Happy Essay

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Ch08: Audit Sampling: An Overview and Application to Tests of Controls Question 8-1: Audit Sampling: The 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 characteristic of the balance or class. Auditors sample instead of examining every transaction, because companies grew in sizes and complexity, and became uneconomical to examine all the accounting records and supporting documents Question 8-2: Meaning Type I Type II Deciding that the population is not Deciding that the population tested is acceptable when in reality it is acceptable when in reality it is not in Risk of underreliance Risk of overreliance Terms used test of controls Terms used in Risk of material misstatement Risk of material misstatement rejection substantive tests acceptance Costs when error More audit work than necessary Failing to detect a material misstatement occurred can lead to litigation against the auditor Question 8-3: Audit evidence types that do not involve sampling: 1. Analytical procedures 2. Scanning 3. Inquiry 4. Observation Question 8-4: 1. Nonstatistcial sampling Does not use statistical techniques to determine the sample size, select the sample, and measuring sampling risk Auditor must rely on his professional judgment. Most firms provide their auditors with nonstatistical sampling guidance Statistical Sampling Uses laws of probability to compute the sample size and evaluate the sample results. Most efficient sample size and quantify sampling risk Need additional costs & trained auditors 2. 3. -1- Advantages of statistical sampling: Helps the auditor: 1. Design an efficient sample 2. Measure the efficiency of evidence obtained 3. Quantify sampling risk Disadvantages of Statistical sampling: include additional costs to: 1. Training auditors in the proper use of

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