Basics of Attribute Sampling

Summary

This video explores the fundamentals of attribute sampling in auditing, emphasizing its role in evaluating internal controls efficiently. By testing a representative sample of transactions, auditors can determine the effectiveness of controls without examining every transaction. The video discusses key concepts such as defining the population, identifying attributes, determining sample sizes, and projecting results to the entire population. It highlights the balance between tolerable misstatement rates and expected failures, reinforcing the importance of a systematic approach to auditing that ensures both accuracy and cost-effectiveness.

Takeaways

• 😀 Attribute sampling helps auditors evaluate the reliability of internal controls without examining every transaction.
• 📊 The purpose of attribute sampling is to draw conclusions about a larger population based on a smaller sample.
• ❓ Attribute sampling is used to answer yes/no questions regarding compliance with internal controls.
• ⚠️ It cannot determine if account balances are misstated; both tests of balances and attribute sampling are necessary.
• 📋 Identifying the correct population and attributes to test is crucial for effective sampling.
• 🔍 Sample size is influenced by the desired confidence level, tolerable misstatement rate, and expected misstatement rate.
• 📈 A higher tolerable misstatement rate allows for a smaller sample size but may lead to less accurate conclusions.
• ⚖️ The expected misstatement rate must be lower than the tolerable rate to justify testing the control.
• 🔄 Various sampling methods include random, systematic, and block sampling, each suited for different scenarios.
• 📉 The sample failure rate is calculated by dividing the number of failures by the sample size to evaluate control effectiveness.

Q & A

What is the primary purpose of attribute sampling in auditing?

The primary purpose of attribute sampling is to assess whether internal controls are operating effectively, allowing auditors to make conclusions about the population based on a small sample of transactions.

What type of questions can attribute sampling answer?

Attribute sampling answers yes/no questions such as: Are credit sales made to customers with approved credit? Are shipments made before billing? Are checks signed by authorized individuals? Are goods purchased only from approved vendors?

What kind of questions can attribute sampling not answer?

Attribute sampling cannot directly answer questions about whether account balances are misstated, as it only tests internal controls and not the accuracy of the financial records themselves.

What factors are considered when setting up attribute sampling?

When setting up attribute sampling, auditors must define the population, identify the attribute being tested, and determine the sample size based on risk tolerance, tolerable misstatement rate, and expected misstatement rate.

How do auditors determine the sample size in attribute sampling?

Sample size is determined by considering the auditor's desired level of confidence (risk tolerance), the tolerable misstatement rate (the maximum acceptable error), and the expected misstatement rate (how often the control is expected to fail).

What is the tolerable misstatement rate in attribute sampling?

The tolerable misstatement rate is the percentage of errors auditors are willing to accept while still concluding that the control is operating effectively. A higher tolerable misstatement rate makes it easier to declare the control as working, but requires a smaller sample size.

What does the achieved upper error limit represent in attribute sampling?

The achieved upper error limit represents the maximum estimated error rate in the population based on the sample results, accounting for sampling risk and potential non-sampling errors.

How do automated controls compare to manual controls in terms of error rates?

Automated controls generally have a lower failure rate compared to manual controls, which is why they are often considered more reliable and result in a lower tolerable misstatement rate.

Why is statistical sampling important in attribute sampling?

Statistical sampling is important because it helps auditors project results from the sample to the population while accounting for sampling risk. It provides a more reliable and precise estimation of control effectiveness.

What happens if the expected misstatement rate is higher than the tolerable misstatement rate?

If the expected misstatement rate is higher than the tolerable misstatement rate, the control is deemed ineffective, and auditors will likely not rely on it, as the expected level of failure exceeds the acceptable limit.