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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

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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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