2221268-Notes-Chapter-5-AUD

2221268-Notes-Chapter-5-AUD - AUD Notes Chapter 5...

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AUD - Notes Chapter 5 http://cpacfa.blogspot.com Audit Sampling (statistic sampling) Sampling risk – reach the wrong conclusion based on the sample Although statistical sampling aids the auditor in quantitative ways, it is not a substitute for professional judgement. Professional judgement is still needed/required to set parameters and evaluate the results. 2 main types of sampling 1. Attribute sampling (rate of occurrence) – used for testing internal controls (yes/no questions) 2. Variable sampling (probability-proportional to size PPS or estimation sampling or numerical quantity) used in substantive testing of account balances (\$ values) Audit risk – risk of getting the opinion wrong due to uncertainty in applying audit procedures (sampling and other) Risk of assessing control risk too low – risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control (i.e. sample results indicate a lower deviation rate than actually exists in the population) Risk of assessing control risk too high – risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control. sample results indicate a greater deviation rate than actually exists in the population There are two sorts of mistakes an auditor can make with sampling: 1. The auditor may fail to identify an existing problem (incorrect acceptance and assessing control risk too low) 2. The auditor may falsely identify a problem where none exist (incorrect rejection and assessing control risk too high) The risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in (possibly not) detecting an existing material misstatement. Auditors usually accept a risk of 5% (or 10%). Inverse to the risk is the confidence level (also called reliability). The auditor is 95% confident that the sample is representative of the population. The risk of incorrect rejection and the risk of assessing control risk too high relate to the efficiency of the audit (the auditor does more audit work than is necessary) Attribute Sampling Planning considerations Relationship between the sample to the objective of the test of controls Tolerable deviation rate – maximum rate of deviation from a prescribed procedure the auditor will tolerate without modifying planned reliance (or changing control risk assessment) on internal control. Rate set by the auditor Auditors allowable risk of assessing control risk too low Characteristics of the population Deviation rate – auditors best estimate of the deviation rate in the population from which the sample was selected. There is a direct relationship to sample size: the fewer the deviations expected, the smaller the sample size would be needed. Population of 1000 and sample 100 items and 7 deviations identified within the sample

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2221268-Notes-Chapter-5-AUD - AUD Notes Chapter 5...

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