Control Testing Exercise 1

Educational Goals

This exercise discusses how auditors apply statistical and non-statistical, but formal, techniques to testing controls.Statistically, a test of controls is a binomial test.That is, it is a test with only two possible outcomes:the control works or it doesn't.Thus, the underpinning of the statistical techniques is based on the binomial distribution.

After completing this exercise, students should be able to:

Define key statistical and non-statistical terms that relate to selecting and testing items to test.

Define and explain how the parameters that auditors must set affect the confidence level of the results as well as the sample size selected.That is, students should be able discuss how variation in the parameters affect confidence levels and sample sizes.

Describe the strengths and weaknesses of statistical and non-statistical techniques and describe why auditors might use one over the other.

Questions

1)All testing of controls involves attribute sampling.Define attribute sampling and discuss why tests of controls tend to be attribute samples.

2)Be prepared to define sampling risk and non-sampling risk as well as differentiate between these concepts.The text doesn't address non-sampling risk directly; however, it is the risk that the sample will not be representative of the population for all reasons other than sampling risk.

3)Be prepared to define each of the following parameters used in calculating sample size and explain how changes in each parameter affects sample size.

a)Confidence level

b)Tolerable deviation rate

c)Expected deviation rate

4)What are some factors that auditors use in setting their confidence level?

5)Be prepared to describe the steps auditors use in attribute sampling and discuss the activities that go on in each step and why they are important to the sampling process.

a)Determine objectives of the test

b)Define population characteristics

c)Determine sample size

d)Select sample items.Also, be prepared to differentiate between selection methods (i.e., random, systematic, and haphazard).

e)Perform audit procedures

f)Calculate sample deviation and compute upper deviation rates.

g)Draw final conclusion