New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Chapter 8 Audit Notes

by: Victoria Andreski

Chapter 8 Audit Notes ACCT 4150

Marketplace > Clemson University > Accounting > ACCT 4150 > Chapter 8 Audit Notes
Victoria Andreski

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Chapter 8- Audit Sampling: An Overview & Application to Tests of Controls
Nancy Harp
Class Notes
25 ?




Popular in Auditing

Popular in Accounting

This 5 page Class Notes was uploaded by Victoria Andreski on Saturday March 5, 2016. The Class Notes belongs to ACCT 4150 at Clemson University taught by Nancy Harp in Spring 2016. Since its upload, it has received 23 views. For similar materials see Auditing in Accounting at Clemson University.


Reviews for Chapter 8 Audit Notes


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 03/05/16
CHAPTER 8—Audit Sampling: An Overview & Application to Tests of Controls Sampling • Application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some crdracteristic of the balance or class • 3 Standard of Fieldwork o Sufficient (measure of quantity) competent evidential matter is to be obtained…to afford a reasonable basis for an opinion • Sampling Risk—risk that conclusions based on a sample may be different from the conclusions reached if the test were applied to all items o Risk that we may get a different conclusion b/c all items weren’t tested • Nonsampling Risk—all aspects of audit risk that are not due to sampling (human error) o Be careless, do the wrong test, or do a test incorrectly • Auditing standards recognize & permit both statistical & nonstatistical methods of audit sampling o 1. Development of well-controlled, automated accounting systems o 2. Advent of powerful PC audit software to download & examine client data • Technology will never eliminate the need for auditors to rely on sampling to some degree b/c: o 1) Many control processes require human involvement o 2) Many testing procedures require the auditor to physically examine an asset o 3) In many cases auditors are required to obtain & evaluate evidence from 3 parties Audit Sampling • Selection & evaluation of less than 100% of the items in a population of audit relevance selected in such a way that the auditor expects the sample to be representative of the population & thus likely to provide a reasonable basis for conclusions about the population Sampling Risk • Element of uncertainty that enters into the auditor’s conclusions anytime sampling is used o Type 1—risk of incorrect rejection § Risk that the sample supports a conclusion that the control is not operating effectively when, in fact, it is operating effectively § Problem w/ efficiency of audit § Did more work than we had to • Subject to loss of profitability o Type 2—risk of incorrect acceptance § Risk that the sample supports a conclusion that the control is operating effectively when, in fact, it is not operating effectively § Auditors most worried about § Problem w/ effectiveness of audit • Subject to lawsuits • Determining Sample Size o 1) Desired level of assurance in the results (or confidence level) § How confident do we want to be in our test? (Usually about 95%) § Confidence level is the complement of sampling risk • Auditor may set sampling risk for a particular sample at 5%, resulting in a confidence level of 95% o 2) Acceptable defect rate (or tolerable error) § Once the desired confidence level is established, the sample size is determined largely by how much the tolerable error exceeds expected error Precision, at the planning stage of Auditing Standards refer audit sampling, is the difference to Precision as the between the expected & tolerable “Allowance for Sampling deviation rates Risk” § Example: We can tolerate a 5% deviation & expect a 3 % deviationà the difference is the cushion • The larger the cushion, the smaller the precision • The smaller the cushion, the more precise we must be Precision= Expected - Tolerable o 3) Historical defect rate (or expected error) § What do you think the error rate will be before doing any testing? Audit Evidence—Sample or Not? • Inspection of tangible assets o Auditors typically attend the client’s year-end inventory count o When there are a large # of items in inventory, the auditor will select a sample to physically inspect & count • Inspection of records or documents o Certain controls may require the matching of documents o Procedure may take place several times a day o Auditor may gather evidence on the effectiveness of the control by testing a sample of the document package • Reperformance o To comply w/ PCAOB standards, publicly traded clients must document & test controls over important assertions for significant accounts o Auditor may reperform a sample of the tests performed by the client • Confirmation o Rather than confirm all customer account receivable balances, auditor may select a sample of customers Testing all items w/ a particular characteristic • When an account or class of transactions is made up of a few large items, the auditor may examine all the items in the account or class of transaction • When a small # of large transactions make up a relatively large % of an account/class of transactions, auditors will typically test ALL the transactions greater than a particular dollar amount Testing only one or a few items • Highly automated information systems process transactions consistently unless the system or programs are changed • Auditor may test the general controls over the system& any program changes, but test only a few transactions processed by the IT system • Evaluate the nature of the accounts & the balances when determining what to sample Types of Audit Sampling • Nonstatistical (judgmental) sampling—auditor does NOT use statistical techniques to determine sample size, select the sample items, or measure sampling risk • Statistical sampling—uses the laws of probability to compute sample size & evaluate results o Auditor is able to use the most efficient sample size & quantify sampling risk o Advantages § 1. Design an efficient sample § 2. Measure the sufficiency of evidence obtained § 3. Quantify sampling risk o Disadvantages § 1. Training auditors in proper use § 2. Time to design & conduct sampling application § 3. Lack of consistent application across audit teams Attribute Sampling • Used to estimate the proportion of a population that possess a specified characteristic • Most common use is for tests of controls • Look for attributes/indicators (example: initials) • In conducting a statistical sample for a test of controls, auditing standards require the auditor to properly plan, perform, & evaluate the sampling application & to adequately document each phase of the sampling application o Planà Performà Evaluateà Document Planning 1. Determine the test objectives a. The objective of attribute sampling when used for tests of controls is to evaluate the operating of effectiveness of the internal control b. What am I trying to verify from the test? (Authorization, accuracy, etc.) 2. Define the population characteristics: a. Define the sampling population i. All of the items that constitute the class of transactions make up the sampling population b. Define the sampling unit i. Each sampling unit makes up one item in the population ii. The sampling unit should be defined in relation to the specific control being tested c. Define the control deviation conditions i. A deviation is a departure from adequate performance of the internal control 3. Determine the sample size a. The desired confidence level or risk of incorrect acceptance i. Confidence level—desired level of assurance that the sample results will support a conclusion that the control is functioning effectively ii. Generally, when the auditor has decided to rely on controls, the confidence level is set at 90% or 95% 1. Auditor is willing to accept a 10% or 5% risk of accepting the control as effective when it is not b. The tolerable deviation rate i. Maximum deviation rate from a prescribed control that the auditor is willing to accept & still consider the control effective c. The expected population deviation rate i. Rate the auditor expects to exist in the population 1. The larger the expected population deviation rate, the larger the sample size must be, all else equal Performance 4. Select sample items: a. Random-Number Selection i. Every item in the population has the same probability of being selected as every other sampling unit in the population b. Systematic Selection i. Auditor determines the sampling interval by dividing the population by the sample size ii. A starting # is randomly selected in the first interval & every nth item is selected thereafter 5. Perform the Audit Procedures a. Voided documents b. Unused or inapplicable documents i. Unless the auditor finds something unusual about either of these items, they should be replaced w/ a new sample item c. Inability to examine a sample item i. If the auditor is unable to examine a document or to use an alternative procedure to test the control, the sample item is a deviation for purposes of evaluating the sample results d. Stopping the test before completion i. If a large # of deviations are detected early in the tests of controls, the auditor should consider stopping the test, as soon as it is clear that the results of the test will not support the planned assessed level of CR 6. Calculate the Sample Deviation & Upper Deviation Rates a. After completing the audit procedures, the auditor summarizes the deviations for each control tested & evaluates the results b. Upper deviation rate—sum of the sample deviation rate & an appropriate allowance for sampling risk 7. Draw Final Conclusions a. Auditor compares the tolerable deviation rate to the computed upper deviation rate Nonstatistical Sampling for Tests of Controls • Calculating the upper deviation rate o With a nonstatistical sample, the auditor can calculate the sample deviation rate, but cannot mathematically quantify the computed upper deviation rate & sampling risk associated w/ the risk o Disadvantage of nonsampling


Buy Material

Are you sure you want to buy this material for

25 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Kyle Maynard Purdue

"When you're taking detailed notes and trying to help everyone else out in the class, it really helps you learn and understand the I made $280 on my first study guide!"

Steve Martinelli UC Los Angeles

"There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."


"Their 'Elite Notetakers' are making over $1,200/month in sales by creating high quality content that helps their classmates in a time of need."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.