Audit Sampling

Welcome to Week 5 ofManaging Regulatory Compliance.

Reviewing the Introduction and Learning Outcomes on this page will orient you to this week's topics and activities.

As auditors continue conducting field work, more areas may be uncovered that might contain misstatements. Auditors may use sampling to help fulfill the audit objectives and detect risks. When preparing an audit sample, auditors must properly plan the design and size of the sample to make sure it reaches the desired goals. In evaluating the sample, auditors rely on professional judgment to help determine whether there is efficient audit evidence and to determine the level of uncertainty.

This week, you will assess sampling and detection risks and evaluate the differences between classical variables sampling and PPS sampling.

Week 5 Application: Classical Variables Sampling vs. Probability-to-Size Sampling Choosing the right sampling method to achieve the desired information requires an auditor's judgment. Using the information presented in this document calculate Requirement 1, Requirement 2, and Requirement 3. Analyze your calculations and then write a one page paper on your analysis. Determine whether Anthony's Orchard's choice of PPS sampling is the most systematic approach and yields the desired results to satisfying their audit needs or whether the audit needs would be best satisfied through classical variables sampling. Evaluate the difference between classical variables sampling and PPS sampling. PPS Sampling Objective of the Test The object of the test is to determine Anthony's Orchard's audit needs. The object of this Application Assignment is to determine the reasonableness of the Accounts Receivable balance. Define the Target Population Anthony's Orchard audit team identified Accounts Receivable as the target population with a balance of $1,000,000. Chose Sampling Technique Anthony's Orchard audit team selected PPS. Evaluate their selection of PPS. Determine whether this choice informs the audit's needs. Calculating Sample Size Determine the sample size of Anthony's Orchard's audit. Calculate the sampling size and the sample interval in the field provided based on the information in the audit below. Note: The Expansion Factor for risk at 5% of incorrect misstatements is 1.6. With number of overstatements of (0) and risk of incorrect acceptance, the Reliability Factor is 3. Tolerable Misstatement Risk of incorrect Acceptance Expected misstatement ($40,000) .05 ($8,000) Calculate Sampling Size = Calculate Sample Interval = Requirement 1: Calculate the Sampling Size and the Sample Interval Calculate the Sampling Size in order to calculate the Sample Interval. Selecting a Sample Method The method Anthony's Orchard chose for selecting the sample was systematic. Determine whether the classical variables sampling method would have been the more systematic choice to satisfy Anthony's Orchard's audit needs. Conducting Sample Procedure Anthony's Orchard conducted the sample procedure. As you work through the following steps, determine whether the procedure yields the desired results. PPS Sampling Procedure Complete the table below by calculating the Sampling Interval and the Projected Misstatement. Requirement 2: Calculate the Projected Misstatements Book Value Audit Value $125 $100 $12,000 $1,000 $50 $40 Misstatement $25 $11,000 $10 Taint Percent 25% 20% Sampling Interval Projected Misstatement Requirement 3: Calculate and Interpret the Upper Limit on Misstatements Decision Matrix: The tolerable misstatement is $40,000. If the upper limit of the misstatements is below the tolerable misstatements, then account receivable is reasonable. If the upper limit of the misstatements is above of the tolerable misstatements, then the account receivable is not reasonable. Note: The Expansion Factor for risk at 5% of incorrect misstatements is 1.6. With number of overstatements of (0) and risk of incorrect acceptance, the Reliability Factor is 3. Basic Precision = Reliability Factor * Sampling Interval = 3.0 * $9,090 = $27,270 Calculate the Incremental Allowance for Projected Misstatements Reliability factor 3.0 4.75 6.30 Increment 1.75 1.55 Increment Less one .75 .55 2272 1818 Total Projected Incremental Misstatements Allowance 1704 999 2703 By Day 7 save your Application as a \".doc\" or \".rtf\" file with the filename last name+your first initial_Week5. For example, Susan Ride's assignment filename would be \"RideS_Week5\". In the Dropbox, click on the Submit an Assignment link, choose the Week 5: Application basket, and then add your Application as an attachment