A3-M7-Sampling Part 1

What is the difference between nonstatistical and statistical sampling?

Nonstatistical sampling:

• does not utilize statistical models in calcs

• auditors use their judgment to determine sample sizes, and sample results are evaluated using auditor judgment

Statistical sampling:

• uses laws of probability for selection and evaluation of a sample

• allows for quantification of audit risk (AR) and sufficiency of audit evidence

When is professional judgment necessary in the use of statistical or nonstatistical sampling by an auditor?

The auditor must use professional judgment to:

• define the population and sampling unit

• select the appropriate sampling method

• evaluate whether the audit evidence is appropriate

• evaluate the nature of deviations or errors

• consider sampling risk

• evaluate sample results and project to the population

Define sampling risk.

Sampling risk (SR) is the risk that the auditor’s conclusion based on a sample is different from the conclusion that would’ve been reached if the tests had been applied to all items in the population.

Identify two aspects of SR the auditor would be concerned with when performing substantive testing.

1. Risk of incorrect acceptance: deciding from the sample that the balance is correct when it’s really materially misstated; affects audit effectiveness (too little)

2. Risk of incorrect rejection: deciding from the sample that the balance is materially misstated when it’s really correct; affects audit efficiency (too much)

Define the two aspects of SR for TOCs.

1. Risk of assessing CR too low: The risk that the assessed level of CR is less than the trust risk, which is caused by thinking that the control is more effective and reliable than it really is; affects audit effectiveness (too little)

2. Risk of assessing CR too high: The risk that the assessed level of CR is greater than the true risk, which is caused by thinking the control is less effective and reliable than it really is; affects audit efficiency (too much)

What is the relationship between SR and reliability (confidence level)?

Sampling risk (SR) + confidence level = 100%

What is attribute sampling?

Attribute sampling is a statistical sampling method used to estimate a rate of occurrence in a sample. It is used in TOCs.

What factors affect sample size for an attribute sampling application?

The following factors affect sample size in an attribute sampling application:

• risk of assessing CR too low (inverse relationship)

• tolerable deviation rate (TDR) → inverse relationship

• expected deviation rate (EDR) → direct relationship

  • population size (not an issue if the population is large)

What rates are compared in drawing a conclusion about an attribute sampling application?

The auditor compares the UDR with the TDR in drawing conclusions about an attribute sampling application. If the UDR exceeds the auditor’s TDR, the auditor will not rely on the control. (The UDR is the sample deviation rate plus an allowance for sampling risk)

What is discovery sampling?

Discovery sampling is a type of attribute sampling used when the EDR is 0 or near 0. It’s used when the auditor is looking for a very critical characteristic (fraud).