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 Substantive Tests 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 The risk that the sample will not be representative of the population is: 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: Risk of assessing control risk too low Risk of assessing control risk too high Risk of incorrect acceptance Risk of 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 The _____ represents the way the auditor identifies the performance of internal controls of interest. Population Sampling Unit Materiality Sampling Risk B. Sampling Unit

Study Break The _____ is the maximum rate of deviation from a control that an auditor is willing to accept and still use the planned control risk. 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 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. Test of Controls Attribute Tests Audit Tests Substantive Tests D. Substantive Tests

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