Management and Organizational Studies 3363A/B Chapter 11: MOS 3363 - Chapter 11

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Management and Organizational Studies
Management and Organizational Studies 3363A/B
Michelle Loveland

Audit Sampling Concepts • The only way we test balances (especially with the income statement) The Nature of Sampling • More cost effective and efficient than taking a census • Auditing uses sampling to deal with three key aspects: o Planning the sample o Selecting the sample and performing tests o Evaluating the results • A representative sample is one where the characteristics of the sample are approximately the same as those of the population • A non-representative sample is one where the characteristics are not approximately the same as those of the population. • Non-sampling risk arises when the auditor uses inappropriate audit procedures, fails to detect a misstatement when applying an audit procedure, or misinterprets the audit results o It is reduced by adequate training, proper planning and effective supervision • Sampling risk results from testing less than the entire population. It is the risk that conclusions based on the sample results will not be true of the population as a whole. o Can be reduced by increasing the sampling size • Statistical and non-statistical sampling refer to the type of sampling method • Probabilistic and non-probabilistic sampling refers to the way the sample is chosen and tested • Statistical sampling uses the laws of probability for selecting and evaluating a sample from a population for the purposes of reaching a conclusion about the population that has been selected at random o The found misstatement is then projected on the entire population o The auditor is able to quantify the sampling risk • Statistical sampling also gives rise to two types of errors: o Type 1 Error – the risk as assessing the control risk as too high/risk of incorrect rejection. The auditor may perform more work than necessary o Type 2 Error – the risk of assessing control risk too low / Risk of incorrect acceptance – the auditor may fail to detect a material misstatement. • Statistical sampling has a number of advantages in that it provides for: o Quantitative evaluation of the sample results. o A more defensible expression of the test results. o More objective recommendations for management. • When statistical sampling is used, the sample must be probabilistic, and appropriate statistical evaluation methods must be used with the sample results to determine sampling risk. • In non-statistical sampling the auditor uses subjective judgement in determining the sample size and selection process to the audit items of greatest value and highest risk o Conclusions are reached about the population based on a judgemental basis o A non-statistical sample can be designed so that it is equally effective and efficient as statistical sampling — while being less costly. • Non-statistical sampling does not allow the auditor to draw objectively valid statistical inferences from the sample results, or quantitatively measure and express sampling risk. • When using probabilistic sample selection, the auditor randomly selects items such that each population item has a known probability of being included in the sample. • When using non-probabilistic sample selection, the auditor selects sample items using professional judgment rather than probabilistic methods. Process of Sampling • Whether the sample is statistical or non-statistical, the same process applies • This will be discussed later on in the chapter (14 steps) o Plan the sample to make sure that the audit tests are performed in a manner that provides the desired sampling risk and minimizes the likelihood of non-sampling error. o Perform the tests by examining documents and performing other audit tests. o Evaluate the results by drawing conclusions based on the audit tests. o Select the sample by deciding how to select sample items from the population. Non-Probabilistic and Non-Stastical Samples • Directed sample selection — each item in the sample is selected on the basis of some judgmental criteria established by the auditor. Refer to Table 11-2. • Block sample selection — the auditor selects the first item in a block, and the remainder of the block is chosen in sequence. o Test every sample within a block • Haphazard sample selection — where the items for the sample are chosen without regard to their size, source, or other distinguishing characteristics. Probabilistic and Statistical Samples • The auditor may choose to stratify the population before selecting a sample. • Simple random sample selection — one in which every possible combination of population items has an equal chance of constituting the sample. • Systematic sample selection — where the auditor calculates an interval and then methodically selects the items for the sample based on the size of the interval. • Probability proportionate-to-size sample selection — a variation of systematic sample selection by unit of interest where the individual dollar is considered the unit of interest. o The interval is determined based upon a statistical formula, and the transactions associated with that dollar interval are selected. • Once the decision has been made to conduct statistical sampling, the auditor may choose from three broad categories of statistical sampling: o Attribute o Probability-proportionate-to-size (PPS) o Variables • Attribute sampling is typically used for tests of controls — a sample is drawn to estimate the proportion of an attribute or characteristic in a population o A
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