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Chapter 8

CHAPTER 8 AUDIT SAMPLING: AN OVERVIEW AND APPLICATION TO TESTS OF CONTROLS . Chapter 8. SAMPLING DEFINED.

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Chapter 8

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  1. CHAPTER 8 AUDIT SAMPLING: AN OVERVIEW AND APPLICATION TO TESTS OF CONTROLS Chapter 8

  2. SAMPLING DEFINED SAS No. 39 defines audit sampling as the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class (AU 350.01).

  3. AUDIT PROCEDURES THAT DO NOT INVOLVE AUDIT SAMPLING • Inquiry and observation • Analytical procedures • Procedures applied to every item in the population • Classes of transactions or accounts not tested • Tests of automated IT controls.

  4. TERMINOLOGY • Sampling Risk • Precision

  5. TERMINOLOGY • Type I and Type II errors • Risk of assessing CR too high / Incorrect rejection • Risk of assessing CR too low / Incorrect acceptance

  6. TYPES OF AUDIT SAMPLING • Nonstatistical Sampling --Judgmental (may not be as effective) • Statistical Sampling --Uses probability to select and evaluate sample --Advantages: • Design efficient sample • Measure sufficiency of evidence • Quantify sampling risk --Disadvantage: Cost of designing application and training employees

  7. SAS 39 Requirements • Planning for Sample Application • Relationship of sample to objective of test • Maximum deviation rate that would support planned level of CR • Risk of incorrect acceptance

  8. SAS 39 Requirements • Sample Selection (representative of population) • Random Number • Systematic • Haphazard

  9. SAS 39 Requirements • Performance Evaluation • Consider effect of not being able to apply a planned audit procedure to a sample item • Project results to entire population • Give consideration to sampling risk • Consider qualitative aspects of misstatements

  10. TYPES OF AUDIT SAMPLING • Types of statistical sampling techniques • Attribute sampling • Monetary-unit sampling • Classical variables sampling

  11. ATTRIBUTE SAMPLING APPLIED TO TESTS OF CONTROLS • Attribute Sampling: Estimates the proportion of a population that possesses a specified characteristic. • Normally used in tests of controls (determine the operating effectiveness of a control procedure in terms of deviations from the prescribed internal control).

  12. PHASES IN AN ATTRIBUTE SAMPLING APPLICATION • Planning • Performance • Evaluation

  13. PLANNING • Determine the tests objective(s). • Define the control deviation conditions. • Define the population. • Define the period covered by the test. • Define the sampling unit.

  14. PLANNING • Determine sample size: • Determine acceptable risk of assessing CR too low. • Determine tolerable deviation rate. • Determine expected population deviation rate. • Consider effect of population size.

  15. Effect of Sample Selection Factors on Sample Size (Table 8-4) FactorRelationship to Sample Size Acceptable risk of assessing CR too low Inverse Tolerable deviation rate Inverse Expected population deviation rate Direct Population size No effect

  16. PERFORMANCE • Randomly select the sample items. • Perform the audit procedures.

  17. SPECIAL SITUATIONS IN PERFORMING THE AUDIT PROCEDURES • Voided documents. • Unused or inapplicable documents. • Inability to examine a sample item. • Stopping the test before completion.

  18. EVALUATION • Calculating the sample results. • Performing error analysis. • Drawing final conclusions

  19. Nonstatistical Sampling • Differences in 3 Steps 1. Determine Sample Size: Use professional judgment, not a statistical formula. Public firms establish guidelines (Below Max – 10 - 15; Moderate – 20 - 35; Low – 30 - 75) 2. Random Selection: Allows use of haphazard samples 3. Calculating Results: Difficult to consider effect of sampling risk

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