Deck 16: Interpreting Sample-Based Audit Evidence

Question 1

What two main factors will determine the sample size for a given audit procedure?

Answer 1

a. The assertion(s) being tested: A sample-based test can be used to examine a number of attributes that might be of interest to an auditor including whether a transaction is properly authorized, meets appropriate control requirements, and is correctly valued and processed. The more significant the assertion(s) is to the overall audit, the larger the sample will be.
b. Assessment of risk: The higher the level of risk associated with the assertion, the larger the sample size will be for testing the attributes associated with that assertion. That is, the higher the likelihood that an audit procedure will reveal significant problems, the more items the auditor will wish to examine to have a better basis to quantify potential problems.
c. Alternatively, the two main factors driving the auditor's sample size are: 1) the auditor willingness to accept risk and 2) the precision gap, that is, the difference between the tolerance for problems and the expectation of problems.

Question 2

What are the steps in the attribute sampling process?

Answer 2

a. Identify the audit procedure and the purpose of the test.
b. Define the population and sample unit.
c. Define the deviation conditions.
d. Specify the tolerable deviation rate.
e. Specify the acceptable risk that the auditor's conclusion will be incorrect.
f. Estimate the expected population deviation rate.
g. Determine the sample size.
h. Select the sample.
i. Perform the audit procedure and document the results.
j. Generalize the sample results to the population.
k. Analyze individual deviations.
l. Conclude whether the assertion tested is acceptable or not.

Question 3

What is the expected deviation rate?

Answer 3

The auditor generates a tentative estimate of the expected deviation rate (EDR) for the population being tested in order to calculate the desirable sample size. One possible source of the estimate is the results from a prior audit. If similar tests were performed in the past, the actual deviation rate from those tests could be used as the estimate of the deviation rate for the current year after adjusting for any process changes (improvements) that may have been made. Another approach that may be used is to audit a small preliminary sample of transactions and use those results to estimate the EDR for the main sample to be taken later. In some cases, the auditor may simply specify the expected deviation rate as zero.

Question 4

What is stratified sampling and when might the auditor use it?

Question 5

For the three sampling techniques that aren't likely to result in a representative sample, when might each be used by an auditor?

Question 6

Describe the sampling techniques most likely to result in a representative sample.

Question 7

You have been assigned the job of obtaining a random sample of purchase orders from the purchase orders included in the purchases journal along with the related supporting documents. The invoices should be selected using a random sample from the sequence of purchase orders for the year. Describe the steps for examining the purchase orders.

Question 8

What is the difference between deviations and transaction errors>

Question 9

What are two ways to implement sampling?

Question 10

What is the most common application of sampling?

Question 11

Describe some difficulties in defining the population or sample.

Question 12

Regardless of how an auditor obtains a sample, what three issues must the auditor consider when obtaining evidence using a sample-based audit procedure?

Question 13

Briefly describe the history of the use of statistical sampling by auditors in the last two decades or so.

Question 14

What is the difference between sampling risk and non-sampling risk?

Question 15

What five sampling techniques are commonly used by auditors?

Question 16

When is the auditor likely to apply attribute sampling?

Question 17

What is the overall goal of sample selection?

Question 18

What is dollar unit sampling? When and how is it applied?

Question 19

Describe the use and limitations of CAATs.

Question 20

What is the tolerable deviation rate?

Question 21

How does the auditor determine sample size?

Question 22

You have performed dollar unit sampling on an audit and discovered that an unacceptable risk exists that the account is misstated in an amount that exceeds tolerable error. What are the advantages and disadvantages of your possible responses?

Question 23

What are the three possible outcomes for a sample-based attributes test?