1. Module E Overview of Sampling ACCT-40801Mudule E

2. 2 1. Introduction Definition Necessary knowledge Uses of sampling in auditing ACCT-4080

3. Mudule E3 2. Types of Sampling Nonstatistical use judgment to select sample and/or evaluate results justification for use Statistical use random selection evaluate results mathematically advantages ACCT-4080

4. Mudule E4 3. Statistical Sampling Models Attribute Sampling fixed sample-size attribute sampling discovery sampling Variables Sampling classical methods MPU, ratio estimation, difference estimation PPS ACCT-4080

5. Mudule E5 4.Random Selection Techniques Random number table Computer generation Systematic selection Block sampling Stratification ACCT-4080

6. Mudule E6 5. Sampling Plan Steps 1. Specify audit objectives and select sampling method 2. Define errors 3. Define population 4. Determine sample size 5. Select sample 6. Apply audit procedures 7. Evaluate results ACCT-4080

7. Mudule E7 6. Sampling Risks Terms errors – deviations – misstatements expected deviation rate tolerable deviation rate precision reliability ACCT-4080

8. Mudule E8 6. Sampling Risks (continued) Nonsampling risk Sampling risk Risk of assessing CR too high (underreliance) Risk of incorrect rejection Risk of assessing CR too low (overreliance) Risk of incorrect acceptance ACCT-4080

9. Mudule E9 Sampling Risk True Population State is: CorrectNot Correct Sample Results Tell You Population is: Correct Correct Conclusionβ risk Not Correct α risk Correct Conclusion ACCT-4080

10. Attribute Sampling (Module F) ACCT-4080Mudule E10

11. Mudule E11 7. Attribute Sampling Used to estimate the extent to which a characteristic (attribute) exists within a population Used in tests of controls Estimate the rate at which internal control policies or procedures are not functioning as intended (deviation rate) Compare rate to the allowable rate (tolerable deviation rate) ACCT-4080

12. Mudule E12 7. Attribute Sampling Example Risk of assessing CR too low: 5% (ROO) Tolerable deviation rate: 7% (TRD) Expected deviation rate: 2% (EPDR) Actual number of deviations found: 2 Use tables on pages: 791, 792, 795 ACCT-4080

13. Mudule E13 7. Attribute Sampling (Con’t) Sample Size Table (5% risk) Tolerable Deviation Rate EDR2%3%4%5%6%7% 1.00%**156937866 2.00%***181127 3.00%****195129 88 ACCT-4080

14. Mudule E14 7. Attribute Sampling (Con’t) Evaluation Table (5% risk) No. of deviations found n 0 1 2 3 4 5 754.06.28.210.111.813.6 803.75.87.7 9.511.112.7 903.35.26.9 8.4 9.911.4 ACCT-4080 7.7

15. Mudule E15 8. Evaluate Sample Results If UL (ULRD) > Tolerable Deviation Rate: Conclude that internal control is not functioning effectively Options Increase sample size in hopes of supporting planned level of control risk Increase level of control risk, leading to conducting more, and more effective, substantive procedures (lower detection risk) ACCT-4080

16. Mudule E16 8. Evaluate Sample Results (Con’t) If UL (ULRD)  Tolerable Deviation Rate Conclude that the internal control is functioning effectively Options Maintain planned level of control risk, leading to conducting the planned amount of substantive tests Consider a further reduction in control risk, leading to conducting fewer substantive procedures (higher detection risk) ACCT-4080

17. Mudule E17 9. Examples - Attribute Sampling Case A B C D Risk of Overreliance 5% 5% 10% 10% Expected Deviation Rate 2% 4% 2% 4% Tolerable Deviation Rate 7% 9% 7% 9% Errors Found 1 2 0 2 ACCT-4080

18. Mudule E18 10. Review Questions for Discussion Module E ACCT-4080 E.1 E.2 E.3 E.4 E.5 E.6 E.10 E.11 E.14 E.15 E.16 E.17