Module E

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# Module E - PowerPoint PPT Presentation

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

Overview of Sampling

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

– Benjamin Disraeli

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?
• 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
• 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
• 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
• 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 (Allowance for sampling risk)
• Closeness of sample estimate to true population value
• Reliability (Confidence)
• Likelihood of achieving a given level of precision
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
• 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
• 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