Modern Auditing:

Assurance Services and the Integrity of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State University at San Luis Obispo

Raymond N. Johnson
Portland State University

Chapter 13 Audit Sampling

Chapter Overview

Basic Audit Sampling Concepts

Nature and Purpose of Audit Sampling
Use less than 100% of items Apply to evaluate entire population

Uncertainty and Audit Sampling

Audit Risk Control Risk and Test of Details Risk

Sampling Risk
Sample v. Population Tests of Controls
Risk of Assessing Control Risk too Low Risk of Assessing Control Risk too High

Substantive Tests
Risk of Incorrect Acceptance Risk of Incorrect Rejection

Sampling Risks Tests of Controls

Sampling Risks Substantive Tests

Nonsampling Risk
Human mistakes Inappropriate application of audit procedures Misinterpretation of results of sample Reliance upon erroneous information from another party

Nonstatistical and Statistical Sampling

Nonstatistical and Statistical Sampling

Study Break
1. The risk that the sample will not be representative of the population is:
A. B. C. D. Inherent Risk Audit Risk Control Risk Sampling Risk

D. Sampling Risk

Study Break
2. The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated is:
A. B. C. D. Risk Risk Risk Risk of of of of assessing control risk too low assessing control risk too high incorrect acceptance incorrect rejection

C. Risk of incorrect acceptance

Tests of Controls v. Substantive Tests

Audit Sampling for Tests of Controls

Determine the Objectives of the Tests of Controls Determine the Procedures to Evaluate Internal Controls

Make a Decision about the Audit Sampling Technique

Audit Sampling for Tests of Controls

Define the Population and Sampling Unit Use Professional Judgment to Determine Sample Size
Nature of Control Frequency of Operation Importance of the Control Risk of Assessing Control Risk too Low Tolerable and Expected Deviation Rates Population Size

Audit Sampling for Tests of Controls

Select a Representative Sample

Apply Audit Procedure

Evaluate the Sample Results

Document Conclusions

Study Break
3. The _____ represents the way the auditor identifies the performance of internal controls of interest.
A. B. C. D. Population Sampling Unit Materiality Sampling Risk

B. Sampling Unit

Study Break
4. The _____ is the maximum rate of deviation from a control that an auditor is willing to accept and still use the planned control risk.
A. B. C. D. Tolerable deviation rate Maximum deviation rate Maximum error rate Inherent risk

A. Tolerable deviation rate

Audit Sampling for Substantive Tests - PPS

Determine the Objectives of the Substantive Test
Estimating total amount of population Estimating amount of misstatement

Determine the Substantive Audit Procedures to Perform

Tests of Details of Transactions Tests of Details of Balances

Audit Sampling for Substantive Tests - PPS

Make a Decision About the Audit Sampling Technique
PPS v. Classical Variables Sampling

Define the Population and Sampling Unit

Reciprocal Population Logical Sampling Unit

Audit Sampling for Substantive Tests - PPS

Use Professional Judgment and Statistical Methods to Determine Sample Size
Book Value of Population Tested Reliability Factor for Specified Risk of Incorrect Acceptance Tolerable Misstatement Anticipated Misstatement and Expansion Factor Calculation of Sample Size

Audit Sampling for Substantive Tests - PPS

Select a Representative Sample
Sampling Risk Calculate Sampling Interval Select Random Sample

Apply Audit Procedures

Audit Sampling for Substantive Tests - PPS

Evaluate Sample Results
Upper Misstatement Limit No Misstatements Found in the Sample Some Misstatements Found in the Sample Qualitative Considerations

Document Conclusions

Study Break
5. This type of test can be used to estimate the total dollar amount of a population or the total dollar amount of error in a population.
A. B. C. D. Test of Controls Attribute Tests Audit Tests Substantive Tests

D. Substantive Tests

Study Break
6. In PPS, an item snagged in the selection of the sample is know as the ______.
A. B. C. D. Sampling Unit Logical Sampling Unit Population Tolerable Misstatement

B. Logical Sampling Unit