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Chapter 10 - Auditing Internal Controls

N ways to control sampling risk n adjust sample size

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n Ways to Control Sampling Risk n Adjust sample size n Use a different method n Non-Sampling Risk n The risk that audit tests will not uncover exceptions in the sample. n Ways to Control Non-Sampling Risk n Careful design of procedures n Proper supervision and review
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+ Q1 – How many items to examine? n Population size - increases sample with increase in population n Population variance (lots of different types of things) - increases sample size because of variability n How much bad stuff (misstatement, deviations) do I expect - increases sample (scary movie example) n How much bad stuff (misstatement, deviations) can I tolerate - decrease sample (low tolerance means we stop if we find something; no exceptions, stop testing)
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+ Q2 – Which items to include? n Sampling methods n Statistical – follow the rules: every item MUST have an equal likelihood of being included in the sample n Random sampling n Systematic sampling n Stratified sampling n Non-statistical – relax the rules: every item NEED NOT have an equal likelihood of being included in the sample n Haphazard n Blocked sampling n Judgmental Random or systematic is also OK
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+ Sampling Methods n Statistical n Suggested by statistical technology (statistical requirements) n Compute sampling risk – gives efficient sample size n Statistical savvy user needed as well as computer n Quite common, especially for tests of controls n Non-statistical n Based on statistical technology (more relaxed requirements) n Sampling risk is “estimated” – care is required when determining sample size n Statistical savvy user – no need for computer
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+ Q3 – How to interpret results? n Quantify Sample Results n Deviation rate n Project to Population n Assumes no sampling risk n Our “best guess” n Consider Sampling Risk n What is “reasonably plausible” n Overall Evaluation n “Reasonably plausible” vs. “tolerable”
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+ Q3 – How to interpret results? Additional Evaluation n Considerations Related to Tests of Controls n Inability to apply tests is indicative of a deviation n Calculate the allowance for sampling risk n Relationship of exceptions to other aspects of the audit n Possible fraud
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+ Attributes Sampling n Attributes sampling is the most common sampling method used for tests of controls (TOC). n Attributes sampling is applied whenever the population contains characteristics of interest. n Examples: credit is approved, details on bill of lading agree to sales invoice, pricing and extensions on invoices are checked, etc. n Attributes sampling may follow either a statistical sampling or a non-statistical sampling methodology.
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+ Audit of IC process – Performing the Audit n Nature of Testing of Controls n Design Effectiveness n Inquiry n Observation n Inspection of documents n Walkthroughs n Operating Effectiveness n Inquiry of appropriate personnel n Inspection of documents n Observation of operations n Reperformance of application of control
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+ Relationship Between COSO and Auditing IC n Examples of how auditors can evaluate the IC according to the COSO framework n Control environment n Integrity and ethical values n Examine documents (code of conduct), talk to
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