Statistical Sampling

Part I. In sampling for attributes (i.e. test of controls) the determination of sample size is a function of (1) risk of assessing control risk too low (Sampling Risk), (2) tolerable rate and, (3) estimated population deviation rate. Fill in the spaces to indicate if the items have a direct or indirect effect on sample size.

Direct or Indirect effect

1. Risk of assessing control risk too low (Sampling risk). ____________

2. Tolerable Deviation Rate.____________

3. Estimated population deviation rate ____________

Part II. (A) Based on the following information determine sample size

Risk of assessing control risk too low; Risk of

Overreviance (Sampling risk) .....................................5%

Tolerable Deviation Rate .............................................6%

Expected population deviation rate ..........................2%

(B) Regardless of your answer to (A), assume that you selected a sample size of 200, and determined that there were eight errors (deviations) in the sample. Evaluate the sample results, use the sample decision rule, [same information as in IIA above] to conclude whether controls are acceptable. Show your work!

Controls are acceptable

(Indicate either YES or NO) ____

Explain your conclusion (i.e. Show work)

Part III. Assume that the Expected Population Deviation Rate is 2% for a control. The company is not publically traded, and thus, the auditor does not have to test controls. Even so, the auditor takes and evaluates a sample and concludes that the control is NOT acceptable. Assume that the population relating to the control consists of 10,000 items and that there are exactly 28 errors in the population. Based on the "population decision rule" discussed in class, was the decision (i.e. controls not acceptable) based on the sample correct? DISCUSS YOUR ANSWER. Show applicable calculations.