 Hello and welcome to the session. This is Professor Farhad in which we would look at the topic of sample. This topic is covered in a CPA exam auditing, simulation or multiple choice CPA exam course. In this session, we would look how the sample size, tolerable misstatement, expected misstatement and the internal control, they all interact with each other. So before you walk into the exam, you want to make sure you understand how these factors and sampling affect each other. They're logical. Once you understand them, they're logical. You don't have to memorize them, but the key is to understand them. And this is what I do. I explain the material to you. I don't review it. I don't assume you know it. I explain it. And to do so, you can go to my auditing and attestation course on my website to learn more about this topic. Although I will go over the questions here, but if you want more explanation, check out my website. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, finance, tax, as well as Excel tutorials. If you like my lectures, please like them, share them, put them in playlist. If they benefit you, it means they might benefit other people. Connect with me on Instagram. As I just stated, you can go to my website, farhatlectures.com. I do have an auditing course, but one subscription basically gives you access to everything. So if you're studying for your auditing course or your CPA exam, I have plenty of resources. So if you want to improve your CPA score and pass the exam 10 to 15 points, I strongly suggest you check out my website. So this is the first question. So the following question relate to determining sample size and test of detailed balance for each select the best answer. So this looks like a multiple choice questions, but this also could be a simulation on the exam where all these choices are a drop down boxes where you would select the best answer. And we're going to have a series of questions or they could give you a scenario. And in the scenario based on the scenario, they could give you those questions. So let's take a look at the first question. Maggie decides to use stratified sampling. So here we are talking about specifically stratified sampling. The reason for using stratified sampling rather than unrestricted random sampling is to what? So simply put they're asking you on this question. Why would in this scenario, we would use stratified sampling? Let's see. Let's see the answer and let's talk a little bit more about stratified sampling, because that's something you want to be familiar with before walking into the exam. OK, so let's take a look at the first and a question and see if it fits our answer. Is it to reduce as much as possible the degree of variability in the overall population? Well, is this why you will do stratified sampling? And basically, and the answer is that's maybe the opposite of stratified sampling. OK, what is stratified sampling is when you take your population, your whole population, and you partition it into subpopulation. OK, so simply put, let's assume you are auditing a utility company. OK, utility company and the utility company might have they might have regular customers like people that lives in in suburbia, suburban area. OK, they might have hospitals. They might have retailers, large retailers. OK, and they might have also, let's assume in this area, they have hotels. OK, and you this is a utility company. Guess what? The people that live in suburban areas. Each customer will have maybe a bill that averages between 80 to $120 per month in utilities. Hospitals because they have 2, 3, 4, maybe they have 10 hospitals in this area. Hospitals, their bill might range between $700 to $1000 per month. Retailers, their bill might range between $250 to $350 per month. And hotels, they might have hotels where the utility bill could be between $1,000 and $1,500. OK, so notice what we have. We have it's the same company. It's a utility company, but they have different type of customers. So rather than treating all the customers as one population and select randomly from this population, what we do is we break it down. Why? Because there's a variability in the population. Each type of business has a different has a different balance. So I'm just giving you those examples. But the point is, is you find some population. Therefore, if you choose a, you're doing exactly the opposite. You want to emphasize variability. So a is one is out. Give every element in the population an equal chance of being included. That's random. It means combine them all together and pull them randomly. That's also not doing stratifying. That's out. Allow the person selecting the sample to use personal judgment and deciding which element should be included in the sample. Well, that's here. Clearly you are using professional judgment and that's different than stratified sampling. Stratified sampling is to, you want to put, you want to put different groups in different population. Therefore is out. Three is out by the process of elimination. Four is the answer. But let's take a look at four. Allow the auditor to emphasize larger items from the population. Yes. If you want to emphasize larger items, you want to stratify. Now, you know what are the larger items and you can select from those larger items. For example, you can combine hospitals and hotels. I just, the reason I stratified it is to make sure, to make sure you understand that you, once you put those population into subpopulation, then you can select from that subpopulation emphasizing the size of that subpopulation, the larger items, emphasizing the larger items. Okay. Let's take a look at this question. Which of the following sample planning factors will influence the sample size for a test of detail balance for a specific account? So which of these two expected amount of misstatements and the measure of tolerable misstatement influence the sample size? Well, I hope you already just, we just a minute ago said that the measure of tolerable misstatement does affect the sample size. So once, if you notice on the exam, so this is an answer and this is an answer. So I can take out one and four because I just told you the tolerable misstatement affect the sample size. Okay. And how does it affect it? We said it affected it negatively. There's a negative relationship. Not negatively, negative relationship. If tolerable misstatement goes up, sample goes down. If tolerable misstatement goes down, the sample goes up. I'm sorry. Let me, let me go back and do this. Tolerable misstatement and sample size negative. If I can't tolerate more, yes, I need less sample size. And that's why it's important to understand it. It's important to understand it. So I'm down to 50-50. The answer is either two or three. Now, expected amount of misstatement. Let's think from a logical perspective. If you expect more mistakes, if you are expecting more errors, more material errors, or more, just simply more errors, more mistakes, if you're expecting that this company or this account will have more mistakes, what do you do? Do you change your sample size? I hope you understand this. If you expect more mistakes, you have to increase your sample size. So does it affect your sample size? Sure it does. If I'm expecting more mistakes, I'm going to have to do more work. Doing more work. How do I do more work? I select more sample. I select more sample. Therefore, more errors, expected amount of misstatement, or less. If I'm expecting less errors or less mistakes in the account, I can lower my sample size. So does the expected mistakes affect the sample size? Of course it does. So yes, for both, the answer is two. So it's very important to understand how all these factors interact with each other. Because again, this looks like a multiple choice. I can turn this easily into an assimilation where you have a scenario and I can ask you, what should we do about the scenario? About the scenario. So make sure you understand this. Once again, I'm going to invite you. If you want more explanation, visit my website, farhat-lectures.com. Specifically, my auditing course, but you will have access to everything. Remember, the CPA is a long-term investment. It's going to pay dividend for years to come. Don't shortchange yourself. Study hard, good luck, and stay safe, especially if you are still living through the coronavirus.