Chapter's 5,6,8,10, & 11
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| Random Based Selection | A.K.A. Random Number Selection
Every item in the population has the same probability of being selected as every other sampling unit in the population.
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| Computed upper exception rate (CUER) | a.k.a Maximum Population deviation rate
The highest estimated exception rate in the population at a given ARACR.
The sum of the sample deviation rate and an appropriate allowance for sampling risk.
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| Sampling Risk | The risk that the results of a sample are not representative of the population.
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| Type I sampling risk | Risk of incorrect rejection (Type I) – in a test of internal controls, it is the risk that the sample supports a conclusion that the control is not operating effectively when, in fact, it is operating effectively. Relates to the efficiency of the audit
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| Type II Sampling Risk | Risk of incorrect acceptance– in a test of internal controls, it is the risk that the sample supports a conclusion that the control is operating effectively when, in fact, it is not operating effectively. Related to the effectiveness of the audit
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| When to use attributes sampling | Used to estimate the proportion of a population that possesses a specified characteristic. May also be used with a substantive test of transactions when such a test is conducted with a test of controls as a dual-purpose test.
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| Four factors to choose sample | Tolerable Exception Rate (TER)
Estimated Population Exception Rate (EPER)
Population size
Acceptable Risk of Assessing Control Risk too low (ARACR)
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| Tolerable Exception Rate (TER) | The maximum deviation rate from a prescribed control that the auditor is willing to accept and still consider the control effective.
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| Estimated Population Exception Rate (EPER) | The rate the auditor expects to exist in the population before testing begins. The larger the expected population deviation rate, the larger the sample size must be, all else equal.
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| Population size | Population size is not an important factor in determining sample size for attributes sampling. The population size has little or no effect on the sample size, unless the population is relatively small, say less than 500 items.
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| Acceptable Risk of Assessing Control Risk too low (ARACR) | The risk that the auditor is willing to take of accepting a control as effective or a rate of monetary misstatements as tolerable, when the true population exception rate is greater than the tolerable exception rate.
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| Statistical sampling | Statistical sampling uses the laws of probability to compute sample size and evaluate results. The auditor is able to use the most efficient sample size and quantify sampling risk.
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| Uses of Statistical Sampling | Helps the auditor to
1. Design an efficient sample
2. Measure the sufficiency of evidence obtained
3. Quantify sampling risk
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| What factor does an auditor generally need to consider in planning a particular test of controls | Desired Confidence Level
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| The Risk of Assessing Control Risk too High affects what? | The efficiency of the audit
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| The Risk of Assessing Control Risk too Low affects what? | The effectiveness of the audit
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| What happens when the expected deviation rate exceeds the tolerable exception rate? | You lower detection risk which means increasing analytical procedures also increasing the sample size
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| Engagement letters include… | o The objectives of the engagement
o Management’s responsibilities
o The auditor’s responsibilities
o The limitations of the engagement
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| Audit Committees | A subcommittee of the board of directors that is responsible of the financial reporting and disclosure process
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