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    Basic Audit Sampling Concepts: Review Questions

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    Dave Manalo
    This document discusses basic audit sampling concepts from a textbook. It covers topics like sampling risk, representativeness of samples, control risk, alpha and beta risks, determining appropriate sample sizes, and interpreting sample results. The document also includes review questions that refer to specific pages and paragraphs in the textbook, as well as multiple choice and case study questions about audit sampling techniques.

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    Basic Audit Sampling Concepts: Review Questions

    Uploaded by

    Dave Manalo
    3K views4 pages
    This document discusses basic audit sampling concepts from a textbook. It covers topics like sampling risk, representativeness of samples, control risk, alpha and beta risks, determining appropriate sample sizes, and interpreting sample results. The document also includes review questions that refer to specific pages and paragraphs in the textbook, as well as multiple choice and case study questions about audit sampling techniques.

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    Auditing, Theory, Cabrera, Solution, Manual

    Original Title

    Chapter 17 Ans

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    This document discusses basic audit sampling concepts from a textbook. It covers topics like sampling risk, representativeness of samples, control risk, alpha and beta risks, determining appropriate sample sizes, and interpreting sample results. The document also includes review questions that refer to specific pages and paragraphs in the textbook, as well as multiple choice and case study questions about audit sampling techniques.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    3K views4 pages

    Basic Audit Sampling Concepts: Review Questions

    Uploaded by

    Dave Manalo
    This document discusses basic audit sampling concepts from a textbook. It covers topics like sampling risk, representativeness of samples, control risk, alpha and beta risks, determining appropriate sample sizes, and interpreting sample results. The document also includes review questions that refer to specific pages and paragraphs in the textbook, as well as multiple choice and case study questions about audit sampling techniques.

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    The key takeaways from the document are that statistical sampling allows auditors to quantify sampling risk and interpret sample results, while nonstatistical sampling provides a point estimate of the population deviation rate. Auditors must use judgement in areas such as defining the population and characteristics, determining the appropriate sampling technique, establishing tolerable deviation rates, and interpreting sample results.

    Some areas that require auditor judgement are defining the population and characteristics to be tested, determining the appropriate sampling technique, establishing tolerable deviation rates and risk levels, interpreting sample results, and determining when statistical sampling is appropriate.

    If a sample shows an unacceptable deviation rate, auditors may enlarge the sample size, isolate deviations and expand testing, or increase the assessed level of control risk and substantive testing.

    CHAPTER 17

    BASIC AUDIT SAMPLING CONCEPTS

    I. Review Questions

    1. Refer to page 638, 3rd paragraph of the textbook.

    2. Refer to page 638, 4th paragraph of the textbook.

    3. Refer to page 640 of the textbook.

    4. Audit conclusions can be made only about the population from which the
    sample was drawn, and a conclusion can only be valid if the sample on which it
    is based actually shows the characteristics of the population. Auditors can
    attempt to achieve representativeness, but they cannot guarantee it. Sampling
    risk – the probability that the sample does not adequately reflect the population
    – always exists.

    5. Refer to page 646, 2nd paragraph; page 647, 1st paragraph of the textbook.

    6. Refer to page 647, 6th paragraph of the textbook.

    7. Refer to page 652, paragraphs 1 to 4 of the textbook.

    8. Refer to page 652, paragraphs 3 and 4 of the textbook.

    9. Refer to page 653, 4th paragraph & page 654, 1st to 3rd paragraph of the textbook.

    10. Sampling risk is the probability that the auditor’s conclusions concerning the
    population will be in error. In terms of conclusions regarding internal control,
    sampling risk consists of two subsets:

    Alpha risk, the risk that the auditor will assess control risk too high and
    perform more substantive testing than is necessary under the circumstances;
    and
    Beta risk, the risk that the auditor will assess control risk too low and
    perform less substantive testing than is necessary.

    For control testing purposes, the auditor is more concerned with beta risk than
    alpha risk, because beta risk poses the threat of underauditing and is therefore
    17-2 Solutions Manual - Principles of Auditing and Other Assurance
    Services
    the basis for the audit opinion. The auditor controls this risk by setting beta risk
    sufficiently low as to maintain overall audit risk at a level less than or equal to
    10%.
    11. Refer to pages 661 to 663 of the textbook.

    12. Refer to pages 655 to 660 of the textbook.

    II. Multiple Choice Questions

    1. b 3. d 5. d 7. a 9. a
    2. c 4. c 6. b 8. d 10. c

    III. Comprehensive Cases

    Case 1. a. Areas requiring the auditors to make judgment decisions when


    statistical sampling techniques are employed (only four required):
    (1) Defining population, characteristics to be tested, and deviations.
    Unless a relationship is defined between the occurrence rate of
    deviations in the population and either the validity of the client’s
    financial statement or the strength of internal control, little useful
    information is gained by estimating the occurrence rate.
    (2) Determining the appropriate statistical selection techniques for drawing
    a random sample. The auditors must recognize the advantages and
    disadvantages of stratified selection, unstratified selection, and
    systematic selection, and determine which technique is appropriate for
    selecting an economical random sample.
    (3) Establishing the required maximum tolerable deviation rate and the risk
    of assessing control risk too low for the procedure. This requires
    judgment decisions regarding materiality, time, cost, and the planned
    assessed level of control risk.
    (4) Interpreting sample results. This requires a decision as to whether the
    results support the auditors’ planned assessed level of control risk, or
    whether additional sampling is necessary to reach a conclusion.
    (5) Following up on the discovery of critical errors or unacceptable
    deviation rates.
    (6) Determining the circumstances under which statistical sampling is
    appropriate, and those in which other techniques should be used in lieu,
    of or to supplement, the statistical sampling techniques.

    This is an open-ended question. The student may identify numerous other


    areas in which the auditors must make judgment decisions.

    b. If the CPAs’ sample shows an unacceptable deviation rate, they may take
    the following actions:
    Basic Audit Sampling Concepts 17-3
    (1) They may enlarge their sample to increase the precision of their
    estimate.
    (2) They may isolate the type of deviation and expand examination as it
    relates to the transactions that give rise to that type of misstatement.
    (3) The auditors’ usual response to an unacceptably high deviation rate is
    to increase their assessed level of control risk. Accordingly, the
    auditors would increase the intensity of their substantive tests.

    c. Techniques for selecting an unstratified random sample of accounts payable


    vouchers include the following:

    Random Sample. A random sample is a sample of a given size drawn from


    a population in a manner such that every possible sample of that size is
    equally likely to be drawn. Items may be selected randomly by:
    (1) Table of Random Numbers. Use one of a number of published tables.
    Using four columns in the table, select the first 80 numbers which fall
    within the range of 1 to 3,200. The starting point in the table should be
    selected randomly and the path to be followed through the table should
    be set in advance and followed consistently.
    (2) Random Number Generator: Using generalized audit software,
    generate a list of 80 random numbers.

    Systematic Sample. A systematic sample is drawn by selecting every nth


    item beginning with a random start.
    (1) Every nth item. Select every 40th voucher after selecting the initial
    voucher (from 1 to 40) randomly.
    (2) Several random starting points. For example, use two random starting
    points and select 40 of the 80 vouchers from each of the two sequences.
    Select every 80th voucher (3,200/40) after each of the two random
    starting points between 1 and 80 for each of the two sequences.

    Case 2. a. (1) Since the results of tests of controls typically play a significant role
    in determining the nature, timing, and extent of other audit procedures,
    the auditors usually specify a low level of risk of assessing control risk
    too low. It is usually set at 5 or 10 percent.

    (2) In determining the tolerable deviation rate, an auditor should consider


    the planned assessed level of control risk and the extent of assurance
    desired from the evidential matter included in the sample.

    (3) In determining the expected population deviation rate, an auditor


    should consider the results of prior years’ tests, the overall control
    environment, or utilize a preliminary sample.
    17-4 Solutions Manual - Principles of Auditing and Other Assurance
    Services

    b. (1) There is a decrease in sample size if the acceptable level of the risk of
    assessing control risk too low is increased.

    (2) There is a decrease in sample size if the tolerable deviation is increased.

    (3) There is an increase in sample size if the population deviation rate is


    increased.

    c. Using a statistical sampling approach, Figure 18.4 reveals that 7 deviations


    in a sample of size 100 results in an achieved upper deviation rate of 12.8%,
    well in excess of the tolerable deviation rate (8%). The sample results
    should thus be interpreted as not supporting the planned assessed level of
    control risk.

    Using a nonstatistical sampling approach, the 7% estimated population


    deviation rate identified in the sample (7 deviations / 100 sample items)
    approaches the tolerable deviation rate of 8%. Therefore, using a
    nonstatistical approach, the sample result would also be interpreted as not
    supporting the planned assessed level of control risk.

    d. Statistical sampling allows the auditors to quantify sampling risk. As


    described in part (c), only when statistical sampling is used do the auditors
    know that the achieved upper deviation rate is 12.8%.

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