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Module E. Overview of Sampling “There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli. Learning Objectives.

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module e

Module E

Overview of Sampling

“There are three kinds of lies: lies, damned lies, and statistics.”

– Benjamin Disraeli

learning objectives
Learning Objectives
  • Understand the basic principles of sampling, including the differences between statistical and nonstatistical sampling and sampling and nonsampling risk.
  • Understand the basic steps and procedures used in conducting a sampling plan.
  • Identify the two situations in which sampling is used in an audit examination.
  • Understand how the basic steps and procedures used in a sampling plan apply to an audit engagement.
when is sampling used
When is Sampling Used?
  • Study and evaluation of internal control
    • Selecting control procedures to verify compliance
    • Termed attribute sampling
  • Substantive procedures
    • Selecting components or transactions of account balances for verification
    • Termed variables sampling
sampling risk
Sampling Risk
  • Risk that the decision made based on the sample differs from the decision that would have been made by examining the population
  • Cause is a nonrepresentative sample
  • Controlled by:
    • Determining an appropriate sample size
    • Ensuring that all items have an equal opportunity of selection
    • Mathematically evaluating sample results
  • Sampling versus nonsampling risk
sampling approaches
Sampling Approaches
  • Statistical sampling methods use the laws of probability to:
    • Select sample items
    • Evaluate sample results
  • Statistical sampling methods control the auditor’s exposure to sampling risk
  • Nonstatistical sampling violates one or both of the above criteria
  • Both statistical sampling and nonstatistical sampling can be used in a GAAS audit
major steps in sampling
Major Steps in Sampling
  • Determine the objective
  • Define characteristic of interest
  • Define the population
  • Determine sample size
  • Select the sample
  • Measure sample items
  • Evaluate sample results

Planning

Performing

Evaluating

precision and reliability
Precision and Reliability
  • Precision (Allowance for sampling risk)
    • Closeness of sample estimate to true population value
  • Reliability (Confidence)
    • Likelihood of achieving a given level of precision
attribute sampling
Attribute Sampling
  • Used to estimate the extent to which a characteristic exists within a population
  • Used in the auditor’s study of internal control
  • Goal: Estimate the rate at which the client’s internal control is failing to function effectively and compare to an allowable level (tolerable deviation rate)
variables sampling
Variables Sampling
  • Used to estimate the amount (or value) of some characteristic of a population
  • Used in the auditor’s substantive procedures
  • Goal: Estimate the amount of error in an account balance or class of transactions and compare to an allowable level (tolerable error)
summary of sampling risks
Summary of Sampling Risks
  • Effectiveness Losses (Major Risk)
    • Risk of assessing control risk too low (overreliance) - Attribute
    • Risk of incorrect acceptance - Variables
  • Efficiency Losses (Minor Risk)
    • Risk of assessing control risk too high (underreliance) - Attribute
    • Risk of incorrect rejection - Variables
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