1. 11 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 11 Audit Sampling Concepts

2. 11 - 2 Copyright  2003 Pearson Education Canada Inc. What is a representative sample?

3. 11 - 3 Copyright  2003 Pearson Education Canada Inc. What is a representative sample? A representative sample has the same characteristics as the population from which the sample was taken.

4. 11 - 4 Copyright  2003 Pearson Education Canada Inc. What can make a sample non- representative?

5. 11 - 5 Copyright  2003 Pearson Education Canada Inc. What can make a sample non- representative? - sampling errors ?

6. 11 - 6 Copyright  2003 Pearson Education Canada Inc. What can make a sample non- representative? Sampling errors occur because of the nature of sampling; the proper sampling method was selected, applied, and interpreted but failed to uncover material misstatements.

7. 11 - 7 Copyright  2003 Pearson Education Canada Inc. What can an auditor do to reduce the risk of sampling errors?

8. 11 - 8 Copyright  2003 Pearson Education Canada Inc. What can an auditor do to reduce the risk of sampling errors? increase sample size

9. 11 - 9 Copyright  2003 Pearson Education Canada Inc. What can make a sample non- representative? - sampling errors - nonsampling errors ?

10. 11 - 10 Copyright  2003 Pearson Education Canada Inc. What can make a sample non- representative? - sampling errors - nonsampling errors result from auditor failure to recognize errors or excep- tions or from the selection of ineffec- tive or inappropriate procedures oops!

11. 11 - 11 Copyright  2003 Pearson Education Canada Inc. What can an auditor do to reduce the risk of nonsampling errors?

12. 11 - 12 Copyright  2003 Pearson Education Canada Inc. What can an auditor do to reduce the risk of nonsampling errors? increase auditor competence Continuing Professional Education

13. 11 - 13 Copyright  2003 Pearson Education Canada Inc. Audit sampling can be based on: statistics OR judgment

14. 11 - 14 Copyright  2003 Pearson Education Canada Inc. nonstatistical sampling statistical sampling

15. 11 - 15 Copyright  2003 Pearson Education Canada Inc. primary advantage: the audit risk can be quantified nonstatistical sampling statistical sampling primary advantage: employs auditor’s experience and judgment

16. 11 - 16 Copyright  2003 Pearson Education Canada Inc. nonstatistical sampling statistical sampling primary advantage: the sampling risk can be quantified primary advantage: employs auditor’s experience and judgment

17. 11 - 17 Copyright  2003 Pearson Education Canada Inc. nonstatistical sampling statistical sampling determine sample size explicitly recognizing relevant factors judgmentally determine sample size implicitly recognizing relevant factors

18. 11 - 18 Copyright  2003 Pearson Education Canada Inc. nonstatistical sampling statistical sampling determine sample size explicitly recognizing relevant factors randomly select a representative sample judgmentally determine sample size implicitly recognizing relevant factors judgmentally select a representative sample

19. 11 - 19 Copyright  2003 Pearson Education Canada Inc. determine sample size explicitly recognizing relevant factors randomly select a representative sample apply audit procedures judgmentally determine sample size implicitly recognizing relevant factors judgmentally select a representative sample apply audit procedures nonstatistical sampling statistical sampling

20. 11 - 20 Copyright  2003 Pearson Education Canada Inc. nonstatistical sampling statistical sampling determine sample size explicitly recognizing relevant factors randomly select a representative sample apply audit procedures evaluate test results statistically and judgmentally determine sample size implicitly recognizing relevant factors judgmentally select a representative sample apply audit procedures evaluate test results judgmentally

21. 11 - 21 Copyright  2003 Pearson Education Canada Inc. nonstatistical sampling judgmentally select a representative sample sample selection Nonstatistical sampling employs nonprobabilistic selection - the auditor decides which population items to select.

22. 11 - 22 Copyright  2003 Pearson Education Canada Inc. nonprobabilistic selection methods - judgmental (directed sample) selection auditor selects items based on charac- teristics because random selection does not consider: ~ each type of transaction sample selection nonstatistical sampling judgmentally select a representative sample

23. 11 - 23 Copyright  2003 Pearson Education Canada Inc. nonprobabilistic selection methods - judgmental (directed sample) selection auditor selects items based on charac- teristics because random selection does not consider: ~ each type of transaction ~ each preparer of transactions sample selection nonstatistical sampling judgmentally select a representative sample

24. 11 - 24 Copyright  2003 Pearson Education Canada Inc. nonprobabilistic selection methods - judgmental (directed sample) selection auditor selects items based on charac- teristics because random selection does not consider: ~ each type of transaction ~ each preparer of transactions ~ large dollar balances sample selection nonstatistical sampling judgmentally select a representative sample

25. 11 - 25 Copyright  2003 Pearson Education Canada Inc. sample selection nonprobabilistic selection methods - block sampling - selection of a sequence and examining every item in the sequence Example: examine all cancelled cheques of February Ace Corporation 324 $ pay to the order of date nonstatistical sampling judgmentally select a representative sample CANADIAN BANK

26. 11 - 26 Copyright  2003 Pearson Education Canada Inc. nonprobabilistic selection methods - haphazard selection - auditor selects items without regard to characteristics sample selection Beware of bias! nonstatistical sampling judgmentally select a representative sample

27. 11 - 27 Copyright  2003 Pearson Education Canada Inc. statistical sampling randomly select a representative sample sample selection Statistical sampling employs probabilistic selection - every population item has a known chance of being selected.

28. 11 - 28 Copyright  2003 Pearson Education Canada Inc. statistical sampling randomly select a representative sample sample selection probabilistic selection methods - simple random sample selection used to sample populations that are not segmented for audit purposes

29. 11 - 29 Copyright  2003 Pearson Education Canada Inc. statistical sampling randomly select a representative sample sample selection probabilistic selection methods - random number tables How does an auditor use random number tables ?

30. 11 - 30 Copyright  2003 Pearson Education Canada Inc. statistical sampling randomly select a representative sample sample selection probabilistic selection methods - use of random number table 1. number each population item 2. establish correspondence between table and population 3. establish a route in the table 4. select a random starting point 5. document the method

31. 11 - 31 Copyright  2003 Pearson Education Canada Inc. statistical sampling randomly select a representative sample sample selection probabilistic selection methods - computer generation of random numbers

32. 11 - 32 Copyright  2003 Pearson Education Canada Inc. statistical sampling randomly select a representative sample sample selection probabilistic selection methods - systematic selection - the auditor cal- culates an interval, starts at random, and selects every nth item. Beware of possible bias with numeric tests, e.g., every 314th cheque is written on a Friday.

33. 11 - 33 Copyright  2003 Pearson Education Canada Inc. statistical sampling randomly select a representative sample sample selection probabilistic selection methods - probability proportional to size and stratified sample selection discussed in chapter 14

34. 11 - 34 Copyright  2003 Pearson Education Canada Inc. Audit Sampling ?

35. 11 - 35 Copyright  2003 Pearson Education Canada Inc. Audit sampling is a method used to determine the proportion of population items containing a particular attribute. Audit Sampling

36. 11 - 36 Copyright  2003 Pearson Education Canada Inc. When is audit sampling appropriate?

37. 11 - 37 Copyright  2003 Pearson Education Canada Inc. When is audit sampling appropriate? Example: credit authorization of sales SALES INVOICE 38527 Date: Ace Company Customer: 834 Reynolds Rd. Winnipeg, MB R2V 4E3 Sales Representative: Quantity Description Price total invoice amount Terms of sale (including discounts and freight costs): Carrier: Credit authorization: tests of controls

38. 11 - 38 Copyright  2003 Pearson Education Canada Inc. Audit Sampling Terms - attribute - the tested characteristic

39. 11 - 39 Copyright  2003 Pearson Education Canada Inc. - attribute - acceptable risk of assessing control risk too low (ARACR)- the risk that the auditor is willing to accept that con- trols are accepted as effective, but the actual population exception rate is greater than the TER Audit Sampling Terms

40. 11 - 40 Copyright  2003 Pearson Education Canada Inc. - attribute - acceptable risk of assessing control risk too low (ARACR) - tolerable exception rate (TER) - the population exception rate the auditor will permit and still be willing to use the assessed control risk and/or the amount of monetary misstatements in the transactions established during planning Audit Sampling Terms

41. 11 - 41 Copyright  2003 Pearson Education Canada Inc. - attribute - acceptable risk of assessing control risk too low (ARACR) - tolerable exception rate (TER) - estimated population exception rate (EPER) - the exception rate that the auditor expects to find (this estimate is made prior to any testing) Audit Sampling Terms

42. 11 - 42 Copyright  2003 Pearson Education Canada Inc. - attribute - acceptable risk of assessing control risk too low (ARACR) - tolerable exception rate (TER) - estimated population exception rate (EPER) - initial sample size - determined judg- mentally by the auditor implicitly con- sidering the ARACR, TER, EPER, and population size Audit Sampling Terms

43. 11 - 43 Copyright  2003 Pearson Education Canada Inc. - attribute - acceptable risk of assessing control risk too low (ARACR) - tolerable exception rate (TER) - estimated population exception rate (EPER) - initial sample size - exception - a deviation from the tested characteristic Audit Sampling Terms

44. 11 - 44 Copyright  2003 Pearson Education Canada Inc. - attribute - acceptable risk of assessing control risk too low (ARACR) - tolerable exception rate (TER) - estimated population exception rate (EPER) - initial sample size - exception - sample exception rate (SER): number of exceptions sample size Audit Sampling Terms

45. 11 - 45 Copyright  2003 Pearson Education Canada Inc. - attribute - acceptable risk of assessing control risk too low (ARACR) - tolerable exception rate (TER) - estimated population exception rate (EPER) - initial sample size - exception - sample exception rate (SER) - computed upper exception rate (CUER) - considering the extent of exceptions, the worst likely population exception rate Audit Sampling Terms

46. 11 - 46 Copyright  2003 Pearson Education Canada Inc. Audit Sampling Sequence ?

47. 11 - 47 Copyright  2003 Pearson Education Canada Inc. SALES INVOICE 38527 Date: Acme Company Customer: 834 Reynolda Rd. Winnipeg, MB R2V 4E3 Sales Representative: Quantity Description Price total invoice amount Est. shipment date: Terms of sale (including discounts and freight costs): Carrier: Credit authorization: 1. State the objectives of the audit test. Example: The auditor is testing proper credit approval of sales. Audit Sampling Sequence

48. 11 - 48 Copyright  2003 Pearson Education Canada Inc. 2. Decide if audit sampling applies. yesno audit sampling is appropriate audit sampling is not appropriate Does the auditor plan to reach conclusions based on a sample? Audit Sampling Sequence

49. 11 - 49 Copyright  2003 Pearson Education Canada Inc. 3. Define attributes and exception conditions. In the example, what is the attribute? Audit Sampling Sequence

50. 11 - 50 Copyright  2003 Pearson Education Canada Inc. SALES INVOICE 38527 Date: Acme Company Customer: 834 Reynolda Rd. Winnipeg, MB R2V 4E3 Sales Representative: Quantity Description Price total invoice amount Est. shipment date: Terms of sale (including discounts and freight costs): Carrier: Credit authorization: Joe Credit the signature of the credit manager on the sales invoice In the example, what is the attribute? 3. Define attributes and exception conditions. Audit Sampling Sequence

51. 11 - 51 Copyright  2003 Pearson Education Canada Inc. 3. Define attributes and exception conditions. In the example, what is the exception condition? Audit Sampling Sequence

52. 11 - 52 Copyright  2003 Pearson Education Canada Inc. SALES INVOICE 38527 Date: Acme Company Customer: 834 Reynolda Rd. Winnipeg, MB R2V 4E3 Sales Representative: Quantity Description Price total invoice amount Est. shipment date: Terms of sale (including discounts and freight costs): Carrier: Credit authorization: forged signature of credit manag- er, no signature, signature of someone else Jill Accountant In the example, what is the exception condition? 3. Define attributes and exception conditions. Audit Sampling Sequence

53. 11 - 53 Copyright  2003 Pearson Education Canada Inc. 4. Define the population. In the example, what is the population? audit sampling sequence

54. 11 - 54 Copyright  2003 Pearson Education Canada Inc. 4. Define the population. 2004 sales invoices (sequence 10397 - 40465) Population size = 30,068. In the example, what is the population? Audit Sampling Sequence

55. 11 - 55 Copyright  2003 Pearson Education Canada Inc. 5. Define the sampling unit. In the example, what is the sampling unit? Audit Sampling Sequence

56. 11 - 56 Copyright  2003 Pearson Education Canada Inc. 5. Define the sampling unit. one sales invoice In the example, what is the sampling unit? Audit Sampling Sequence

57. 11 - 57 Copyright  2003 Pearson Education Canada Inc. 6. Specify the tolerable exception rate. This determination is based on: - auditor judgment - materiality - importance of the attribute Audit Sampling Sequence

58. 11 - 58 Copyright  2003 Pearson Education Canada Inc. In the example, the auditor needs to ask: concerning the indication of credit ap- proval on sales invoices, what percent of invoices without appropriate approval would prevent auditor use of the assessed control risk and/or the amount of monetary misstatement in the transactions established during planning. 6. Specify the tolerable exception rate. Audit Sampling Sequence

59. 11 - 59 Copyright  2003 Pearson Education Canada Inc. 6. Specify the tolerable exception rate. Audit Sampling Sequence In the example, the auditors judgmentally assess the tolerable exception rate (TER): TER = 7%

60. 11 - 60 Copyright  2003 Pearson Education Canada Inc. When would the auditor establish a low TER? Audit Sampling Sequence 6. Specify the tolerable exception rate.

61. 11 - 61 Copyright  2003 Pearson Education Canada Inc. When would the auditor establish a low TER? when the auditor is less willing to accept excep- tions (e.g., cash controls) Audit Sampling Sequence 6. Specify the tolerable exception rate.

62. 11 - 62 Copyright  2003 Pearson Education Canada Inc. 7. Specify the acceptable risk of assess- ing control risk too low (ARACR). To what degree does the auditor want to rely on controls? Audit Sampling Sequence

63. 11 - 63 Copyright  2003 Pearson Education Canada Inc. low reliance on controls = high ARACR high reliance on controls = low ARACR To what degree does the auditor want to rely on controls? Audit Sampling Sequence 7. Specify the acceptable risk of assess- ing control risk too low (ARACR).

64. 11 - 64 Copyright  2003 Pearson Education Canada Inc. To what degree does the auditor want to rely on controls? In the example, the auditors judgmentally assess the acceptable risk of assessing con- trol risk too low: ARACR = medium Audit Sampling Sequence 7. Specify the acceptable risk of assess- ing control risk too low (ARACR).

65. 11 - 65 Copyright  2003 Pearson Education Canada Inc. 8. Estimate the population exception rate (EPER) - estimate based on prior year year audit or small preliminary sample For the example: EPER = 4% Audit Sampling Sequence

66. 11 - 66 Copyright  2003 Pearson Education Canada Inc. 9. Determine the initial sample size (SS). considered initial because the auditor may later decide to sample more Audit Sampling Sequence

67. 11 - 67 Copyright  2003 Pearson Education Canada Inc. 9. Determine the initial sample size (SS). Determined judgmentally based on = 30,068 = 7% = 10% = 4% pop. TER ARACR EPER Audit Sampling Sequence

68. 11 - 68 Copyright  2003 Pearson Education Canada Inc. Sample Size Determination RELATIONSHIP FACTOR TO SAMPLE SIZE ARACR inverse TER inverse EPER direct Pop. size no effect (if pop.> 5,000)

69. 11 - 69 Copyright  2003 Pearson Education Canada Inc. 9. Determine the initial sample size (SS). sample size = 150 = 30,068 = 7% = medium = 4% pop. TER ARACR EPER Audit Sampling Sequence Determined judgmentally based on

70. 11 - 70 Copyright  2003 Pearson Education Canada Inc. SALES INVOICE 38527 Date: Acme Company Customer: 834 Reynolda Rd. Winston-Salem, NC27109 Sales Representative: Quantity Description Price total invoice amount Est. shipment date: Carrier: Credit authorization: Joe Credit 10. Select the sample. 11. Perform the audit procedures. how? Audit Sampling Sequence

71. 11 - 71 Copyright  2003 Pearson Education Canada Inc. SALES INVOICE 38527 Date: Acme Company Customer: 834 Reynolda Rd. Winston-Salem, NC27109 Sales Representative: Quantity Description Price total invoice amount Carrier: Credit authorization: Joe Credit 10. Select the sample. 11. Perform the audit procedures. Of 150 invoices examined, 7 had no credit approval. Audit Sampling Sequence

72. 11 - 72 Copyright  2003 Pearson Education Canada Inc. 12. Generalize from the sample to the population. = 30,068 = 7% = medium = 4% = 150 = 7 pop. TER ARACR EPER SS exceptions Audit Sampling Sequence Considering these factors, judgmentally determine CUER

73. 11 - 73 Copyright  2003 Pearson Education Canada Inc. 12. Generalize from the sample to the population. = 30,068 = 7% = medium = 4% = 150 = 7 pop. TER ARACR EPER SS exceptions Audit Sampling Sequence Considering these factors, judgmentally determine CUER CUER = 8%

74. 11 - 74 Copyright  2003 Pearson Education Canada Inc. What does this mean? Audit Sampling Sequence CUER = 8% 12. Generalize from the sample to the population.

75. 11 - 75 Copyright  2003 Pearson Education Canada Inc. There is a medium risk (ARACR) that the true exception rate > 8% Audit Sampling Sequence 12. Generalize from the sample to the population. CUER = 8%

76. 11 - 76 Copyright  2003 Pearson Education Canada Inc. 13. Analyze the exceptions. Is there a justifiable reason? In the example, the auditors found 7 sales in- voices without credit approval. Could they be sales to internal departments or subsidiaries? Audit Sampling Sequence

77. 11 - 77 Copyright  2003 Pearson Education Canada Inc. 14. Decide on the acceptability of the population. Decision rule: For population acceptability: CUER < TER Audit Sampling Sequence

78. 11 - 78 Copyright  2003 Pearson Education Canada Inc. 8% < 7% Decision rule: For population acceptability: CUER < TER The population is not acceptable; the controls regarding the indication of credit approval on sales invoices are not satisfactory.

79. 11 - 79 Copyright  2003 Pearson Education Canada Inc. When an internal control is judged unacceptable, what options does the auditor have?

80. 11 - 80 Copyright  2003 Pearson Education Canada Inc. - revise the TER and/or ARACR This may be considered ethically questionable. WHY? When an internal control is judged unacceptable, what options does the auditor have?

81. 11 - 81 Copyright  2003 Pearson Education Canada Inc. - expand the sample size When is this appropriate? When an internal control is judged unacceptable, what options does the auditor have?

82. 11 - 82 Copyright  2003 Pearson Education Canada Inc. This is only appropriate if the auditor believes that the sample was not repre- sentative of the population. When an internal control is judged unacceptable, what options does the auditor have? - expand the sample size

83. 11 - 83 Copyright  2003 Pearson Education Canada Inc. - revise the assessed control risk up- ward, and increase tests of details of balances for related accounts (a/r, sales, bad debt expense, allowance for doubtful accounts) When an internal control is judged unacceptable, what options does the auditor have?

84. 11 - 84 Copyright  2003 Pearson Education Canada Inc. When an internal control is judged unacceptable, the auditor is required to communicate this weakness to management, and may inform the audit committee as well.

85. 11 - 85 Copyright  2003 Pearson Education Canada Inc. Audit Sampling Sequence 1. State the objectives of the audit test.

86. 11 - 86 Copyright  2003 Pearson Education Canada Inc. 1. State the objectives of the audit test. Example: The auditor wants to deter- mine the acceptability of the notes re- ceivable balance of $600,000. notes receivable $600,000 acceptable? Audit Sampling Sequence

87. 11 - 87 Copyright  2003 Pearson Education Canada Inc. 1. Determine the objectives of the test. 2. Decide if audit sampling applies. Does the auditor plan to reach conclusions based on a sample? Audit Sampling Sequence

88. 11 - 88 Copyright  2003 Pearson Education Canada Inc. 1. Determine the objectives of the test. 2. Decide if audit sampling applies. 3. Define misstatement conditions. ? Audit Sampling Sequence

89. 11 - 89 Copyright  2003 Pearson Education Canada Inc. 1. Determine the objectives of the test. 2. Decide if audit sampling applies. 3. Define misstatement conditions. Misstatement conditions are any conditions that represent monetary fraud, errors or irregularities in the accounting records. Audit Sampling Sequence

90. 11 - 90 Copyright  2003 Pearson Education Canada Inc. 1. Determine the objectives of the test. 2. Decide if audit sampling applies. 3. Define misstatement conditions. 4. Define the population. ? Audit Sampling Sequence

91. 11 - 91 Copyright  2003 Pearson Education Canada Inc. 1. Determine the objectives of the test. 2. Decide if audit sampling applies. 3. Define misstatement conditions. 4. Define the population. notes receivable dollars Audit Sampling Sequence

92. 11 - 92 Copyright  2003 Pearson Education Canada Inc. 1. Determine the objectives of the test. 2. Decide if audit sampling applies. 3. Define misstatement conditions. 4. Define the population. 5. Define the sampling unit. ? Audit Sampling Sequence

93. 11 - 93 Copyright  2003 Pearson Education Canada Inc. 1. Determine the objectives of the test. 2. Decide if audit sampling applies. 3. Define misstatement conditions. 4. Define the population. 5. Define the sampling unit. one customer name or loan number Audit Sampling Sequence

94. 11 - 94 Copyright  2003 Pearson Education Canada Inc. 1. Determine the objectives of the test. 2. Decide if audit sampling applies. 3. Define misstatement conditions. 4. Define the population. 5. Define the sampling unit. 6. Specify tolerable misstatement. What amount of monetary fraud, error or irregularity can exist in notes receivable without causing the financial statements to be materially misstated? Audit Sampling Sequence

95. 11 - 95 Copyright  2003 Pearson Education Canada Inc. 6. Specify tolerable misstatement. based on auditor judgment Audit Sampling Sequence What amount of monetary fraud, error or irregularity can exist in notes receivable without causing the financial statements to be materially misstated?

96. 11 - 96 Copyright  2003 Pearson Education Canada Inc. 6. Specify tolerable misstatement. In the notes receivable example, tolerable mis- statement is established at $24,000 for both over- and understatements. Audit Sampling Sequence What amount of monetary fraud, error or irregularity can exist in notes receivable without causing the financial statements to be materially misstated?

97. 11 - 97 Copyright  2003 Pearson Education Canada Inc. 7. Specify acceptable risk of incorrect acceptance. What level of risk is the auditor willing to take of concluding that the account balance is not materi- ally misstated when, in fact, it is materially misstated. Audit Sampling Sequence

98. 11 - 98 Copyright  2003 Pearson Education Canada Inc. 7. Specify acceptable risk of incorrect acceptance. What level of risk is the auditor willing to take of concluding that the account balance is not materi- ally misstated when, in fact, it is materially misstated. also based on auditor judgment Audit Sampling Sequence

99. 11 - 99 Copyright  2003 Pearson Education Canada Inc. 7. Specify acceptable risk of incorrect acceptance. What level of risk is the auditor willing to take of concluding that the account balance is not materi- ally misstated when, in fact, it is materially misstated. In the notes receivable example, ARIA is established at 5%. Audit Sampling Sequence

100. 11 - 100 Copyright  2003 Pearson Education Canada Inc. 8. Estimate misstatements in the population. What is the amount of mis- statement that the auditor expects to find in the population? Audit Sampling Sequence

101. 11 - 101 Copyright  2003 Pearson Education Canada Inc. What is the amount of mis- statement that the auditor expects to find in the population? based on auditor judgment and prior year results 8. Estimate misstatements in the population. Audit Sampling Sequence

102. 11 - 102 Copyright  2003 Pearson Education Canada Inc. What is the amount of mis- statement that the auditor expects to find in the population? In the example, EPER is 1.5%; i.e., the auditor expects that 1.5% of the notes receivable balance is misstated. 8. Estimate misstatements in the population. Audit Sampling Sequence

103. 11 - 103 Copyright  2003 Pearson Education Canada Inc. 9. Determine the initial sample size. For nonstatistical sampling, professional judgment of auditor is used to determine initial sample size. Audit Sampling Sequence

104. 11 - 104 Copyright  2003 Pearson Education Canada Inc. 9. Determine the initial sample size. For statistical sampling of test of controls, population size, TER, ARACR, and EPER are all factors used to determine initial sample size. Audit Sampling Sequence

105. 11 - 105 Copyright  2003 Pearson Education Canada Inc. Audit Sampling Sequence 10. Select the sample. Nonprobabilistic: - Directed sample selection - Block sample selection - Haphazard sample selection

106. 11 - 106 Copyright  2003 Pearson Education Canada Inc. Audit Sampling Sequence 10. Select the sample. Probabilistic: - Simple random sample selection - Systematic sample selection - Probability proportionate-to-size sample selection

107. 11 - 107 Copyright  2003 Pearson Education Canada Inc. 11. Perform the audit procedures. Through confirmation of selected notes receivable balances, $1,380 of misstatements were discovered in a sample of $35,500. Audit Sampling Sequence Canada 48

108. 11 - 108 Copyright  2003 Pearson Education Canada Inc. 12. Generalize from the sample to the population. Audit Sampling Sequence Project the sample misstatement results to the population and consider sampling error and sampling risk: sample misstatement total recorded point estimate total sample pop. value of misstatement x=

109. 11 - 109 Copyright  2003 Pearson Education Canada Inc. 12. Generalize from the sample to the population. Project the sample misstatement results to the population and consider sampling error and sampling risk: In the notes receivable example: Audit Sampling Sequence sample misstatement total recorded point estimate total sample pop. value of misstatement x = $1,380 $35,500 x $600,000 = $23,324 point estimate

110. 11 - 110 Copyright  2003 Pearson Education Canada Inc. 12. Generalize from the sample to the population. Audit Sampling Sequence tolerable misstatement - point estimate = allowance for sampling error $24,000 - $23,324 = $676 The auditor must also judgmentally assess sampling error, considering several factors. The most important of these factors is the difference between the point estimate and tolerable misstatement.

111. 11 - 111 Copyright  2003 Pearson Education Canada Inc. 12. Generalize from the sample to the population. The auditor must also judgmentally assess sampling error, considering several factors. The most important of these factors is the difference between the point estimate and tolerable misstatement. In the notes receivable example: Audit Sampling Sequence tolerable misstatement - point estimate = allowance for sampling error $24,000 - $23,324 = $676

112. 11 - 112 Copyright  2003 Pearson Education Canada Inc. 13. Analyze exceptions or misstatements. evaluate the nature and cause of each misstatement Audit Sampling Sequence

113. 11 - 113 Copyright  2003 Pearson Education Canada Inc. 13. Analyze the exceptions or misstatements. evaluate the nature and cause of each misstatement This evaluation may affect the auditor’s conclu- sions regarding financial statements, client operations, and/or other areas. Audit Sampling Sequence

114. 11 - 114 Copyright  2003 Pearson Education Canada Inc. 14. Determine the acceptability of the population. Decision Rule: Considering sampling error, if the point estimate is less than the tolerable mis- statement, accept the conclusion that the book value is not misstated by a material amount. Audit Sampling Sequence

115. 11 - 115 Copyright  2003 Pearson Education Canada Inc. In the notes receivable example: Decision Rule: Considering sampling error, if the point estimate is less than the tolerable mis- statement, accept the conclusion that the book value is not misstated by a material amount. original point estimate estimate of point estimate incl. of misstatement sampling error sampling error += $23,324 + $1,500 = $24,824 judgmentally determined conclusion?

116. 11 - 116 Copyright  2003 Pearson Education Canada Inc. $24,824>$24,000 tolerable misstatement The notes receivable balance of $600,000 is not acceptable. In the notes receivable example: Decision Rule: Considering sampling error, if the point estimate is less than the tolerable mis- statement, accept the conclusion that the book value is not misstated by a material amount. original point estimate estimate of point estimate incl. of misstatement sampling error sampling error += $23,324 + $1,500 = $24,824 conclusion?

117. 11 - 117 Copyright  2003 Pearson Education Canada Inc. What are the auditor’s options? book value is not acceptable

118. 11 - 118 Copyright  2003 Pearson Education Canada Inc. - take no action until tests of other audit areas are completed What are the auditor’s options? book value is not acceptable

119. 11 - 119 Copyright  2003 Pearson Education Canada Inc. - take no action until tests of other audit areas are completed - perform expanded audit tests in specific areas What are the auditor’s options? book value is not acceptable

120. 11 - 120 Copyright  2003 Pearson Education Canada Inc. - take no action until tests of other audit areas are completed - perform expanded audit tests in specific areas - increase sample size What are the auditor’s options? book value is not acceptable

121. 11 - 121 Copyright  2003 Pearson Education Canada Inc. - take no action until tests of other audit areas are completed - perform expanded audit tests in specific areas - increase sample size - request the account balance be adjusted What are the auditor’s options? book value is not acceptable

122. 11 - 122 Copyright  2003 Pearson Education Canada Inc. - take no action until tests of other audit areas are completed - perform expanded audit tests in specific areas - increase sample size - request the account balance be adjusted -request the client to correct the population What are the auditor’s options? book value is not acceptable

123. 11 - 123 Copyright  2003 Pearson Education Canada Inc. - take no action until tests of other audit areas are completed - perform expanded audit tests in specific areas - increase sample size - request the account balance be adjusted - request the client to correct the population - refuse to give an unqualified opinion What are the auditor’s options? book value is not acceptable