Auditing-Seminar 5
Discussion Questions
8-30 Exhibit 8.1. Describe at least one auditing procedure for each financial statement assertion for a sampling and gas.
| Financial Statement Assertion | Sampling to Gather Evidence | Gas to Gather Evidence |
| Existence or occurrence | Take sample of recorded transactions and for selected items examine underlying evidence or send out confirmations | Sort the file to identify the largest terms, the last transactions during the year (for testing cutoff), or the most frequent items within the file; also useful in scanning for unusual transactions |
| Completeness | Take a sample of subsequent cash disbursements to search for underreported liabilities. | Sort the file by vendor to identify the most commonly used vendors, or the least commonly used vendors; or comparing the list of vendors from the prior year to the current year. |
| Rights or obligations | Perform in conjunction with existence testing, including examining source documents. | Sort the file to scan for unusual transactions. |
| Valuation or allocation | Select items and trace back to source documents, such as purchase agreements. | Foot the file and test computations. |
| Presentations and disclosure | Verify estimates or other items for proper disclosure. |
8-33 Distinguish between the terms sampling risk and nonsampling risk.
Sampling risk is the risk that the auditors’ conclusion based on a sample might be different from the conclusion that would be reached if the audit procedure were applied in the same way to the entire population, and nonsampling risk is the risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk. (Chapter 8, p. 344 – 345).
8-35 Exhibit 8.4. Compare and contrast statistical sampling and nonstatistical sampling on the following dimensions; sample size determination, samples selection, evaluation, costs, and benefits.
| Sample size | Sample size is determined by auditor judgement. | Auditor judgment is quantified, and sample size is determined by probability theory. |
| Sample selection | Selection involves any method that the auditor believes is representative of the population.Judgement sampling can also be directed at a portion of the population, for example, all transactions during the last five days of the year | The sample must be randomly selected to give each unit in the population as equal chance to be included in the sample; there are several approached to random selection including simple random sampling and stratified random sampling. The population of interest can also be directed; for example, the transactions during the last ten days of the year can be statistically selected. |
| Evaluation | Evaluation is based on auditor judgement, and projections are based on sample results. | Evaluation is based on statistical inference that is used to assist auditor judgment. |
| Costs | Selection costs are lower because audit judgment is required only to determine an appropriate sample size and evaluate the results.This type of sampling does not provide an objective way to control and measure sampling risk. | Training costs are higher because knowledge of statistical sampling methods and/or special software is required.This type of sampling requires the auditor to define acceptable risk in advance. |
| Benefits | This method can be based on the auditors’ prior expectations about errors in the account.This method may take less time to plan, select, and evaluate the sample. | This method helps the auditor to design an efficient sample, measure the sufficiency of evidence, and evaluate the results by providing an objective measure of sampling risk. |
8-39 Exhibit 8.5. Sample Size
| Risk of Overreliance | Tolerable Rare of Deviation | Expected Population Deviation Rate | Samples Size (with expected errors in parenthesis) | |
| a. | 5% | 2% | 1% | 590 (6) |
| b. | 5% | 6% | 5% | 1,580 (79) |
| c. | 5% | 10% | 8% | 649 (52) |
| d. | 10% | 2% | 1% | 398 (4) |
| e. | 10% | 6% | 5% | 1,019 (51) |
| f. | 10% | 10% | 8% | 424 (34) |
First 3 calculations are from Table 1 and second 3 calculations are for Table 2.
Define the following terms
a.simple random sampling: selecting a random sample by matching a random numbers generated by a computer or selected from a random-number table, for example, document numbers in an invoice or purchase order.
b. systematic sampling: dividing the number of physical units in the population by the sample size to determine a uniform interval; a random starting point is selected in the first interval, and one item us selected throughout the population at each of the uniform intervals after the starting point.
c. systematic random sampling: sampling technique implemented when first item is selected randomly from the interval.
d. haphazard sampling: is a nonstatistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias, or special reason for including or omitting certain items from the sample.
e. block sampling: selecting a sample that consists of contiguous population items, such as selecting transactions by day or week. (Chapter 8, p. 354 – 355).
8-44 When evaluating an attributes sample, why is the focus on the upper limit of deviations in the sample? Attributes sampling is a statistical sampling method used to estimate the rate of control procedure failures based on selecting one sample and performing the appropriate audit procedure. An attribute is a characteristic of the population of interest to the auditor. An optimal sample size minimizes sampling risk and promotes audit efficiency.
The tolerable rate of deviation is implemented by the auditor to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population. The auditor wants to make sure that the upper limit does not exceed the tolerable deviation rate in order to mitigate a risk. (Chapter 8).
If the upper limit of deviation exceeds the tolerable deviation rate in attributes sampling, what alternative courses of action are available to the auditor?
In determining what changes to make in substantive audit procedures, the auditor should consider the nature of control deviation, and determine the effect of such deviations on potential material misstatement in the financial statements. When the upper limit of the possible deviation rate exceeds the tolerable deviation rate, the auditor has to decide whether the control failures, leads to a conclusion that there are either significant deficiencies or material weaknesses regarding internal control over financial reporting. (Chapter 8, p. 355).
Johnstone, K., Gramling, A., & Rittenberg, L. E. (2015). Auditing: A Risk Based-Approach to Conducting a Quality Audit. Boston, MA: Cengage
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