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Modern Concepts of Audit Sampling - Efficient Techniques for Reliable Financial Reporting

Explore the nature, purpose, and risks of audit sampling. Learn to evaluate populations effectively, assess control risks, and conduct substantive tests. Understand nonstatistical and statistical sampling methods, sample size determination, and result evaluation for optimum auditing outcomes.

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Modern Concepts of Audit Sampling - Efficient Techniques for Reliable Financial Reporting

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  1. Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 13 – Audit Sampling

  2. Chapter Overview

  3. Basic Audit Sampling Concepts • Nature and Purpose of Audit Sampling • Use less than 100% of items • Apply to evaluate entire population • Uncertainty and Audit Sampling • Audit Risk • Control Risk and Test of Details Risk

  4. Sampling Risk • Sample v. Population • Tests of Controls • Risk of Assessing Control Risk too Low • Risk of Assessing Control Risk too High • Substantive Tests • Risk of Incorrect Acceptance • Risk of Incorrect Rejection

  5. Sampling Risks – Tests of Controls

  6. Sampling Risks – Substantive Tests

  7. Nonsampling Risk • Human mistakes • Inappropriate application of audit procedures • Misinterpretation of results of sample • Reliance upon erroneous information from another party

  8. Nonstatistical and Statistical Sampling

  9. Nonstatistical and Statistical Sampling

  10. Study Break • The risk that the sample will not be representative of the population is: • Inherent Risk • Audit Risk • Control Risk • Sampling Risk D. Sampling Risk

  11. Study Break 2. The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated is: • Risk of assessing control risk too low • Risk of assessing control risk too high • Risk of incorrect acceptance • Risk of incorrect rejection C. Risk of incorrect acceptance

  12. Tests of Controls v. Substantive Tests

  13. Audit Sampling for Tests of Controls • Determine the Objectives of the Tests of Controls • Determine the Procedures to Evaluate Internal Controls • Make a Decision about the Audit Sampling Technique

  14. Audit Sampling for Tests of Controls • Define the Population and Sampling Unit • Use Professional Judgment to Determine Sample Size • Nature of Control • Frequency of Operation • Importance of the Control • Risk of Assessing Control Risk too Low • Tolerable and Expected Deviation Rates • Population Size

  15. Audit Sampling for Tests of Controls • Select a Representative Sample • Apply Audit Procedure • Evaluate the Sample Results • Document Conclusions

  16. Study Break • The _____ represents the way the auditor identifies the performance of internal controls of interest. • Population • Sampling Unit • Materiality • Sampling Risk B. Sampling Unit

  17. Study Break • The _____ is the maximum rate of deviation from a control that an auditor is willing to accept and still use the planned control risk. • Tolerable deviation rate • Maximum deviation rate • Maximum error rate • Inherent risk A. Tolerable deviation rate

  18. Audit Sampling for Substantive Tests - PPS • Determine the Objectives of the Substantive Test • Estimating total amount of population • Estimating amount of misstatement • Determine the Substantive Audit Procedures to Perform • Tests of Details of Transactions • Tests of Details of Balances

  19. Audit Sampling for Substantive Tests - PPS • Make a Decision About the Audit Sampling Technique • PPS v. Classical Variables Sampling • Define the Population and Sampling Unit • Reciprocal Population • Logical Sampling Unit

  20. Audit Sampling for Substantive Tests - PPS • Use Professional Judgment and Statistical Methods to Determine Sample Size • Book Value of Population Tested • Reliability Factor for Specified Risk of Incorrect Acceptance • Tolerable Misstatement • Anticipated Misstatement and Expansion Factor • Calculation of Sample Size

  21. Audit Sampling for Substantive Tests - PPS • Select a Representative Sample • Sampling Risk • Calculate Sampling Interval • Select Random Sample • Apply Audit Procedures

  22. Audit Sampling for Substantive Tests - PPS • Evaluate Sample Results • Upper Misstatement Limit • No Misstatements Found in the Sample • Some Misstatements Found in the Sample • Qualitative Considerations • Document Conclusions

  23. Study Break • This type of test can be used to estimate the total dollar amount of a population or the total dollar amount of error in a population. • Test of Controls • Attribute Tests • Audit Tests • Substantive Tests D. Substantive Tests

  24. Study Break • In PPS, an item snagged in the selection of the sample is know as the ______. • Sampling Unit • Logical Sampling Unit • Population • Tolerable Misstatement B. Logical Sampling Unit

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