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78 Cards in this Set
- Front
- Back
- 3rd side (hint)
How is the statement called that is hoped or expected to be true instead of the null hypothesis? |
alternative hypothesis |
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How would a null hypothesis and the alternative hypothesis be called if one wanted to prove that an error rate within a controll is < 1% ? |
null hypothesis: error rate >= 1% alternative hypothesis: error rate < 1% |
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How is the characteristic the IA wants to estimate about the population called?
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attribute of interest
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What is another expression for sample item? |
sample unit
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What type of risk is hazard risk? Provide example! |
insurable risk (e.g. natural disasters, impairments of physical assets)
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How is audit risk defined? |
risk that IA issues an incorrect opinion on financial statements
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How is audit risk calculated? |
audit risk (AR)= inherent risk (IR) x control risk (CR) x detection risk (DR)
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How can the audit risk model be illustrated? |
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What is inherent risk? |
risk of misstated financial statements without any risk mitigating controls
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What is control risk? |
risk that risk mitigating controls will fails to prevent misstated financial statements
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What is detection risk? |
risk that IA fails to detect a significant error in the financial statements through test and analysis
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Which risk is set? |
audit risk
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How large is audit risk set so that an audit provides a high level of assurance? |
5%
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Which risks are assessed?
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inherent risk, control risk
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Which risk is determined? |
DR = AR/(IR x CR)
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What 2 other types of risk does detection risk comprise? |
"sampling risk
– non–sampling risk |
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What is the relation between sampling risk and confidence level? |
Sampling risk = 1 minus confidence level
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What is sampling risk? |
– the risk that the sample, even though it was chosen properly, does not represent the population as the sample, by chance, has proportionately more errors than the population
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How does sampling risk relate to sample size? |
the smaller the sample size, the larger the sampling risk
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How can sampling risk be overcome? |
by increasing the sample size
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What effect does an increase in the assessed control risk have on detection risk, sampling risk, confidence level, and sample size? |
"detection risk = audit risk / (inherent risk x control risk)
Increase in control risk –> decrease in detection risk –> decrease in sampling risk –> increase in confidence level (=1 – sampling risk) –> increase in sample size |
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which types of risk does sampling risk of variables and attributes sampling comprise? |
"variables:
– risk of incorrect acceptance of financial statements (beta risk; type II error) – risk of incorrect rejection of financial statements (alpha risk; type I error) control/attribute: – risk of assessing control risk too low (beta risk; type II error) – risk of assessing control risk too high (alpha risk; type I error) |
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How is alpha risk defined and when can it only occur?
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- correct statements are indicated as incorrect by the sampling result
- it only occur when the misstatement is less than material |
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How is beta risk definedand when can it only occur? |
- incorrect statements are indicated as correct by the sampling result
- it only occur when the misstatement is more than material |
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When is alpha risk the largest? |
just below the material misstatement (MM) andequals (at the limit of the material misstatement) one minus beta risk at MM |
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When is beta risk the largest? |
at the amount when a material misstatement (MM) starts to begin |
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To what does the risk of incorrect rejection/risk of assessing control risk too high/alpha risk/type I error relate? |
sampling efficiency
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To what does the risk of incorrect acceptance/risk of assessing control risk too low/beta risk/ type II error relate? |
sampling effectiveness
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What is more crucial: sampling efficiency or sampling effectiveness? |
sampling effectiveness
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How does the risk of assessing control risk too low influence the sample size? |
the larger the IA allows the risk of assessing control risk too low to be, the smaller the sample size may be (since the confidence level decreases as well) |
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What is nonsampling risk? |
"– human errors that can be reduced or eliminated or
– the risk that the auditor's conclusion is inappropriate for any other reason, e.g. the application of inappropriate procedures or the failure to recognise a misstatement |
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When does a larger sample not represent a population more than a smaller sample? |
when the larger sample is selected in a biased way
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Of which two elements does statistical sampling consist? |
"– statistical sample selection
– projection to the population |
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What shall the statistical sample selection ensure? |
that the sample is representing the population
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Which 2 criteria must be met so that a sample can be considered representative? |
"– the probability of every population item being selected is > 0
– the probability of every population item being selected is EQUAL or KNOWN |
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What shall the projection to the population allow? |
to conclude whether sampling result may be projected to the whole population
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Which sample selection methods are statistical?(3) |
"– simple random sampling
– systematic/interval sampling – stratified sampling |
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What is the characteristic of the size of a random sample with regard to the population size? |
"– above a certain population size, the sample size does not increace (the absolute size of the sample affects the precision more than its size relative to the population)
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When is simple random sampling the most appropriate method for drawing a sample? |
when population items are consecutively numbered (e.g. account payable checks)
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When is simple random sampling appropriate with regard to the detection of fraud? |
if the extent of fraud is to be estimated rather than to determine if fraud has occurred in the first place
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How is randomness of a simple random sample ensured? |
– randomness is ensured by selecting the sample using random number tables
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What does a random number sample ensure? |
that the sample is unbiased as each sampling unit and each combination of sampling unit has an equal and nonzero probability to be selected
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What is a disadvantage of simple random sampling over systematic sampling? |
there is a chance that the sample items drawn using simple random sampling are clustered; this is avoided at systematic sampling as the population is evenly sampled
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Is a sample selected using random numbers an absolute representative sample? |
no, sampling risk and sampling error allow to estimate the probability that a random sample is not representative
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What is the finite population correction factor used for in simple random sampling? |
for adjusting the achieved precision in cases where the sample size exceeds 5% of the population (the larger the sample size, the narrower the precision)
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What does the systematic interval sampling plan assume? |
– items are arranged randomly in the population
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What effect does a not randomly distributed population have on systematic sampling and how may this effect be overcome? |
the results will be biased. This bias may be overcome by taking repeated systematic sample items, each with a random start
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How is systematic sampling called as well? |
interval sampling
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How does systematic sampling work for a population of 1000 items? |
"– select a sample size e.g. 35
– 1000/35=28.57 – select randomly a number between 1 and 28 as the first sample item – select every 28th item |
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How must the starting point in systematic sampling be selected to give each item of the population an equal chance of selection? |
randomly
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How is the random starting point in systematic sampling selected (sampling interval:28)? |
from a table of random digits between one and 28
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When is systematic sampling most appropriate?(2) |
"– sampling units are not numbered
– matching of sampling unit against random numbers is too cumbersome |
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If a certain pattern in the population is present in systematic sampling, how should the size of the interval be selected? |
so that it is not a multiple of the population pattern
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What can be checked using systematic sampling? |
– if a control was operated throughout an entire year
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Which sample selection methods are nonstatistical?(3) |
"– haphazard
– judgemental sampling – cluster block |
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What is judgmental sampling? |
selecting the size of a sample and the items whithin the sample based on the auditor's subjective judgment
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When is judgmental sampling most appropriate? |
when reasons exist for focusing audit attention on specific transactions, e.g. large mortgages |
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How does cluster block sampling work? |
– selects groups of items as the sampling units rather than individual items (e.g all cash payments for May and September)
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What is cluster block sampling most appropriate for? |
for performing year–end cutoff tests
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What is the disadvantage of cluster block sampling? |
– variability of items within the clusters is not representative
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What is the advantage of cluster block sampling? |
– avoids the need to assign random number to individual items in the population
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What is the purpose of stratifying a sample? |
to reduce variation in order to be able to use a smaller sample than would be required without stratification
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When is cluster block sampling most appropriate? |
when each aggregate sampling group is representative of the entire population |
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What is the difference between stratified sampling and cluster block sampling? |
stratified sampling is used to give special emphasis to certain categories in the population (skewed or unusual values, e.g. with a high variability i.e. standard deviation)
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How useful is cluster block sampling if a built–in pattern is expected in the population? |
not at all as cluster block sampling does not overcome patterns
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What does statistical sampling provide in contrast to nonstatistical sampling? |
"– precision/sampling error (how closely the sample represents the population)
– confidence level/sampling risk (percentage of times the sample will adequately represent the population) |
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By which range around the projected population paramter is precision represented?
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– the range around the projected population parameter (projected from the sample parameter of a statistically selected sample) that will contain the true population value at a given confidence level
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What kind of uncertainty does precision represent? |
the uncertainty in the projection of a sample result to thepopulation (i.e. uncertainty due to not observing the whole population but only a fraction of it)
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What are the other expressions for precision?(4) |
"– confidence interval
– sampling error – margin of error – allowance for sampling risk |
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What does the confidence level express? |
the level of reliability that a selected sample is representative for the whole population (i.e. the percentage of confidence intervals constructed around the projected population parameter (projected from the sample parameter of a statistically selected sample) that will contain the true population value)
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If based on a sample a routine check was performed correctly in 88% of the time what do a 95% confidence level and a 5% precision mean in that context? |
the probability is 95% that real percentage of the routine checks carried out correctly lies between 83% and 93%
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How is the confidence level called as well? |
– reliability
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On what does the size of precision mainly depend for a given confidence level? |
on the sample size
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The larger the sample size, the... |
the smaller the precision
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Which sampling factor does the IA control and which determine, reliability or precision? |
- IA determines the reliability (confidence level) according to the audit risk model - IA controls precision by setting the maximum tolerable error |
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To what is the expected value of a random sample of any size equal? |
the population mean |
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What may the results of prior years' samplings be used for? |
for obtaining preliminary information on the population sampled (e.g. variability) |
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Are pilot samples discarded after being used to determine the variability of error in the population in order to calculate the sample size? |
no, pilot samples are used as a part of the total sample |
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