Foundations of Audit Sampling

A series of vocabulary flashcards to help understand key concepts related to audit sampling for exam preparation.

What is audit sampling?

The process of selecting and evaluating a sample from a population to draw conclusions about the entire population.

What does 'representative sample' mean?

A sample that leads to the same conclusions as testing the entire population.

Why do auditors use sampling?

Because testing the entire population is too costly and inefficient.

What is sampling risk?

The risk that the auditor’s conclusion based on a sample differs from the conclusion if the whole population was tested.

How can sampling risk be reduced?

By increasing sample size.

What is nonsampling risk?

Risk caused by auditor errors (wrong procedures, misinterpretation, etc.).

How is nonsampling risk reduced?

Through proper planning, supervision, and quality control.

What is statistical sampling?

Sampling that uses statistical methods to plan, select, and evaluate samples.

Main advantage of statistical sampling?

It allows auditors to measure and control sampling risk.

What is nonstatistical sampling?

Sampling based on auditor judgment without statistical measurement of risk.

Key disadvantage of nonstatistical sampling?

Cannot quantify sampling risk.

Can both statistical and nonstatistical sampling provide valid evidence?

Yes.

What is random selection?

Every item has an equal chance of being selected.

What is systematic selection?

Selecting every nth item after a random starting point.

Risk of systematic sampling?

Bias if the population has patterns.

What is haphazard selection?

Selecting items without structure but without intentional bias.

What is block selection?

Selecting a group of items (like a time period).

Why is block sampling weak?

It may not be representative of the population.

What is stratification?

Dividing a population into smaller, similar groups (strata).

Why do auditors stratify?

To increase efficiency and reduce sample size.

How are large/high-risk items treated in stratification?

They are often tested 100%.

What are sampling plans?

Procedures used to achieve audit objectives.

What are the two main types of sampling plans?

Attributes (occurrence rate) and variables (dollar amounts).

What does attributes sampling measure?

The rate of deviations from a control.

What is a deviation?

A failure of a control to operate properly.

Does a deviation always mean a misstatement?

No.

What is the tolerable deviation rate?

The maximum deviation rate auditors are willing to accept.

What is the expected deviation rate?

The deviation rate auditors expect in the population.

Relationship: Expected deviation ↑ → sample size?

Sample size increases.

Relationship: Tolerable deviation ↑ → sample size?

Sample size decreases.

What is the risk of assessing control risk too HIGH?

Thinking controls are worse than they actually are.

Effect of risk too HIGH?

More testing than necessary (inefficient audit).

What is the risk of assessing control risk too LOW?

Thinking controls are better than they actually are.

Why is risk too LOW dangerous?

Leads to less testing and possible audit failure.

Which risk is more important?

Risk of assessing control risk too LOW.

First step in attributes sampling?

Determine the objective of the test.

What must be defined before testing?

Attributes and deviation conditions.

What must be specified before sampling?

Risk of assessing control risk too low and tolerable deviation rate.

What affects sample size in attributes sampling?

Risk, tolerable deviation, expected deviation.

What do auditors calculate after testing?

Deviation rate.

What is the achieved upper deviation rate?

The maximum deviation rate supported by the sample.

Decision rule: Upper deviation vs tolerable?

If upper ≤ tolerable → control is reliable; If upper > tolerable → control is not reliable.

What do substantive tests measure?

Dollar misstatements.

What is the risk of incorrect acceptance?

Concluding no misstatement when one exists.

Why is incorrect acceptance dangerous?

Leads to issuing wrong audit opinion.

What is the risk of incorrect rejection?

Concluding misstatement exists when it doesn’t.

Effect of incorrect rejection?

Inefficient audit (extra work).

What is MUS?

Sampling where each dollar is a sampling unit.

Key feature of MUS?

Larger dollar amounts are more likely to be selected.

What is classical variables sampling?

Sampling based on accounts/transactions.

Biggest concern in sampling?

Missing a material misstatement.

What increases sample size?

Higher expected deviation, lower tolerable deviation, lower acceptable risk.

What decreases sample size?

Higher tolerable deviation, higher acceptable risk.