Audit Chapter 10

Reasons for audit sampling

1. Evidence not in electronic form

2. Data in different formats

3. Weak internal controls

4. Small audit population size

What is sampling risk?

The possibility of reaching an incorrect conclusion because the sample is not representative of the population

Risk of incorrect rejection (Type 1)

Risk of incorrectly rejecting a control or balance as ineffective/misstated when it is actually effective/correct

Risk of incorrect acceptance (Type 2)

Risk of incorrectly accepting a control or balance as effective/correct when it is actually ineffective/misstated

Key features of statistical sampling

1. Uses probability laws

2. Efficient sample sizing

3. Quantifies risk

4. Provides objective approach

Key feature of non-statistical sampling

1. Uses professional judgment

2. No statistical risk measurement

3. Flexible for smaller populations

What affects sample size in statistical sampling?

1. Level of assurance

2. Tolerable misstatement

3. Expected misstatement

Tolerable misstatement

Maximum error an auditor will accept while still concluding the account balance is fairly stated

Expected misstatement

Auditor’s estimate of the amount of error expected in the population

Random sample selection method

Selection process where the auditor has no influence on choice, ensuring true population representation

Systematic sample selection

Selection using a sampling interval to choose items systematically

Haphazard sample selection

Non-methodical selection technique only permitted for non-statistical sampling

Stratification

Dividing the population into groups with common characteristics

Individually significant items

Items potentially containing misstatements exceeding tolerable misstatement threshold

Ratio method

Estimation technique using audited value divided by book value of sample to project population value

Difference method

Estimation by adding/subtracting project differences between audited and book values

Drawback of sampling

The sample must be representative of the population and, therefore, likely to provide a reasonable basis for conclusions about the population