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Chapter 10

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Chapter 10

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  1. Chapter 10 Audit Sampling

  2. Introduction Overview of Audit Sampling Definition Population Nonsampling and Sampling Risk Assessing control risk to high Assessing control risk to low

  3. Sampling Risk: Substantive Testing • Risk of incorrect acceptance • Risk of incorrect rejection • Selecting a Sampling Approach • Statistical sampling • Nonstatistical sampling • Sampling to Test Controls • Attribute estimation sampling

  4. Substantive Sampling Considerations • Basic Steps: • Specify audit objective • Define a misstatement • Define the population • Choose sampling method • Determine sample size • Selectthe sample • Audit the selected items • Evaluatethe sample results • Perform follow-up work as necessary • Document

  5. Specify the Audit Objective • Combination of sampling and other audit procedures. • Sampling used in two ways: • Determine reasonableness of an account balance. • Estimate some amount.

  6. Define Misstatements • Misstatements should be defined before beginning to: • preclude rationalizing away misstatements • provide guidance to the audit team • Misstatement: a difference that affects the correctness of the overall account balance.

  7. Define the Population • Group of items in an account balance that the auditor wants to test. • Does not include: • items that the auditor has decided to examine 100%. • items that will be tested separately.

  8. Define the Sampling Unit • Sampling units are the individual auditable elements as defined by the auditor. • Completeness of the Population • Auditor needs assurance that the list accurately represents the population.

  9. Identify Individually Significant Items • Top stratum--few large-dollar items • Lower stratum--the remaining items • Stratification of the population

  10. Choose a Sampling Method • Nonstatistical • Probability proportional to size (PPS) • Classical sampling methods (Appendix 10B) • Mean-per-unit • Ratio estimation • Difference estimation

  11. Determine the Sample Size, Select the Sample, and Evaluate the Results • Tolerable misstatement • Expected misstatement • Document the Results

  12. Nonstatistical Sampling • Determine sample size • Selecting the Sample • Haphazard selection • Evaluating the sample results • Using audit software

  13. Probability Proportional to Size Sampling • PPS sampling is an adaptation of attribute sampling methods to dollar value testing. • Population definition • Test of details risk (incorrect acceptance) • Other substantive procedures risk (OSPR) • Sample size and selection • Zero and Negative Balances

  14. PPS • Sample Evaluation • Error Evaluation Terminology • Upper misstatement limit (UML) • Basic precision • Most likely misstatement (MLM) • Incremental allowance for sampling error • Allowance for sampling error

  15. Appendix 10A: Sampling to Test Controls • Planning Factors • Audit objective • Tolerable failure rate • Expected failure rate • Allowance for sampling error (precision) • Allowable risk of assessing control risk too low

  16. Sampling to Test Controls • Nonstatistical sampling • Attribute Estimation sampling • Define the attributes of interest and failures • Define the population • Period covered by the tests • Sampling unit • Ensuring the population is complete

  17. Sampling to Test Controls • Determine the Sample Size • Multiple attributes • Effect of population size (finite adj. factor) • Determine the method of selecting the sample • Random numbers • Systematic selection • Haphazard selection

  18. Sampling to Test Controls • Select and audit the sample items. • Evaluate the sample results. • Quantitative evaluation • Qualitative evaluation • Linkage to substantive testing

  19. Appendix 10B: Classical Sampling Methods • MPU Sampling • Difference estimation sampling • Ratio estimation sampling • Sample Size • Estimation of population standard deviation • Desired allowance for sampling error

  20. Classical Sampling Methods • Sample Selection • Sample Evaluation • Point estimate • Projected misstatement • Achieved precision • Decision rules • Adjusted achieved precision • Unacceptable results

  21. Classical Sampling Methods • Comparison of PPS and classical sampling • Computer support