Auditing and assurance services 14e by arens chapter 17

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Audit Sampling for Tests of Details of Balances Chapter 17 http://www.authorstream.com/shengv n/ ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Differentiate audit sampling for tests of details of balances and for tests of controls and substantive tests of transactions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- Tests of Details of Balances and Controls, and Substantive Tests of Transactions Differences among tests Type Typeof ofTest Test What WhatItItMeasures Measures Controls Effectiveness of controls Transactions Monetary correctness of transactions Balances Existence of material misstatements ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- Learning Objective Apply nonstatistical sampling to tests of details of balances ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- Nonstatistical Sampling 14 steps required in audit sampling for tests of details of balances Steps parallel the sampling approach used to test controls and/or test transactions There are a few differences because of the different objectives of the tests ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- Comparison of the 14 Steps Audit sampling for tests of details of balances State the objectives of the audit test Decide whether audit sampling applies Define a misstatement Define the population Define the sampling unit Audit sampling for tests of controls and substantive tests of transactions State the objectives of the audit test Decide whether audit sampling applies Define attributes and exception conditions Define the population Define the sampling unit ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- Comparison of the 14 Steps Audit sampling for tests of details of balances Specify tolerable misstatement Specify acceptable risk of incorrect acceptance Estimate misstatements in the population Determine the initial sample size Audit sampling for tests of controls and substantive tests of transactions Specify the tolerable exception rate Specify acceptable risk of assessing control risk too low Estimate the population exception rate Determine the initial sample size ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- Comparison of the 14 Steps Audit sampling for tests of Audit sampling for tests controls and substantive of details of balances tests of transactions 10 Select the sample 10 Select the sample 11 Perform the audit 11 Perform the audit procedures procedures 12 Generalize from the 12 Generalize from the sample to the population sample to the population 13 Analyze the misstatements 13 Analyze the exceptions 14 Decide the acceptability 14 Decide the acceptability of the population of the population ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- Action When a Population Is Rejected       Take no action until tests of other audit areas are completed Perform expanded audit tests in specific areas Increase the sample size Adjust the account balance Request the client to correct the population Refuse to give an unqualified opinion ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- Learning Objective Apply monetary unit sampling ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 10 Mean Sampling distribution – Normal Population distribution – Skewed Value of x Frequency of values in percent Sampling Distribution for a Population Distribution in dollars ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 30 Variables Methods  Difference estimation Ratio estimation Mean-per-unit estimation ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 31 Stratified Statistical Methods  All of the elements of the population are divided into two or more subpopulations  Each subpopulation is independently tested The calculations are then made for each stratum and then combined into one overall population estimate ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 32 Sampling Risks (ARIA and ARIR) Actual audit decision Actual state of the population Materially Not materially misstated misstated Conclude that the population is materially misstated Correct conclusion – no risk Incorrect conclusion – risk is ARIR Conclude that the population is not materially misstated Incorrect conclusion – risk is ARIA Correct conclusion – no risk ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 33 Learning Objective Use difference estimation in tests of details of balances ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 34 Plan the Sample and Calculate the Sample Size  State the objectives of the audit test Decide whether audit sampling applies Define misstatement conditions Define the population Define the sampling unit Specify tolerable misstatement ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 35 Specify Acceptable Risk ARIA ARIR ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 36 Estimate Misstatement in the Population Estimate an expected point estimate 2.Make an advance population standard deviation estimate – variability of the population ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 37 Calculate the Initial Sample Size n= SD*(ZA + ZR)N (TM – E *) where: n SD* ZA ZR N TM E* = initial sample size = advance estimate of the standard deviation = confidence coefficient for ARIA = confidence coefficient for ARIR = population size = tolerable misstatement for the population (materially) = estimated point estimate of the population misstatemen ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 38 Select the Sample and Perform the Procedures The auditor must use one of the probabilistic sample selection methods to select the items for confirmation The auditor must use care in confirming and performing alternative procedures ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 39 Evaluate the Results Generalize from the sample to the population Compute the point estimate of the total misstatement Compute an estimate of the population standard deviation Compute the precision interval Compute the confidence limits ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 40 Effect of Changing Each Factor Type of change Effect on the computed precision interval Increase ARIA Increase the point estimate of the misstatements Increase the standard dev Increase the sample size ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 41 Analyze the Misstatements The auditor must evaluate misstatements to determine the cause of each misstatement and decide whether modification of the audit risk model is needed ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 42 Auditor’s Decision Rule for Difference Estimation ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 17- 43 End of Chapter 17 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 ... balances and for tests of controls and substantive tests of transactions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 17- Tests of Details of Balances and Controls, and. .. Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 17- Learning Objective Apply monetary unit sampling ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 17- 10 Monetary... Publishing, Auditing 14/e, Arens/ Elder/Beasley 17- 21 Illustration of the Auditor’s Decision Rule for MUS ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 17- 22 Determining
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