Sampling
Used when costs outweigh benefits of statistical samplingAuditor judgment guided by Experience Prior knowledge Current information
GBW 8th ed., Ch. 923
SUBSTANTIVE SAMPLING RISK: 2 Sources
Risk of incorrect rejection Risk that audit sample suggests
account balance is materially misstated when it is fairly stated
Risk of incorrect acceptance Risk that sample suggests account
balance is fairly stated when it is materially misstated
GBW 8th ed., Ch. 924
VARIABLES SAMPLING PLAN
Determine objectives of testDefine populationChoose sampling techniqueDetermine sample sizeDetermine method of sample selectionPerform sampling planEvaluate sample results
GBW 8th ed., Ch. 925
OBJECTIVES OF TEST
To estimate account balance that is not recordedTo test reasonableness of recorded account balance
GBW 8th ed., Ch. 926
DEFINING POPULATIONAudit population All items constituting an account
balance or class of transactions defined by auditor’s characteristic of interest
Sampling unit Any individual elements of a
population
GBW 8th ed., Ch. 927
AUDIT SAMPLINGSampling used only for those accounts where it is appropriate When large number transactions
within one accountTechniques Probability proportional to size
(PPS) Nonstatistical sampling Classical variables sampling
(appendix)
GBW 8th ed., Ch. 928
SAMPLING DECISIONSChoice between statistical & nonstatistical sampling based on Costs Effectiveness Need for quantitative estimate of
sampling risk
GBW 8th ed., Ch. 929
PROBABILITY-PROPORTIONAL-TO-SIZE (PPS)
Derived from attributes sampling theoryAppropriate when 1 or a few errors expectedCharacteristics Automatically stratifies an audit population Appropriate for testing for overstatement
Useful for testing assets & revenues
GBW 8th ed., Ch. 930
PPSAn Example
Define population for accounts receivable All customer debit balances testing
overstatement or All customer balances, including 0 &
negative Requires special consideration
Dollar is sample unit
GBW 8th ed., Ch. 931
PPS SAMPLE SIZE ELEMENTS
Determine Reliability factor for overstatement
errors based on Expected number overstatement errors Risk of incorrect acceptance
Tolerable (acceptable) error Anticipated error & expansion factor
GBW 8th ed., Ch. 932
PPS SAMPLE SIZE MODEL
n = RF x B TE – (AE x EF)where
RF – reliability factor (from table)B – book value (from client)TE – tolerable error (auditor judgment)AE – anticipated error (auditor judgment)EF – expansion factor (from table)
GBW 8th ed., Ch. 933
PPS SAMPLE SELECTION
Used for statistical sampling methods Random number Systematic sampling
GBW 8th ed., Ch. 934
EVALUATING RESULTS:PPS Decision Rule
If the upper error limit is less than or equal to the tolerable error, the account is fairly presented
GBW 8th ed., Ch. 935
NONSTATISTICAL SAMPLINGUsed when
No apparent need to quantify sampling riskCost of statistical sampling exceeds benefitsCost to select sampling units exceeds benefits
GBW 8th ed., Ch. 936
SAMPLE SIZE IN NONSTATISTICAL SAMPLING
Requires Degree audit assurance
Substantial, moderate, little Assurance factor Estimated tolerable error
GBW 8th ed., Ch. 937
EVALUATING SAMPLE RESULTS
When likely error is estimated, auditor has 4 choices Accept client’s book value Propose audit adjustment Perform additional substantives
tests Request client to revalue entire
population