Question

1. What is value-weighted selection?

2. Give the steps involved in an attributes sampling plan.

3. Give at least three determinants of the sample size for tests of controls. Relate each determinant to sample size.

4. Give the steps involved in a variables sampling plan.

5. Give at least three determinants of the sample size for substantive tests. Relate each determinant to sample size.

Answer 1

1. What is value-weighted selection?

Answer : Value weighted sample selection is used when the population consists of monetary amounts (e.g. accounts receivable balance). ... The amounts in the account balance that contain the selected dollar units are picked as the samples. Amounts with a higher value have a greater chance or probability of being selected.

2. Give the steps involved in an attributes sampling plan.

Answer : Attribute sampling is a statistical process used in audit procedures that aims to analyze the characteristics of a given population. This practice is often used to test whether or not a company's internal controls are being correctly followed.

steps involved in an attributes sampling plan :

Step-1. Anticipates the deviation rate for the control activity (or other application) being tested. Expected rate is based on difficulty of activity, experience of person performing the control, results found in previous audits, etc. The more deviations that are anticipated the larger the sample must be.

Step-2. Sets a tolerable deviation rate. This is the maximum error rate that the auditor could tolerate and still believe the control activity was operating effectively and efficiently. As the rate that the auditor can tolerate gets smaller, sample size must get larger.

Step-3. Sets allowable level of risk that the sample will be misleading. For this particular testing, auditor is especially worried that the sample will look better than the actual population. In that case, auditor may think that the control activity is functioning properly and will set control risk too low and do less substantive testing than is needed. To reduce the level of risk that the sample will be misleading, the size of the sample must be increased.

Step-4. Based on these three figures, a calculation or a chart is used to determine proper sample size. Except with very small populations, the number of items in the population has little or no effect on the sample size.

Step-5. The appropriate number of items is selected from the population. Items must be picked randomly, each item should have an equal chance of selection.

Step-6. Sample items are examined and the number of deviations (usually errors) is determined. That number is restated as a percentage based on sample size.

Step-7. Another chart is used to convert the actual deviation rate of the sample to the potential upper deviation rate of the population. Difference between the actual rate and upper deviation rate is called the allowance for sampling risk.

3. Give at least three determinants of the sample size for tests of controls. Relate each determinant to sample size.

Answer : sample size : Sample size refers to the number of participants or observations included in a study. This number is usually represented by n. The size of a sample influences two statistical properties: 1) the precision of our estimates and 2) the power of the study to draw conclusions.

1) the risks of assessing control risk too low,

(2) the tolerable deviation rate

(3) the expected population deviation rate.

4. Give the steps involved in a variables sampling plan.

Answer : Variable sampling : A variables sampling plan is an acceptance sampling technique. Plans for variables are intended for quality characteristics that are measured in a continuous scale. This plan requires the knowledge of the statistical.

steps involved in a variables sampling plan

Step-1. Sets the level of a tolerable misstatement. This is the size of the largest misstatement in the account being examined that (when combined with misstatements in all other accounts) would still not cause the financial statements to be materially misstated. If auditor reduces the size of a misstatement that can be tolerated, a bigger sample will be required.

Step-2. Sets allowable risk levels that sample will be misleading. To reduce these risk levels, a larger sample size must be selected:

• A misleading sample can cause incorrect acceptance. There is a risk that a sample will substantiate client figure when the population is actually materially misstated. This problem leads to an unqualified opinion being given on statements that are not fairly presented.
• A misleading sample can cause incorrect rejection. There is a risk that a sample will not substantiate the client figure even though the population is not materially misstated. This problem leads to additional (unnecessary) testing being performed.

Step-3. Estimates the amount of misstatement in the population. This figure is usually affected by the efficiency of the accounting system and staff. The bigger the expected misstatement, the larger the sample size required. Again, population size has only a little impact on sample size.

Step-4. Auditor takes a preliminary sample to estimate the variability of the items in the population. If the items are all about the same amount, variability is low. Variability is measured by estimating the standard deviation. The higher the variability, the more items that have to be selected to get a representative sample.

Step-5. Auditor randomly selects items for the sample and measures the average value of these items. The average of the sample is then extended to the entire population to give a total. Difference between this total and client figure is the projected misstatement. If projected misstatement is less than tolerable misstatement, the test has provided evidence that reported balance is fairly presented. If projected misstatement is more, the test has not provided evidence that balance is fairly presented.

5. Give at least three determinants of the sample size for substantive tests. Relate each determinant to sample size.

Answer : The statistical sampling method most commonly used for tests of controls and substantive tests of transactions is attributes sampling. It is a frequency distribution of the results of all possible samples of a specified size that could be obtained from a population containing some specific parameters.

determinants of the sample size for substantive tests

1.Larger sample size : if auditor assessesrisk ofmaterial misstatementas greater (higher IR, CR)

2.Smaller sample size :if auditor also using othersubstantive procedures forsame assertion

3.Larger sample size : if auditor requiresgreaterconfidencefrom results of tests (requires lower DR) if auditor requiresgreaterconfidencefrom results of tests (requires lower DR)