cpa audit review ch 15 review 6

Incorrect rejection.

An auditor is concerned with two aspects of sampling risk in performing substantive tests of details: the risk of incorrect acceptance and the risk of incorrect rejection. The second is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not materially misstated.

Variables and attributes.

Variables sampling is used by auditors to estimate quantities or dollar amounts in substantive testing. Attribute sampling applies to testing of internal controls and is used to estimate a deviation rate (occurrence rate) within a population.

To determine the sample size for a test of controls, the auditor considers (1) the tolerable rate of deviations from the control being tested, (2) the expected actual rate of deviations, and (3) the allowable risk of overreliance. An increase in the allowable risk of overreliance, an increase in the tolerable rate, and a decrease in the expected rate each has the effect of reducing the required sample size.

More than the deviation rate in the auditor’s sample.

In the case of a test of controls, overreliance is the erroneous conclusion that controls are more effective than they actually are. Overreliance occurs if the sample has fewer observed deviations than the true deviation rate in the population.

Estimate whether the dollar amount of inventory is reasonable.

Variables sampling is used by auditors to estimate quantities or dollar amounts in substantive testing. Attribute sampling applies to tests of controls and is used to estimate a deviation rate (occurrence rate) for a population. Thus, an auditor who wants to estimate whether the dollar amount of inventory is reasonable uses variables sampling.