audit a final
TRANSCRIPT
Audit Sampling
1. Which of the following is included as part of the definition of audit sampling?a) Inquiry and observation procedures.b) Documentation evidence.c) Evaluation of some characteristic.d) Statistical techniques.
Answer A is incorrect because various procedures other than inquire and observation are possible when applying audit sampling (e.g., inspection and reperfromance); also, the inquiry and observation techniques are not ordinarily used in statistical sampling applications.
Answer B is incorrect because both internally and externally generated evidence are acceptable for audit sampling.
Answer C is correct because audit sampling is the application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.
Answer D is incorrect because both statistical and nonstatistical sampling techniques are acceptable.
2. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor toa) Minimize the failure to detect errors and irregularities.b) Eliminate the risk of nonsampling errors.c) Reduce the level of audit risk and materiality to a relatively low amount.d) Measure the sufficiency of the evidential matter obtained.
Answer A is incorrect because auditors may minimize the failure to detect errors and irregularities with either nonstatistical or statistical sampling.
Answer B is incorrect because the risk of nonsampling errors is not directly affected by whether statistical or nonstatistical sampling is used.
Answer C is incorrect because either statistical or nonstatistical sampling may be used to reduce the level of audit risk to a relatively low level. Also, assistance in reducing materiality is not an advantage of statistical sampling over nonstatistical sampling.
Answer D is correct because statistical sampling helps the auditor to: (1) design an efficient sample, (2) measure the sufficiency of the evidential matter obtained, and (3) evaluate the sample results.
3. Which of the following is an element of sampling risk?a) Choosing an audit procedure that is inconsistent with the audit objective.b) Choosing a sample size that is too small to achieve the sampling objective.c) Failing to detect an error on a document that has been inspected by the auditor.d) Failing to perform audit procedures that are required by the sampling plan.
Answer A is incorrect because choosing an audit procedure inconsistent with the audit objective is an example of nonsampling risk. Nonsampling risk is unrelated to the mathematics of the sampling process.
Answer B is correct because sampling risk includes the possibility that the sample size selected may be too small to achieve the sampling objective (e.g., sample items selected disclose no errors).
Answer C is incorrect because the failure to detect an error on a document inspected by the auditor is an example of nonsampling risk.
Answer D is incorrect because the failure to perform audit procedures required by the sampling plan is an example of nonsampling risk.
4. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to thea) Efficiency of the audit.b) Effectiveness of the audit.c) Selection of the sample.d) Audit quality controls.
Answer A is correct because AU 350 states that the risk of incorrect rejection and the risk of assessing control risk too high relate to the efficiency of the audit. These two errors generally result in an auditor performing unnecessary additional procedures.
Answer B is incorrect because the risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit.
Answer C is incorrect because sampling risk components do not directly affect the actual selection of sample items.
Answer D is incorrect because the quality controls to be adhered to during the audit engagement are not directly affected by the components of sampling risk.
5. Which of the following best illustrates the concept of sampling risk?a) A randomly chosen sample may not be representative of the population as a
whole on the characteristic of interest.b) An auditor may select audit procedures that are not appropriate to achieve the
specific objective.c) An auditor may fail to recognize errors in the documents examined for the
chosen sample.d) The documents related to the chosen sample may not be available for
inspection.
Answer A is correct because sampling risk arises from the possibility that an auditor's conclusions based upon a sample would differ from the conclusions drawn when examining the entire population (i.e., the risk that the sample examined is not representative of the population).
Answer B is incorrect because it relates to errors which could occur even if 100% of the population were examined (i.e., nonsampling risk).
Answer C is incorrect because it relates to errors which could occur even if 100% of the population were examined (i.e., nonsampling risk).
Answer D is incorrect because it relates to errors which could occur even if 100% of the population were examined (i.e., nonsampling risk).
6. At times a sample may indicate that the auditor’s planned assessed level of control risk is reasonable when, in fact, the true compliance rate does not justify such reliance. This situation illustrates the risk ofa) Assessing control risk too low.b) Assessing control risk too high.c) Incorrect procession.d) Incorrect rejection.
Answer A is correct because the risk of assessing control risk too low is the risk that the sample supports the auditor's planned degree of reliance on the control when the true compliance rate would not support such reliance.
Answer B is incorrect because the risk of assessing control risk too high pertains to the situation in which the sample does not support the auditor's planned degree of reliance on the control when the true compliance rate supports such reliance.
Answer C is incorrect because the risk of incorrect precision is a nonsense term.
Answer D is incorrect because the risk of incorrect rejection relates to substantive tests.
7. Which of the following best describes the distinguishing feature of statistical sampling?a) It provides for measuring mathematically the degree of uncertainty that results
form examining only part of the data.b) It allows the auditor to have the same degree of sampling risk as with
nonstatistical sampling but with substantially less work.c) It allows the auditor to substitute sampling technique for audit judgment.d) It provides for measuring the actual misstatements in financial statements in
terms of sampling risk and allowance for sampling risk.
Answer A is correct because statistical sampling provides the auditor with a means of assessing sampling risk--the risk that the sample will not accurately reflect the population characteristics.
Answer B is incorrect because nonstatistical sampling does not allow quantification of the sampling risk achieved.
Answer C is incorrect because audit judgment is an important consideration in statistical sampling (e.g., specifying the confidence level and precision interval). Audit judgment can never be entirely eliminated.
Answer D is incorrect because statistical sampling allows the auditor to infer that a population value (e.g., inventory), is within a certain range with a specified level of sampling risk. The actual misstatement in the financial statements could only be determined by a complete count.
8. The objective of the allowance for sampling risk in sampling for tests of controls on internal control is toa) Determine the probability of the auditor’s conclusion based upon reliance
factors.b) Determine that financial statements taken as a whole are not materially in error.c) Estimate the risk of incorrect acceptance of substantive tests.d) Estimate the range of procedural deviations in the population.
Answer A is incorrect because "the auditor's conclusion based upon reliance factors" is a nonsense concept.
Answer B is incorrect because tests of controls relate to the internal control and the internal control of and by itself does not provide assurance that the financial statements taken as a whole are not materially misstated. In addition to an effective internal control, substantive tests including analytical procedures and tests of transactions and balances are required.
Answer C is incorrect because the risk of incorrect acceptance of substantive tests is independent of tests of controls.
Answer D is correct because the objective of the allowance for sampling risk is to estimate the confidence interval (range of procedural deviations) of the population.
9. Auditors often utilize sampling methods when performing tests of controls. Which of the following sampling methods is most useful when testing controls?a) Attributable sampling.b) Variable sampling.c) Unrestricted random sampling with replacement.d) Stratified random sampling.
Answer A is correct because tests of controls utilize attribute sampling. Attribute sampling is based on the binomial distribution which describes yes/no decisions, and error/nonerror situations.
Answer B is incorrect because variable sampling utilizes the normal distribution which is continuous (i.e., elements of the population can take on a continuum of the variable, such as receivables and inventories).
Answer C is incorrect because unrestricted random sampling with replacement is a sample selection method rather than a sampling technique. This method allows population items to be selected more than once.
Answer D is incorrect because statistical random sampling is a sample selection method rather than a sampling technique. This method stratifies the population and then applies random sampling techniques to each strata.
10.An auditor examining inventory may appropriately apply sampling for attributes in order to estimate thea) Average price of inventory items.b) Percentage of slow-moving inventory items.c) Peso value of inventory.d) Physical quantity of inventory items.
Answer A is incorrect because estimating the average price of inventory items is an application of variables sampling.
Answer B is correct because attribute sampling expresses a conclusion about the population in terms of a rate of occurrence. Accordingly, determining the percentage of slow-moving inventory items would be an appropriate attribute sampling application.
Answer C is incorrect because estimating the peso value of inventory is an application of variables sampling.
Answer D is incorrect because estimating the physical quantity of inventory items is an application of variables sampling.
11.Ram, CPA, believes the industry-wide occurrence rate of client billing errors is 3% and has established a maximum acceptable occurrence rate of 5%. In the review of client invoices Ram should usea) Discovery sampling.b) Attributable sampling.c) Stratified sampling.d) Variable sampling.
Answer A is incorrect because discovery sampling can be used only when the expected error rate is extremely low (e.g., less than 1%).
Answer B is correct because attribute sampling is used to estimate the error rate for internal control activities.
Answer C is incorrect because stratification is most frequently utilized with variable sampling.
Answer D is incorrect because variable sampling is used when the auditor wishes to estimate dollar or quantity errors, not when estimating error rates.
12.Statistical sampling generally may be applied to test controls when the client’s internal control activitiesa) Depend primarily on appropriate segregation of duties.b) Are carefully reduced to writing and are included in client accounting manuals.c) Leave an audit trail in the form of documentary evidence of compliance.d) Enable the detection of material irregularities in the accounting records.
Answer A is incorrect because statistical sampling is generally not applicable to controls which depend primarily on the segregation of duties.
Answer B is incorrect because the fact that the client's control activities are included in client accounting manuals has no direct impact on the use of statistical sampling.
Answer C is correct because statistical sampling may be applied when testing controls which leave an audit trail in the form of documentary evidence. Documentary evidence in the form of audit stamps, initials, calculations, etc., lends itself to tests of controls where the auditor's objective is to determine the rate of compliance with the prescribed control.
Answer D is incorrect because whether the controls enable detection of material irregularities is irrelevant to the applicability of statistical sampling. The structure of internal control is expected to prevent or detect material irregularities from entering the accounting records.
13. If an auditor, planning to use statistical sampling, is concerned with the number of a client’s sales invoices that contain mathematical errors, the auditor would most likely utilizea) Random sampling with replacement.b) Sampling for attributes.c) Sampling for variables.d) Stratified random sampling.
Answer A is incorrect because random sampling with replacement refers to a sample selection method which assumes that items in the population can be reselected because they are returned to the population after selection.
Answer B is correct because the auditor is concerned with the existence of an error or the nonexistence of an error; therefore, attribute sampling is appropriate.
Answer C is incorrect because variables sampling is concerned with the determining the peso amount of a variable such as the peso value of receivables or inventory.
Answer D is incorrect because stratified random sampling is a technique which stratifies the population into subpopulations and then applies random sampling methodology to each strata.
14.An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client’s internal control activities. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation anda) Evaluate the results as if the sample size had been 19.b) Treat the missing check as a deviation for the purpose of evaluating the
sampling.c) Treat the missing check in the same manner as the majority of the other 19
checks (i.e., countersigned or not).d) Choose another check to replace the missing check in the sample.
Answer A is incorrect because it ignores the missing check and bases results on the remaining 19 checks.
Answer B is correct. The requirement is to determine the proper method of handling a sample item which cannot be located for evaluation purposes. An auditor would ordinarily consider the selected item to be a deviation.
Answer C is incorrect because treating the check similarly to the majority is unjustified because, since it cannot be found, it is quite different than the remaining 19 checks.
Answer D is also incorrect because to be justified one would have to assume that the replacement check had the same pertinent characteristics as the one which cannot be located.
15.When performing a test of a control with respect to control over cash disbursements, a CPA may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the populationa) Must be recoded in a systematic pattern before the sample can be drawn.b) May occur in a systematic pattern, thus destroying the sample randomness.c) May systematical occur more occur more than once in the sample.d) Must be systematically replaced in the population after sampling.
Answer A is incorrect because recording the population in a systematic pattern would bias the sample.
Answer B is correct because if a cyclical or periodic pattern exists in the disbursements which is related to the attribute being tested, a bias may result. Thus, the sample will not be random and the sampling results will not be valid.
Answer C is incorrect because individual disbursement items will be selected only once when systematic sampling is properly applied.
Answer D is incorrect because individual disbursement items are not being replaced. Thus, each item has the opportunity of being selected only once when systematic sampling is properly applied.
16. If certain forms are not consecutively numbereda) Selection of a random sample probably is not possible.b) Systematic sampling may be appropriate.c) Stratified sampling should be used.d) Random number tables cannot be used.
Answer A is incorrect because selection of a random sample is possible even though the population is not consecutively numbered.
Answer B is correct because systematic sampling is a procedure where a random start is obtained and then every nth item is selected. For example, a sample of forty from a population of a thousand would require selecting every 25th item after obtaining a random start between items 1 through 25. Therefore, although the forms are not consecutively numbered, the use of systematic sampling may be appropriate.
Answer C is incorrect because there is no special reason for using stratified sampling. Stratified sampling breaks down the population into subpopulations and applies different selection methods to each subpopulation. This selection method is used when the population consists of different types of items (e.g., large balances and small balances).
Answer D is incorrect because random number tables can be used even though the forms are not consecutively numbered. If random numbers are selected for which there are no forms, they are ignored. This is the same as if there are 86,000 items in a consecutively numbered population and random numbers selected between 86,000 and 99,999 are ignored.
17. If the size of the sample to be used in a particular test of attributes has not been determined by utilizing statistical concepts, but the sample has been chosen in accordance with random selection proceduresa) No inference can be drawn form the sample.b) The auditor has committed a nonsampling error.c) The auditor may or may not achieved desired allowance for sampling risk at the
desired risk of incorrect acceptance.d) The auditor will have to evaluate the results by reference to the principles of
discovery sampling.
Answer A is incorrect because inferences can be drawn.
Answer B is incorrect. Nonsampling risk includes all aspects of ultimate risk that are not due to sampling. However, the error committed in this case is a sampling error.
Answer C is correct because although the use of random sampling makes it possible to calculate statistical conclusions, the wrong size sample will affect the achieved allowance for sampling risk at the desired risk of incorrect acceptance. For example, a sample which is too small will lead to a larger allowance for sampling risk than desired because of a larger than desired standard error of the mean.
Answer D is incorrect because discovery sampling, a type of attribute sampling, uses a predetermined sample size to arrive at statistical conclusions.
18. In examining cash disbursements, an auditor plans to choose a sample using systematic selection with a random start. The primary advantage of such a systematic selection is that population itemsa) Which include irregularities will not be overlooked when the auditor exercises
compatible reciprocal options.b) May occur in a systematic pattern, thus making the sample more representative.c) May occur more than once in a sample.d) Do not have to be prenumbered in order for the auditor to use the technique.
Answer A is incorrect because irregularities may be overlooked.
Answer B is incorrect because a disadvantage of systematic sampling is that it may result in a nonrepresentative sample if a systematic pattern exists in the population being sampled.
Answer C is incorrect because an auditor using every nth item will not include one item in a sample more than once.
Answer D is correct because the items need not be prenumbered, the auditor will simply select every nth item.
19.Which of the following statistical selection techniques is least desirable for use by an auditor?a) Systematic selection.b) Stratified selection.c) Block selection.d) Sequential selection.
Answer A is incorrect because systematic sampling with a random start usually provides a good representation of the entire population because all items in the population have an equal opportunity of being selected.
Answer B is incorrect because populations are often stratified into homogeneous groups to reduce variability in the sample and results in smaller sample sizes.
Answer C is correct because sample items should be selected in such a way that the sample can be expected to be representative of the population allowing all items in the population to have an equal opportunity of being selected. A block sample consisting of sequential items may preclude items from meeting the above criteria.
Answer D is incorrect because sequential sampling is an alternative to a fixed sample plan. Instead of examining a single sample of a specified size, the sample is taken in several steps, with each step conditional on the results of the previous step.
20. In estimation sampling for attributes, which one of the following must be known in order to appraise the results of the auditor’s sample?a) Estimated peso value of the population.b) Standard deviation of the values in the population.c) Actual occurrence rate of the attribute in the population.d) Sample size.
Answer A is incorrect because the estimated dollar value of the population is used only in variables sampling.
Answer B is incorrect because the standard deviation of the values in the population is a measure used in variables sampling not attribute sampling.
Answer C is incorrect because the auditor will not know the actual occurrence rate of the attribute in the population unless the entire population is audited.
Answer D is correct because the sample size is needed in order to evaluate the results of the attribute sampling. The sample size is used to calculate the deviation rate for the sample.
21.Which of the following statements is correct concerning statistical sampling in tests of controls?a) Deviations from control procedures at a given rate usually in misstatement at a
higher rate.b) As the population size doubles, the sample size should also double.c) The qualitative aspects of deviations are not considered by the auditor.d) There is an inverse relationship between the sample size and the tolerate rate.
Answer A is incorrect. Many deviations do not necessarily result in a misstatement.
Answer B is incorrect. A doubling of the population size will result in less than a doubling of the required sample size.
Answer C is incorrect. Auditors must consider the qualitative aspects of deviations.
Answer D is correct. The sample size increases as the tolerable rate decreases, an inverse relationship.
22. In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the prior year’s rate because of the results of the prior year’s tests of controls and the overall control environment. The auditor most likely would then increase the planneda) Tolerate rate.b) Allowance for sampling risk.c) Risk of assessing control risk too low.d) Sample size.
Answer A is incorrect because an increase in the expected population deviation rate need not lead to an increase in the tolerable rate.
Answer B is incorrect because the allowance for sampling risk will decrease, not increase, when the expected population deviation rate increases.
Answer C is incorrect because the auditor need not necessarily increase the risk of assessing control risk too low in such circumstances. See AU 350 and the AICPA Audit and Accounting Guide, Audit Sampling, for information on audit sampling.
Answer D is correct because an increased population deviation rate will require an increase in sample size when the planned assessed level of control risk is to remain the same.
23.As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is thata) The deviation rates of both the auditor’s sample and the population exceed the
tolerable rate.b) The deviation rates of both the auditor’s sample and the population is less than
the tolerable rate.c) The deviation rate in the auditor’s sample is less than the tolerable rate, but the
deviation rate in the population exceeds the tolerable rate.d) The deviation rate in the auditor’s sample exceeds the tolerable rate, but the
deviation rate in the population is less then the tolerable rate.
Answer A is incorrect because when the sample deviation rate exceeds the tolerable rate the auditor will conclude that the control is ineffective and therefore not incorrectly assess control risk lower than appropriate.
Answer B is incorrect because, when the deviation rate is less than the tolerable rate, control risk will not be assessed lower than is appropriate since the control is operating effectively.
Answer C is correct because when the deviation rate in the auditor's sample is less than the tolerable rate (despite the fact that the deviation rate in the population exceeds the tolerable rate), the auditor may incorrectly conclude that the control is operating more effectively than it actually is.
Answer D is incorrect because if the sample deviation rate exceeds the tolerable rate when the population deviation rate is less than the tolerable rate, the auditor will incorrectly assess control risk at a higher level than is appropriate.
24. In connection with his test of the accuracy of inventory counts, a CPA decides to use discovery sampling. Discovery sampling may be considered a special case ofa) Judgmental sampling.b) Sampling for variables.c) Stratified sampling.d) Sampling for attributes.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is correct. Both discovery sampling and acceptance sampling are special cases of sampling for attributes. Discovery sampling is a special case of acceptance sampling. In discovery sampling there should be no opportunity to observe more than one occurrence, because it is designed to sample for serious or critical errors. Once a critical or serious error is discovered, the sampling plan will probably be abandoned and a more comprehensive examination undertaken.
25.What is an auditor’s evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?a) Modify the planned assessed level of control risk because the tolerable rate plus
allowance for sampling risk exceeds the expected population deviation rate.
b) Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
c) Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowable for sampling risk equals the expected population deviation rate.
d) Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
Answer A is incorrect. The tolerable rate plus the allowance for sampling risk will always exceed the expected population deviation rate when tests of controls are being performed.
Answer B is incorrect. When the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate the sample results do not support the planned assessed level of control risk.
Answer C is incorrect. The tolerable rate less the allowance for sampling risk should be compared with the actual deviation rate.
Answer D is correct. When the deviation rate plus the allowance for sampling risk exceeds the tolerable rate, the assessed level of control risk may increase. Here the deviation rate of 6% (3 deviations/50 documents) plus the allowance for sampling risk of 2% equals 8% and exceeds the tolerable rate of 7%.
26. In performing tests of controls, the auditor will normally find thata) The level of risk is directly proportionate to the rate of error.b) The rate of deviations in the sample exceeds the rate of error in the accounting
records.c) The rate of error in the sample exceeds the rate of deviations.d) All unexamined items results in errors in the accounting records.
Answer A is incorrect because no directly proportionate relationship exists between the level of risk and the rate of error.
Answer B is correct because the existence of a deviation from a control activity may or may not indicate that an error exists in the accounting records. For example, an invoice which has not been footed to test mathematical accuracy may still be correctly totaled and properly recorded in the accounting records.
Answer C is incorrect because, as is the case with errors in the accounting records, the rate of errors in the sample itself will generally be lower than the rate of deviations from control procedures.
Answer D is incorrect because there is no reason to believe that all unexamined items result in errors in the accounting records.
27.When using a statistical sampling plan, the auditor would probably require a smaller sample if thea) Population increases.b) Desired sampling risk decreases.c) Desired sampling risk increases.d) Expected error occurrence rate increases.
Answer A is incorrect because as population increases sample size increases. The exception would be for populations greater than or equal to 5,000 items, in which case population size no longer affects sample size.
Answer B is incorrect because a decrease in the allowance for sampling risk results in a larger sample size.
Answer C is correct because increased sampling risk allows a larger margin of error and suggests a smaller sample size.
Answer D is incorrect because an increase in the expected error occurrence rate results in a larger sample size.
28.An auditor may decide to increase the risk of incorrect rejection whena) Increase reliability form the sample is desired.b) Many differences (audit value minus recorded value) are expected.c) Initial sample results do not support the planned level of control risk.d) The cost and effort of selecting additional sample items is low.
Answer A is incorrect because there will be no necessary increase in the reliability of the sample.
Answer B is incorrect because the presence of differences should not have a direct effect on the risk of incorrect rejection.
Answer C is incorrect because initial sample results should not have a direct effect on the risk of incorrect rejection.
Answer D is correct. The requirement is to determine why an auditor may decide to increase the risk of incorrect rejection. Increasing the risk of incorrect rejection increases the likelihood of improperly concluding that a balance is materially misstated when it is not. Such an improper conclusion will typically result in the application of additional audit procedures, and in the consideration of other audit evidence that will ordinarily lead the auditor to the correct conclusion. When the cost and effort of selecting these additional sample items is low, the cost of incorrectly rejecting the balance will be low.
29.The risk of incorrect acceptance and the risk of assessing control risk too low for internal control relate to thea) Preliminary estimate of materially levels.b) Allowable risk of tolerable misstatement.c) Efficiency of the audit. d) Effectiveness of the audit.
Answer A is incorrect because preliminary estimates of materiality levels relate most directly to the risk of incorrect acceptance, and only indirectly to the risk of assessing control risk too low.
Answer B is incorrect because the term allowable risk of tolerable misstatement is ambiguous, and not used in the professional literature.
Answer C is incorrect because the risk of incorrect rejection and the risk of assessing control risk too high relate to the efficiency of the audit.
Answer D is correct because the risks of incorrect acceptance and assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement.
30.There are many kinds of statistical estimates that an auditor may find useful, but basically every accounting estimate is either of a quantity or of an error rate. The statistical terms that roughly correspond to “quantities” and “error rate,” respectively, area) Attributes and variables.b) Variables and attributes.c) Constants and attributes.d) Constants and variables.
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct. Statistical sampling accounting applications are either based on variables sampling or attribute sampling. Variables sampling is measurement of a continuous variable (i.e., a variable such as number of items in inventory or amount of accounts receivable). The variable being estimated can take on a continuum of values (e.g., zero to infinity). Variable sampling is based upon the normal distribution. Attribute sampling is based on the binomial distribution and sample items must be binary in nature (i.e., right or wrong, correct or incorrect, etc.) Attribute sampling is most applicable to tests of compliance and variables sampling is most applicable to substantive tests.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
31.The auditor faces a risk that the examination will not detect material misstatements which occur in the accounting process. In regard to minimizing this risk, the auditor primarily relies ona) Substantive tests.b) Tests of controls.c) Internal control.d) Statistical analysis.
Answer A is correct because the purpose of substantive tests is to obtain evidence as to the validity and the propriety of accounting treatment of transactions and balances or, conversely, of errors or irregularities. Thus, the auditor relies on substantive tests to minimize the risk of failure to detect material misstatements which occur in the accounting process.
Answer B is incorrect because tests of controls provide assurance that the internal control procedures are operating as prescribed. Tests of controls do not directly test account balances and, therefore, would not be relied on to minimize the risk of failure to detect material misstatements which occur in the accounting process.
Answer C is incorrect because the question presumes the existence of a breakdown in internal control. Without this presumed breakdown in internal control, material errors in the accounting process would not occur.
Answer D is incorrect because the auditor may or may not choose to use a statistical approach in the substantive tests which are performed.
32. In which of the following cases would the auditor be more likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis?
The measure of tolerable misstatement is
Error frequency is expected to be
A Large LowB Small HighC Large HighD Small Low
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is correct because a small tolerable misstatement combined with a high misstatement frequency increases the auditor's required sample size which may lead to the conclusion by the auditor that all items of the account should be examined.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
33.Which of the following sampling plans would be designed to estimate a numerical measurement of a population, such as a peso value?a) Discovery sampling.b) Numerical sampling.c) Sampling for variables.d) Sampling for attributes.
Answer A is incorrect because discovery sampling is a type of attribute sampling used in tests of controls when very low occurrence rates are expected and the auditor wants a chance to observe one occurrence.
Answer B is incorrect because numerical sampling has no established meaning for audit sampling.
Answer C is correct because sampling for variables is used in substantive testing to estimate the dollar amount of a population or the amount of error in a population.
Answer D is incorrect because sampling for attributes is used in tests of controls to estimate occurrence rates in a population.
34. In estimation sampling for variables, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation?a) The qualitative aspects of errors.b) The total peso amount of the population.c) The acceptable level of risk.d) The estimated rate of error in the population.
Answer A is incorrect because while the auditor will consider the qualitative aspects of errors when evaluating the sample, they need not be considered in determining an appropriate sample size.
Answer B is incorrect because a primary objective of variables sampling is to estimate the audited peso amount of the population.
Answer C is correct. In order for an auditor to estimate the appropriate sample size, the auditor must first know the acceptable level of risk.
Answer D is incorrect because a rate of error in the population relates to attribute sampling.
35.The size of a sample designed for dual purpose testing should bea) The larger of the sample that would otherwise have been designed for the two
separate purposes.b) The smaller of the sample that would otherwise have been designed for the two
separate purposes.c) The combined total of the sample that would otherwise have been designed for
the two separate purposes.d) More than the larger of the sample that would otherwise have been designated
for the two separate purposes, but less than the combined total of the sample that would otherwise have been designated for the two separate purposes.
Answer A is correct because the auditor should select the larger of the two samples that would otherwise be required for separate purposes.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is incorrect. Refer to the correct answer explanation.
Answer D is incorrect. Refer to the correct answer explanation.
36.To determine the number of items to be selected in a sample for a particular substantive test of details, the auditor should consider all of the following excepta) Tolerable misstatement.b) Deviation rate.c) Allowable risk of incorrect acceptable.d) Characteristics of the population.
Answer A is incorrect because the auditor when determining sample size must consider materiality in terms of the tolerable misstatement allowed without causing material misstatement in the financial statements.
Answer B is correct because the deviation rate applies to attribute sampling which is appropriate for tests of controls, not substantive tests.
Answer C is incorrect because the allowable risk of incorrect acceptance must be considered when determining sample size.
Answer D is incorrect because the characteristics of the population must be considered when determining sample size.
37.Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling?a) The sampling distribution should approximate the normal distribution.b) Overstated units have a lower probability of sample selection than units that are
understated.
c) The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
d) The sampling interval is calculated by dividing the number of physical units in the population by the sample size.
Answer A is incorrect. PPS sampling does not assume a normal distribution.
Answer B is incorrect. The book value of the unit determines how probable it is that it will be included in the sample, not whether it is over or understated.
Answer C is correct. When using PPS sampling, the auditor controls the risk of incorrect acceptance by specifying a risk level when planning the sample.
Answer D is incorrect. The sampling interval is calculated by dividing the book value of the population by the sample size.
38. In a probability-proportional-to-size sample with a sampling interval of Php10,000, an auditor discovered that a selected account receivable with a recorded amount of Php5,000 had an audit amount of Php2,000. The projected error of this sample wasa) Php3,000b) Php4,000c) Php6,000d) Php8,000
Answer A is incorrect. Refer to the correct answer explanation.
Answer B is incorrect. Refer to the correct answer explanation.
Answer C is correct. The requirement is to determine the projected error of a PPS sample with a sampling interval of 10,000 when an auditor has discovered an account receivable with a recorded amount of 5,000 and an audit amount of 2,000. For accounts with a book value less than the sampling interval, one must first calculate a tainting percentage which is equal to: [(Recorded amount - Audit amount)/Recorded amount]. The tainting percentage is multiplied by the sampling interval to determine projected error. In this question the tainting percentage is 60% [(5,000 - 2,000)/5,000]. The projected error is calculated as 60% times the sampling interval, or .60 x 10,000 = 6,000.
Answer D is incorrect. Refer to the correct answer explanation.
39.The major reason that the difference and ratio estimation methods would be expected to produce audit efficiency is that thea) Number of member of the population of differences or ratios is smaller than the
number of member of the population of book values.b) Beta risk may be completely ignored.c) Calculations required in using difference or ratios estimation are less arduous
and fewer than those required when using direct estimation.d) Variability of the population of differences or ratios is less than that of the
population of book values or audited values.
Answer A is incorrect because the number of members in the population for differences or ratio methods would be the same as the number of items in the population for a direct estimation method. In difference sampling, many items would be zero because audit and book values are the same, and in ratio sampling, many of the members would be one for the same reason.
Answer B is incorrect because beta risk can never be ignored, as beta risk is the risk of accepting an incorrect (unacceptable) population.
Answer C is incorrect because the calculations required in difference and ratio sampling are similar to those used in direct estimation sampling.
Answer D is correct because difference and ratio estimation methods measure the difference between audit and book values or the ratio of audit to book values. As these differences should not be great, the population of these differences will have little variance. In statistical sampling the less variation in a population, the smaller the required sample to provide an estimate of the population. In other words, difference and ratio estimation methods are more efficient because the differences between audit and book values are expected to vary less than the actual items in the population.
40.When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known asa) Precision.b) Reliability.c) Projected error.d) Standard deviation.
Answer A is correct because precision (the allowance for sampling risk) is used to construct an interval around the sample results in which the true population characteristic is expected to lie. Accordingly, possible error in either direction from the sample results is considered.
Answer B is incorrect because reliability in variables sampling is the risk of incorrect rejection.
Answer C is incorrect because the projected error (projected misstatement) is the difference between the client's book value and the auditor's estimate of the audited value.
Answer D is incorrect because the standard deviation is a statistical concept relied upon for evaluating results in classical variables sampling.
41.Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate whena) The total book value is known and corresponds to the sum of all the individual
book values.b) A book value for each sample item is unknown.c) There are some observed differences between audited values and book values.d) The audited values are nearly proportional to the book values.
Answer A is incorrect because the total book value must be known and it must correspond to the sum of the individual book values if the ratio estimation sampling technique is to be used.
Answer B is correct because the ratio estimation sampling technique is based upon comparing the ratio of the book value to the audited value of the sampled items. This method cannot be used when book values for the sample items are unknown.
Answer C is incorrect because there must be some observed differences between the audit values and the book values to obtain valid conclusions when the ratio estimation sampling technique is used.
Answer D is incorrect because ratio estimation will be more efficient in terms of required sample size than alternative methods when the audited values are nearly proportional to the book values.