Modules E and F attributes and variables sampling PDF

Preview

Summary

Modules E and F lecture notes, contains bulleted lists of all important topics in the modules....

Description

Modules E and F: Attributes Sampling and Variables Sampling  Sampling risk – present whenever sampling is used; decisions based on a sample may differ from decisions based on the population  2 primary areas in which sampling is used in the audit::: 1) attributes sampling (performing tests of controls to determine the operating effectiveness of internal control and assess control risk). 2) variables sampling (performing substantive tests of details to provide the necessary level of detection risk and evaluate the fairness of an account balance or class of transactions).  Attributes sampling – used to determine the extent to which some attribute exists within a population of interest; in tests of controls, that attribute is whether a specific control was properly applied and is appropriately functioning  7 steps of attributes sampling::: 1) determine objective. 2) define characteristic. 3) define population. 4) determine sample size. 5) select sample items. 6) measure items. 7) evaluate results.  Step 1 determine the objective of sampling: ID the objective of attributes sampling, which is related to examining key controls corresponding to management assertions of interest to the audit team.  Step 2 define the characteristic of interest: in an attributes sampling context, this is deviation (instances in which controls are not functioning as intended) condition  Step 3 define the population: population (set of all items about which a conclusion is desired) in attributes sampling represents all potential occurrences of the control activity of interest  When defining the population, the audit team also needs to determine the physical representation of the population – frame of reference that the audit team uses in selecting the sample (source of the sample)  Step 4 determine the sample size: sample size = number of items the audit team examines within a population of interest.  4 main factors influence sample size::: tolerable rate of deviation (max rate of deviations permissible by the audit team without modifying control risk), sampling risk (two types include risk of underreliance and overreliance), expected population deviation rate (some

 

  

level of deviation will occur in internal control), population size (unless population size is very small, this is not a considerable factor). Step 5 select the sample items: basic goal is to increase the likelihood that the sample is representative of the population, reducing sampling risk. Two common methods are used for selection: unrestricted random selection (random numbers equal to desired sample size and selects the numbered item in the corresponding population) AND systematic random selection (random starting point in the population and then bypasses a fixed number of items and selects corresponding items until the appropriate number has been selected). Step 6 measure the sample items: audit team determines whether the control has been appropriately performed. Nonsampling risk can occur – risk that the audit teams sample provides an incorrect conclusion for reasons other than the representativeness of the sample Step 7 evaluating sample results:

Sample rate of deviation = number of deviations noted in the sample / sample size  The ULRD (*page 770*) helps make the decision rule of whether to rely on internal control or expand procedures  Sequential sampling – provide the audit team the opportunity to draw conclusions using a smaller sample  Discovery sampling – form of attributes sampling, used when deviations from controls are very critical  Nonstatistical sampling methods – permissible under GAAP

 How audit teams control audit risk: 1) establish desired level. 2) assess inherent risk. 3) assess control risk. 4) assess analytical procedures risk. 5) determine tests of details risk  variables sampling – used to examine a population when the audit team wants to estimate the “true” balance or the misstatement of a particular account or class of transactions  True balance – amount at which the account should be recorded if no misstatements exist  Misstatement – difference between the true balance and the recorded balance  7 step procedure of variables sampling: 1) determine objective of sampling. 2) define characteristic of interest. 3) define population. 4) determine sample size. 5) select items. 6) measure items. 7) evaluate results.  Monetary unit sampling (MUS) – items in the sample are selected based on their size (probability proportional to size selection); best used when the audit team expects to find few or no misstatements and when overstatement is of greatest concern  Steps 1 – 3 planning: once the objective of sampling has been determined, the audit team defines the characteristic of interest.  The audit team is interested in determining the proper amount at which the items should be recorded (audited value) which is simply the dollar amount at which the item should be recorded assuming that there were no mistakes in the application of GAAP

 In an MUS application, the characteristic of interest is the difference between the recorded balance and the audited value (misstatement)  The population of MUS is defined as all of the individual dollars (or other monetary unit) within the account balance or class of transactions  Step 4 determine the sample size: in variables sampling the sample size are transactions or components underlying the account balance or class of transactions being audited  4 factors influencing the sample size in an MUS application: sampling risk (two types are risk of incorrect acceptance and rejection), tolerable misstatement (max amount the account balance or class of transactions can be misstated without the audit teams requiring an adjusting entry to prevent a modified opinion), expected misstatement (amount of misstatement the audit team anticipates in the account balance or class of transactions), and population size (sampling unit = dollar in an account balance or class of transactions)  There is a direct relationship between population size and sample size  Step 5 select the sample items: audit team normally selects the sample items using a systematic random selection method (random starting point, bypasses a fixed number of items and selects the next item for examination)(sampling unit = individual dollar within a population)  The audit team must examine the logical unit that contains the individual sampling unit Sampling interval = population size / sample size  Step 6 measure the sample items: the audit team performs the appropriate substantive procedure and measures the sample items  Tainting percentage = percentage by which the transaction is misstated  Step 7 evaluating sample results: audit team must calculate a conservative estimate of the TOTAL misstatement composed of 3 components (projected misstatement, incremental allowance for sampling risk, basic allowance for sampling risk)  Projected misstatement – assumes that the entire sampling interval contains the same % of misstatement as the item examined by the auditor  Incremental allowance for sampling risk steps: 1) for all misstatements less than the sampling interval, rank them in descending order. 2) determine incremental confidence factor associated with the discovery of the misstatement. 3) multiply the projected misstatement by the incremental confidence factor minus 1  Basic allowance for sampling risk – provides a statistical measure of the misstatement that could be included in sampling intervals in which the audit team did not detect a misstatement Basic allowance for sampling risk = sampling interval * confidence factor  Upper limit on misstatements (ULM) – sum of projected misstatement, incremental allowance for sampling risk, and the basic allowance for sampling risk  MUS automatically selects items with larger dollar balances for examination  The audit team is required to document various information related to the sampling procedure, generally includes::: info on the objective of sampling/assertions evaluated,

sampling technique used, method and parameters used, sample size determined, info on the selection of sample items, description of substantive procedures, audit teams conclusion  Other than MUS, there is a system called classical variables sampling (see appendix FB)  GAAS does not require the use of statistical sampling methods, in many cases it is easier and more efficient to use nonstatistical methods  Differences in statistical vs nonstatistical methods: 1) determining sample size (MUS table vs professional judgment). 2) selecting sample items (nonstatistical allows professional judgement [haphazard selection, block selection]). 3) evaluating sample results (team can judgmentally draw a conclusion about fairness of account balance) Nonstatistical sample size = (recorded balance of population / tolerable misstatement) * confidence factor...