AUDIT SAMPLING CONCEPTS

7/18/2019 AUDIT SAMPLING CONCEPTS

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11 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 11

Audit Sampling

Concepts


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What is aWhat is a representativer

epresentativesample?sample?


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What is aWhat is a representativer

epresentativesample?sample?

A representative sample has the samecharacteristics as the population from

which the sample was taken.


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What can make a sampleWhat can make a sample nonnon--representative?representative?


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- sampling errors

?


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ampling errors

occur !ecause of the natureof sampling" the proper

sampling metho# was selecte#$

applie#$ an# interprete# !utfaile# to uncover materialmisstatements.


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What can an au#itor #o to re#uceWhat can an au#itor #o to re#ucethe risk ofthe risk of sampling errorssampling errors??


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What can an au#itor #o to re#uceWhat can an au#itor #o to re#ucethe risk ofthe risk of sampling errorssampling errors??

increase sample si'e


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- sampling errorsnonsampling errors

?


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- sampling errorsnonsampling errors result from au#itorfailure to recogni'e errors or e*cep-

tions or from the selection of ineffec- tive or inappropriate proce#ures

oops+


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What can an au#itor #o to re#uceWhat can an au#itor #o to re#ucethe risk ofthe risk of nonsampling errorsnonsampling errors??



What can an au#itor #o to re#uceWhat can an au#itor #o to re#ucethe risk ofthe risk of nonsampling errorsnonsampling errors??

increase au#itor competence

Continuing Professional

Education



Au#it sampling can !e !ase# on,Au#it sampling can !e !ase# on,

statistics

/u#gment



nonstatistical sampling statistical sampling



primar0

a#vantage,the au#it

risk can !euantifie#


primar0

a#vantage,emplo0sau#itors

e*periencean#

/u#gment




primar0

a#vantage,thesampling

risk can !euantifie#

primar0

a#vantage,emplo0sau#itors

e*periencean#

/u#gment


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#etermine sample si'e

e*plicitl0 recogni'ing relevant factors

/u#gmentall0

#etermine sample si'eimplicitl0 recogni'ing relevant factors


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ran#oml0 select a

representative sample

/u#gmentall0


/u#gmentall0 select a



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ran#oml0 select a


appl0 au#it proce#ures

/u#gmentall0







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ran#oml0 select a



evaluate test results statisticall0 an# /u#gmentall0

/u#gmentall0





evaluate test results /u#gmentall0



nonstatistical sampling/u#gmentall0 select arepresentative sample

sample selection

onstatistical sampling emplo0snonpro!a!ilistic selection -the au#itor #eci#es which

population items to select.



nonpro!a!ilistic selection metho#s- /u#gmental #irecte# sample selection au#itor selects items !ase# on characteristics !ecause ran#om selection#oes not consi#er,

each t0pe of transaction

sample selectionnonstatistical sampling

/u#gmentall0 select arepresentative sample


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each t0pe of transaction each preparer of transactions




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each t0pe of transaction each preparer of transactions large #ollar !alances




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sample selection

nonpro!a!ilistic selection metho#s- !lock sampling - selection of a

seuence an# e*amining ever0 item inthe seuence

7*ample, e*amine all cancelle#

che ues of 8e!ruar

Ace 9orporation 324

:pa0 to the or#er of

#ate


ANADIAN BANK


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nonpro!a!ilistic selection metho#s

- hapha'ar# selection - au#itor selects

items without regar# to characteristics

sample selection

;ewareof !ias+



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11 - 2%Copyright 2003 Pearson Education Canada Inc.

statistical sampling ran#oml0 select arepresentative sample sample selection

tatistical sampling emplo0s

pro!a!ilistic selection - ever0population item has a known

chance of !eing selecte#.

t ti ti l li


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11 - 2&Copyright 2003 Pearson Education Canada Inc.

statistical sampling ran#oml0 select arepresentative sample

sample selection

pro!a!ilistic selection metho#s

- simple ran#om sample selection

use# to

sample populationsthat are not segmente#

for au#it purposes

t ti ti l li


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sample selection

pro!a!ilistic selection metho#s- ran#om num!er ta!les


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sample selection

pro!a!ilistic selection metho#s- use of ran#om num!er ta!le 1. num!er each population item 2. esta!lish correspon#ence !etween ta!le an# population 3. esta!lish a route in the ta!le 4. select a ran#om starting point

5. #ocument the metho#

t ti ti l li


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sample selection

pro!a!ilistic selection metho#s

- computer generation of ran#om num!ers

t ti ti l li


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sample selection

pro!a!ilistic selection metho#s- s0stematic selection - the au#itor cal-

culates an interval$ starts at ran#om$ an# selects ever0 nth item.

;eware of possi!le !ias with numeric tests$e.g.$ ever0 314th cheue is written on a 8ri#a0.

t ti ti l li


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sample selection

pro!a!ilistic selection metho#s- pro!a!ilit0 proportional to si'e an#

stratifie# sample selection

#iscusse# inchapter 14


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Au#it amplingAu#it ampling

?


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Au#itsampling is a

metho# use#to #etermine the

proportion of

population itemscontaining aparticular attri!ute.

Au#it amplingAu#it ampling


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When is au#it samplingWhen is au#it sampling

appropriate?appropriate?


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When is au#itWhen is au#itsamplingsampling

appropriate?appropriate?

7*ample,cre#it

authori'ationof sales

A=7 >>97 3&52% @ate,

Ace 9ompan0 9ustomer,&34 e0nol#s #.Winnipeg$ ; 2 473ales epresentative,Buantit0 @escription Crice

total invoice amount

Derms of sale inclu#ing #iscounts an# freight costs,

9arrier,9re#it authori'ation,

tests ofcontrols

A

#i li D


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Au#it ampling DermsAu#it ampling Derms

- attri!ute - the teste# characteristic


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- attri!ute- accepta!le risk of assessing control risk too low AA9- the risk that the au#itor is willing to accept that controls are accepte# as effective$ !ut the actual population e*ception rate is greater than the D7


A #it

li D


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- attri!ute- accepta!le risk of assessing control risk too low AA9

- tolera!le e*ception rate D7 - the population e*ception rate the au#itor will permit an# still !e willing to use the

assesse# control risk an#Eor the amount of monetar0 misstatements inthe transactions esta!lishe# #uring

planning


A #i li DA #it

li D


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- attri!ute- accepta!le risk of assessing control risk too low AA9- tolera!le e*ception rate D7- estimate# population e*ception rate7C7 - the e*ception rate that theau#itor e*pects to fin# this estimate is

ma#e prior to an0 testing


A #it li DA #it

li D


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- attri!ute- accepta!le risk of assessing control risk too low AA9- tolera!le e*ception rate D7- estimate# population e*ception rate7C7

- initial sample si'e - #etermine# /u#g- mentall0 !0 the au#itor implicitl0 consi#ering the AA9$ D7$ 7C7$ an#

population si'e


A #it li DA #it

li D


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- attri!ute- accepta!le risk of assessing control risk too low AA9

- tolera!le e*ception rate D7- estimate# population e*ception rate7C7

- initial sample si'e- e*ception - a #eviation from the teste# characteristic


A #it li DA #it

li D


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- attri!ute

- accepta!le risk of assessing control risk too low AA9- tolera!le e*ception rate D7

- estimate# population e*ception rate7C7

- initial sample si'e

- e*ception- sample e*ception rate 7,

num!er of e*ceptions

sample si'e


A #it li DA #it

li D


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- attri!ute- accepta!le risk of assessing control risk too low AA9- tolera!le e*ception rate D7

- estimate# population e*ception rate 7C7- initial sample si'e- e*ception

- sample e*ception rate 7- compute# upper e*ception rate 9F7 - consi#ering the e*tent of e*ceptions$ the

worst likel0 population e*ception rate


A #it li A

#it li


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Au#it ampling euenceAu#it ampling euence

?

A #it li A #it

li


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A=7 >>97 3&52% @ate,Acme 9ompan0 9ustomer,

&34 e0nol#a #.Winnipeg$ ; 2 473ales epresentative,Buantit0 @escription Crice


7st. shipment #ate,

Derms of sale inclu#ing #iscounts an# freight costs,9arrier,

9re#it authori'ation,

1. tate the o!/ectives of the au#it test.

7*ample, Dhe au#itor is testing propercre#it approval of sales.


Au#it ampling euenceA

u#it ampling euence


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2. @eci#e if au#it sampling applies.

0es no

au#it

samplingisappropriate

au#itsampling

is notappropriate

@oes the au#itor

plan to reachconclusions !ase#

on a sample?


A #it li A #it

li


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3. @efine attri!utes an# e*ceptioncon#itions.

>n thee*ample$ what is

the attri!ute?


A #it li A #it

li


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A=7 >>97 3&52% @ate,

Acme 9ompan0 9ustomer,&34 e0nol#a #.Winnipeg$ ; 2 473ales epresentative,Buantit0 @escription Crice


7st. shipment #ate,

Derms of sale inclu#ing #iscounts an# freight

costs,

9arrier,


Joe Credit

the

signatureof thecre#it

manageron thesales

invoice

>n the

e*ample$ what isthe attri!ute?



A #it li A #it am

pling e ence


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the e*ceptioncon#ition?


A #it li Au#it am

pling euence


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A=7 >>97 3&52% @ate,

Acme 9ompan0 9ustomer,&34 e0nol#a #.Winnipeg$ ; 2 473ales epresentative,Buantit0 @escription Crice


7st. shipment #ate,Derms of sale inclu#ing #iscounts an# freight costs,

9arrier,


forge# signatureof cre#it manag-er$ no signature$

signature ofsomeone else

Jill Accountant


the e*ceptioncon#ition?

3. @efine attri!utes an# e*ception

con#itions.


#it liau#it sa

mpling seuence


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4. @efine the population.

>n thee*ample$ what is the

population?

au#it sampling seuenceau#it sampling seuence

A #it ampling e enceAu#it am

pling euence


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4. @efine the population.

2))4 sales invoicesseuence 1)3(% - 4)465Copulation si'e G 3)$)6&.

>n the

e*ample$ what is thepopulation?


Au#it ampling euenceAu#it am

pling euence


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5. @efine the sampling unit.


sampling unit?



pling euence


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onesales invoice


sampling unit?



pling euence


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6. pecif0 the tolera!le e*ception rate.

Dhis #etermination is !ase# on,- au#itor /u#gment- materialit0

- importance of the attri!ute



pling euence


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>n the e*ample$ the au#itor nee#s to ask,

concerning the in#ication of cre#it ap-proval on sales invoices$ what percent of

invoices without appropriate approval

woul# prevent au#itor use of the assesse#control risk an#Eor the amount of monetar0misstatement in the transactions

esta!lishe# #uring planning.




pling euence


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>n the e*ample$ the au#itors /u#gmentall0

assess the tolera!le e*ception rateD7,

D7 G %H


pling euence


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When woul# the au#itorWhen woul# the au#itoresta!lish aesta!lish a lowlowD7?D7?




u#it ampling euence


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When woul# the au#itorWhen woul# the au#itoresta!lish aesta!lish a lowlowD7?D7?

when the au#itoris less willing to accept e*cep-

tions e.g.$ cash controls




pling euence


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%. pecif0 the accepta!le risk of assessing control risk too low AA9.

Do what #egree

#oes the au#itor wantto rel0 on controls?



pling euence


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low reliance on controls G high AA9high reliance on controls G low AA9

Do what #egree#oes the au#itor wantto rel0 on controls?


%. pecif0 the accepta!le risk of assessing control risk too low AA9.


pling euence


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Do what #egree

#oes the au#itor wantto rel0 on controls?

>n the e*ample$ the au#itors /u#gmentall0

assess the accepta!le risk of assessing con-trol risk too low,

AA9 G me#ium

Au#it ampling euenceAu#it ampling euence%. pecif0 the accepta!le risk of assess-

ing control risk too low AA9.


pling euence


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&. 7stimate the population e*ception rate 7C7 - estimate !ase# on prior 0ear 0ear au#it or small preliminar0 sample

8or thee*ample, 7C7 G 4H



pling euence


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(. @etermine the initial sample si'e .

consi#ere#initial !ecausethe au#itor ma0

later #eci#e tosample more



pling euence


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@etermine# /u#gmentall0!ase# on

= 30,068

= 7%

= 10%

= 4%

pop.D7

AA97C7


l i @ t i ti

ample i e @etermination


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ample i'e @eterminationample i'e @etermination

7=AD>C8A9D D AC=7 >I7AA9 inverseD7 inverse7C7 #irect

Cop. si'e no effect if pop.J 5$)))


u#it ampling euence


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sample si'e G 15)

= 30,068

= 7%

= medium

= 4%

pop.D7AA9

7C7


@etermine# /u#gmentall0!ase# on


pling euence


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A=7 >>97 3&52% @ate,

Acme 9ompan0 9ustomer,&34 e0nol#a #.Winston-alem$ 92%1)(ales epresentative,Buantit0 @escription Crice


7st. shipment #ate,9arrier,

9re#it authori'ation, Joe Credit

1). elect the sample.

11. Cerform the au#it proce#ures.

how?



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A=7 >>97 3&52% @ate,

Acme 9ompan0 9ustomer,&34 e0nol#a #.Winston-alem$ 92%1)(ales epresentative,Buantit0 @escription Crice


9arrier,

9re#it authori'ation,Joe Credit

1). elect the sample.11. Cerform the au#it proce#ures.

f 15)invoicese*amine#$ %

ha# nocre#itapproval.



pling euence


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12. Kenerali'e from the sample to the

population.= 30,068

= 7%

= medium

= 4%

= 150

= 7

pop.D7

AA97C7e*ceptions


9onsi#ering these factors$/u#gmentall0 #etermine 9F7


pling euence


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population.= 30,068

= 7%

= medium

= 4%

= 150

= 7

pop.D7

AA97C7e*ceptions


9onsi#ering these factors$/u#gmentall0 #etermine 9F7

9F7

G &H


pling euence


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What #oesthis mean?


9F7

G &H


population.


pling euence


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Dhere is a me#iumrisk AA9 that the

true e*ception rate J &H

Au#it ampling euenceAu#it ampling euence12. Kenerali'e from the sample to the

population.

9F7

G &H


pling euence


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13. Anal0'e the e*ceptions. >s there a /ustifia!le reason?

>n the e*ample$ the au#itors foun# % sales in-voices without cre#it approval. 9oul# the0 !e

sales to internal #epartments or su!si#iaries?



pling euence


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14. @eci#e on the accepta!ilit0 of the population.

@ecision rule@ecision rule,,8or population accepta!ilit0,

9F79F7 LLD7D7


@ecision rule@ecision rule,,


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&H L %H

@ecision rule@ecision rule,,8or population accepta!ilit0,

9F79F7 LLD7D7

Dhe population isnot accepta!le" the controls regar#ing the

in#ication of cre#it approval on salesinvoices are not satisfactor0.


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When an internal control isWhen an internal control is

/u#ge# unaccepta!le$ what/u#ge# unaccepta!le$ whatoptions #oes the au#itor have?options #oes the au#itor have?



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- revise the D7 an#Eor

AA9Dhis ma0 !e

consi#ere# ethicall0 uestiona!le.W


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- e*pan# the sample si'e

When is thisappropriate?

When an internal control isWhen an internal control is/u#ge# unaccepta!le$ what/u#ge# unaccepta!le$ what

options #oes the au#itor have?options #oes the au#itor have?



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Dhis is onl0 appropriateif the au#itor !elieves thatthe sample was not repre-

sentative of the population.



- e*pan# the sample si'e



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- revise the assesse# control risk up-

war#$ an# increase tests of #etails of!alances for relate# accounts aEr$ sales$ !a# #e!t e*pense$ allowance for

#ou!tful accounts




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When an internal control isWhen an internal control is/u#ge# unaccepta!le$ the/u#ge# unaccepta!le$ theau#itor isau#itor is reuire#reuire#toto

communicate this weaknesscommunicate this weaknessto management$ an# ma0to management$ an# ma0

inform the au#it committee asinform the au#it committee aswell.well.

Au#it ampling euenceAu#it a

mpling euence


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Au#it ampling euencep g



mpling euence


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7*ample, Dhe au#itor wants to #eter-mine the accepta!ilit0 of the notes re-ceiva!le !alance of :6))$))).

notes receiva!le :6))$)))

accepta!le?

u# t a p g eue cep g


mpling euence


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1. @etermine the o!/ectives of the test.

2. @eci#e if au#it sampling applies.

@oes

the au#itorplan to reachconclusions

!ase# on asample?

p g p g


mpling euence


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2. @eci#e if au#it sampling applies.3. @efine misstatement con#itions.

?

p g p g


mpling euence


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2. @eci#e if au#it sampling applies.3. @efine misstatement con#itions.

isstatementcon#itions are an0 con#itions

that represent monetar0 frau#$errors or irregularities

in the accountingrecor#s.

p g p g


mpling euence


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2. @eci#e if au#it sampling applies.3. @efine misstatement con#itions.4. @efine the population.

?

p g p g


mpling euence


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notes

receiva!le#ollars

p g p g


mpling euence


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?

p g p g


mpling euence


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5. @efine the sampling unit.one

customer

name or loannum!er

p g p g


mpling euence


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5. @efine the sampling unit.6. pecif0 tolera!le misstatement.

What amount of monetar0 frau#$ error

or irregularit0 can e*ist in notes receiva!lewithout causing the financial statements to

!e materiall0 misstate#?

p g p g


mpling euence


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6. pecif0 tolera!le misstatement.

!ase# onau#itor /u#gment

p g g

What amount of monetar0 frau#$ erroror irregularit0 can e*ist in notes receiva!lewithout causing the financial statements to



mpling euence


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6. pecif0 tolera!le misstatement.

>n the notes

receiva!le e*ample$ tolera!le mis-statement is esta!lishe# at :24$)))for !oth over- an# un#erstatements.

p g

What amount of monetar0 frau#$ erroror irregularit0 can e*ist in notes receiva!lewithout causing the financial statements to



mpling euence


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%. pecif0 accepta!le risk of incorrect

acceptance.

What level of risk is theau#itor willing to take of conclu#ing

that the account !alance is not materi-all0 misstate# when$ in fact$ it is

materiall0 misstate#.

p g


mpling euence


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acceptance.What level of risk is the

au#itor willing to take of conclu#ing

that the account !alance is not materi-all0 misstate# when$ in fact$ it is

materiall0 misstate#.

also !ase# onau#itor /u#gment

g


mpling euence


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acceptance.What level of risk is the

au#itor willing to take of conclu#ingthat the account !alance is not materi-

all0 misstate# when$ in fact$ it ismateriall0 misstate#.

>n thenotes receiva!le e*ample$A>A is esta!lishe# at 5H.


mpling euence


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&. 7stimate misstatements in the population.

What is the amount of mis-statement that the au#itor e*pects

to fin# in the population?


mpling euence


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!ase# on

au#itor /u#gment an# prior0ear results



mpling euence


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>n the e*ample$

7C7 is 1.5H" i.e.$ the au#itore*pects that 1.5H of the notes

receiva!le !alance is misstate#.



mpling euence


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(. @etermine the initial sample si'e.

8or nonstatistical sampling$

professional /u#gment of au#itor is use# to #etermine initial sample si'e.


mpling euence


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(. @etermine the initial sample si'e.

8or statistical sampling of test of

controls$ population si'e$ D7$ AA9$ an# 7C7 are all factors use# to #etermine initial sample

si'e.


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onpro!a!ilistic,- @irecte# sample selection

- ;lock sample selection

-


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Cro!a!ilistic,- imple ran#om sample selection

- 0stematic sample selection

- Cro!a!ilit0 proportionate-to-si'e sample selection


mpling euence


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11. Cerform the au#it proce#ures.

Dhrough confirmation

of selecte# notes receiva!le!alances$ :1$3&) of misstatements

were #iscovere# in a sampleof :35$5)).

Canada 48


mpling euence


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population.

Cro/ect the sample misstatementresults to the population an# consi#ersampling error an# sampling risk,

sample misstatement total recor#e# point estimate

total sample pop. value of misstatement* G


mpling euence


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population.Cro/ect the sample misstatement

results to the population an# consi#ersampling error an# sampling risk,

>n the notes receiva!le e*ample,

sample misstatement total recor#e# point estimate total sample pop. value of misstatement* G

:1$3&):35$5))

* :6))$))) G :23$324 point estimate


mpling euence


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population.

tolera!le misstatement - point estimateG allowance for sampling error

:24$))) - :23$324 G :6%6

Dhe au#itor must also /u#gmentall0

assess sampling error$ consi#ering severalfactors. Dhe most important of these factorsis the #ifference !etween the point estimate

an# tolera!le misstatement.


mpling euence


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population.Dhe au#itor must also /u#gmentall0

assess sampling error$ consi#ering severalfactors. Dhe most important of these factorsis the #ifference !etween the point estimate

an# tolera!le misstatement.


tolera!le misstatement - point estimateG allowance for sampling error

:24$))) - :23$324 G :6%6


mpling euence


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13. Anal0'e e*ceptions or

misstatements.

evaluate the naturean# cause of each

misstatement


mpling euence


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13. Anal0'e the e*ceptions or

misstatements.evaluate the nature an#

cause of each misstatement

Dhis evaluation ma0affect the au#itors conclu-sions regar#ing financial

statements$ client operations$an#Eor other areas.


mpling euence


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14. @etermine the accepta!ilit0 of the

population.

@ecision ule,

9onsi#ering sampling error$ if the pointestimate is less than the tolera!le mis-statement$ accept the conclusion that

the !ook value is not misstate# !0 amaterial amount.

@ecision ule,9onsi#ering sampling error$ if the point


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g p g $ pestimate is less than the tolera!le mis-

statement$ accept the conclusion thatthe !ook value is not misstate# !0 amaterial amount.

original point estimate estimate of point estimate incl. of misstatement sampling error sampling error

N G

:23$324 N :1$5)) G :24$&2

/u#gmentall0#etermine#

conclusion?

@ecision ule,9onsi#ering sampling error$ if the point


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:24$&24J:24$))) tolera!lemisstatement

Dhe notes receiva!le !alanceof :6))$))) is not accepta!le.


g p g $ pestimate is less than the tolera!le mis-

statement$ accept the conclusion thatthe !ook value is not misstate# !0 amaterial amount.

original point estimate estimate of point estimate incl. of misstatement sampling error sampling error

N G

:23$324 N :1$5)) G :24$&2

conclusion?


117/123


What are theWhat are the

au#itorsau#itors

optionsoptions??

!ook valueis not

accepta!le


!ook value


118/123


- take no action until tests of other au#it areas are complete#

au#itorsau#itorsoptionsoptions??

!ook valueis not

accepta!le


!ook value


119/123


- take no action until tests of other au#it areas are complete#- perform e*pan#e# au#it tests in specific areas

What are the


!ook valueis not

accepta!le


!ook value


120/123


- take no action until tests of other au#it areas are complete#- perform e*pan#e# au#it tests in specific areas- increase sample si'e

What are the


!ook valueis not

accepta!le


!ook value


121/123


- take no action until tests of other au#it areas are complete#- perform e*pan#e# au#it tests in specific

areas- increase sample si'e- reuest the account !alance !e a#/uste#

at a e t e


!ook valueis not

accepta!le


!ook value


122/123



- increase sample si'e- reuest the account !alance !e a#/uste#-reuest the client to correct

the population


!ook valueis not

accepta!le


!ook value


123/123


- increase sample si'e- reuest the account !alance !e a#/uste#- reuest the client to correct the population


!ook valueis not

accepta!le

AUDIT SAMPLING CONCEPTS

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