auditing and assurance service ch 8 tb

Chapter 08 - Audit Sampling: An Overview and Application to Tests of Controls

Chapter 08Audit Sampling: An Overview and Application to Tests of Controls

True / False Questions

1. Auditing standards permit both statistical and nonstatistical methods of audit sampling. True False

2. A Type I error is the risk of incorrect acceptance. True False

3. A Type II error is the risk of incorrect acceptance. True False

4. Confidence level is the complement of sampling risk. True False

5. Confidence level and sampling risk are related to sample size. True False

6. The larger the sample, the lower the confidence level and the lower the sampling risk. True False

7. Audit sampling is commonly used to gather confirmation audit evidence. True False

8. Audit sampling is commonly used to gather scanning audit evidence. True False

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9. Attribute sampling is used to estimate the proportion of a population that possesses a specified characteristic. True False

10. With a nonstatistical sampling application, the auditor relies on professional judgment rather than the laws of probability to reach a conclusion about the audit test. True False

Multiple Choice Questions

11. 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 (regarding the characteristic being tested).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.

12. Jones, CPA, believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices Jones should use A. Discovery samplingB. Attributes samplingC. Stratified samplingD. Variables sampling

13. The tolerable deviation rate for a test of controls is generally A. Lower than the expected rate of deviations in the related accounting recordsB. Higher than the expected rate of deviations in the related accounting recordsC. Identical to the expected rate of deviations in the related accounting recordsD. Unrelated to the expected rate of deviations in the related accounting records

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14. The risk of incorrect acceptance relates to the A. Effectiveness of the auditB. Efficiency of the auditC. Preliminary estimates of materiality levelsD. Tolerable misstatement

15. The likelihood of assessing control risk too high is the risk that the sample selected to test controls A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessmentB. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classesC. Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a wholeD. Does not support the tolerable misstatement for some or all of management's assertions

16. For which of the following audit tests would an auditor most likely use attributes sampling? A. Making an independent estimate of the amount of LIFO inventoryB. Examining invoices in support of the valuation of fixed asset additionsC. Selecting accounts receivable balances for confirmationD. Inspecting employee time cards for proper approval by supervisors

17. Harvey Jones, CPA, uses statistical sampling to test control procedures. What is a benefit of using statistical sampling? A. It provides a means of mathematically measuring the sampling risk that result from examining only a part of the dataB. It eliminates the use of judgment required of Jones because the AICPA has established numerical criteria for this type of testingC. It increases Jones' knowledge of the client's prescribed procedures and their limitationsD. It is required by generally accepted auditing standards

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18. In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was A. The only deviation discovered in the sampleB. Identical to a deviation discovered during the prior year's auditC. Caused by an employee's oversightD. Initially concealed by a forged document

19. An underlying feature of random-based selection of items is that each A. Stratum of the accounting population be given equal representation in the sampleB. Item in the accounting population be randomly orderedC. Item in the accounting population should have an opportunity to be selectedD. Item must be systematically selected using replacement

20. An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client's internal control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and A. Evaluate the results as if the sample size had been 19B. Treat the missing check as a deviation for the purpose of evaluating the sampleC. 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

21. An auditor is testing internal control procedures that are evidenced on an entity's vouchers. To select the vouchers for testing, the auditor obtains random numbers between the first and last voucher number in the period. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher A. Constitutes a deviationB. Has been properly voidedC. Cannot be locatedD. Represents an immaterial dollar amount

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22. Which of the following statements is correct concerning statistical sampling in compliance testing? A. The population size has little or no effect on determining sample size except for very small populationsB. The expected population deviation rate has little or no effect on determining sample size except for very small populationsC. As the population size doubles, the sample size also should doubleD. For a given tolerable deviation rate, a larger sample size should be selected as the expected population deviation rate decreases

23. In determining the sample size for a test of controls, an auditor should consider the expected deviation rate, desired confidence level, and the A. Tolerable deviation rateB. Risk of incorrect acceptanceC. Nature and cause of deviationsD. Population size

24. In attributes sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample? A. Population sizeB. Tolerable deviation rateC. Expected population deviation rateD. Standard deviation

25. The computed upper deviation rate is A. The maximum rate of deviations that the auditor is willing to accept before deciding not to rely on the controlB. The rate of deviations that the auditor expects to occur in the populationC. A point estimate of the population deviation rateD. The sum of the sample deviation rate and an appropriate allowance for sampling risk.

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26. In attributes sampling, population size has little or no effect on sample size once the population exceeds approximately A. 500B. 5,000C. 100,000D. 1,000,000

27. A control is deemed to be more important than thought at the time that attributes sampling parameters were set. The auditor is most likely to respond by A. Decreasing the risk of assessing control risk too highB. Increasing population sizeC. Decreasing the tolerable deviation rateD. Decreasing the expected deviation rate

28. If auditors conducting attributes sampling found that the client deviated from a prescribed control in nine of the first 10 items examined, the auditor is most likely to A. Increase sample sizeB. Increase the computed upper deviation rateC. Decrease the tolerable deviation rateD. Stop the test and increase control risk

29. When testing automated IT controls, the auditor is most likely to do all of the following except A. Examine the IT softwareB. Increase sample size because the tolerable deviation rate tends to be higher for automated IT controlsC. Test one or a few of each type of transactionD. Test general controls over system and program changes

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30. In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis? A. Tolerable deviation is large and expected deviation is lowB. Tolerable deviation is small and expected deviation is highC. Tolerable deviation is large and expected deviation is highD. Tolerable deviation is small and expected deviation is low

31. Which of the following factors does an auditor generally need to consider in planning a particular audit sample for a test of controls? A. Number of items in the populationB. Total dollar amount of the items to be sampledC. Desired confidence levelD. Risk of assessing control risk too high

32. As a result of tests of controls, an auditor incorrectly assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was A. More than the risk of assessing control risk too low based on the auditor's sampleB. More than the deviation rate in the auditor's sampleC. Less than the risk of assessing control risk too low based on the auditor's sampleD. Less than the deviation rate in the auditor's sample

33. As a result of tests of controls, an auditor over relied on internal control and decreased substantive testing. This overreliance occurred because the true deviation rate in the population was A. Less than the risk of assessing control risk too low on the auditor's sampleB. Less than the deviation rate in the auditor's sampleC. More than the risk of assessing control risk too low on the auditor's sampleD. More than the deviation rate in the auditor's sample

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34. If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most likely to A. Have a large sample sizeB. Set control risk at the maximum without samplingC. Set control risk at the minimum without samplingD. Pick a lower risk of assessing control risk too low to increase sample size

35. For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3% and the desired confidence level is 95%. What is the allowance for sampling risk included in the computed upper deviation rate? A. 2%B. 3%C. 4%D. 5%

36. Based on a 5% risk of assessing control risk too low, how would an auditor interpret a computed upper deviation rate of 7%? A. The auditor is willing to accept a deviation rate of 7% before deciding not to rely on the controlB. There is a 5% chance that the deviation rate in the population is less than 7%C. There is a 5% chance that the deviation rate in the population exceeds 7%D. There is a 95% chance that the deviation rate in the population equals 7%

37. Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its unique ability to A. Define the precision required to provide audit satisfactionB. Mathematically measure uncertaintyC. Establish conclusive audit evidence with decreased audit effortD. Promote a more legally defensible procedural approach

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38. Which of the following best describes the distinguishing feature of statistical sampling? A. It requires the examination of a smaller number of supporting documentsB. It provides a means for measuring mathematically the degree of uncertainty that results from examining only part of a populationC. It reduces the problems associated with the auditor's judgment concerning materialityD. It is evaluated in terms of two parameters: statistical mean and random selection

39. Statistical sampling provides a technique for A. Exactly defining materialityB. Greatly reducing the amount of substantive testingC. Eliminating judgment in testingD. Measuring the sufficiency of evidential matter

40. Auditors who prefer statistical sampling to nonstatistical sampling may do so because statistical sampling helps the auditor A. Measure the sufficiency of the evidential matter obtainedB. Eliminate subjectivity in the evaluation of sampling resultsC. Reduce the level of tolerable misstatement to a relatively low amountD. Minimize the failure to detect a material misstatement due to nonsampling risk

41. An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods A. Afford greater assurance than a nonstatistical sample of equal sizeB. Provide an objective basis for quantitatively evaluating sample risksC. Can more easily convert the sample into a dual-purpose test useful for substantive testingD. Eliminate the need to use judgment in determining appropriate sample sizes

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42. An auditor who uses statistical sampling for attributes in testing internal controls is most likely to reduce the planned reliance on a prescribed control when the A. Sample deviation rate plus the allowance for sampling risk equals the tolerable deviation rateB. Sample deviation rate is less than the expected population deviation rate used in planning the sampleC. Tolerable deviation rate less the allowance for sampling risk exceeds the sample deviation rateD. Sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate

43. If the size of the sample to be used in a particular test of controls has not been determined by utilizing statistical concepts, but the sample has been chosen in accordance with random selection procedures A. No inferences can be drawn from the sampleB. The auditor has committed a nonsampling errorC. Depending on the size of the sample chosen, the auditor may actually achieve desired precisionD. The auditor will have to evaluate the results by reference to the principles of discovery sampling

44. When performing a test of controls with respect to control over cash receipts, an auditor 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 population A. Must be systematically replaced in the population after samplingB. May systematically occur more than once in the sampleC. Must be recorded in a systematic pattern before the sample can be drawnD. May occur in a systematic pattern, thus destroying the sample randomness

45. For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control? A. Tolerable deviation rate and confidence levelB. Expected deviation rate and confidence levelC. Population size and tolerable deviation rateD. Tolerable deviation rate and expected deviation rate

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46. Which of the following combinations guarantees a larger sample size? A. Decrease the desired confidence level and decrease the tolerable deviation rateB. Increase the desired confidence level and decrease the tolerable deviation rateC. Decrease the desired confidence level and increase the expected deviation rateD. Increase the tolerable deviation rate and increase the expected deviation rate

47. For a large population of cash disbursement transactions, Smith, CPA is testing controls by using attribute sampling techniques. Anticipating an expected deviation rate of 3 percent, Smith found from a table that the required sample size is 400 with a tolerable deviation rate of 5 percent and a desired confidence level of 95 percent. If Smith anticipated an expected deviation rate of only 2 percent but wanted to maintain the same tolerable deviation rate and confidence level, the sample size would be closest to A. 200B. 400C. 533D. 800

48. In non-statistical sampling for tests of controls, increasing the desired confidence level results in a A. Higher tolerable deviation rateB. Lower expected deviation rateC. Larger sample sizeD. Smaller sample size

49. To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the desired confidence level, and the A. Expected population deviation rate.B. Computed upper precision limit.C. Risk of assessing control risk too high.D. Risk of incorrect rejection.

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50. Which of the following statements is correct concerning statistical sampling in tests of controls? A. As the population size increases, the sample size should increase proportionatelyB. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rateC. There is an inverse relationship between the expected population deviation rate and the sample sizeD. In determining tolerable deviation rate, an auditor considers detection risk and the sample size

51. For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control risk too low is 5%. Which of the following is true? A. The auditor must increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rateB. The auditor is likely to increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rateC. The auditor must increase control risk because the computed upper deviation rate is greater than the tolerable deviation rateD. The auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate

52. Which of the following risks is related to effectiveness of testing? A. The risk of incorrect rejection.B. Inherent risk.C. The risk of incorrect acceptance.D. None of the above.

53. Which of the following risks is related to efficiency of testing? A. The risk of incorrect rejection.B. Inherent risk.C. The risk of incorrect acceptance.D. None of the above.

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54. The term precision relates to: A. The difference between confidence level and estimated error.B. The difference between confidence level and tolerable error.C. The difference between expected and tolerable deviation rate.D. The difference between expected and sample deviation rate.

55. Audit sampling is commonly used for which type of audit evidence: A. Inquiry.B. Analytical procedures.C. Reperformance.D. Observation.

56. Audit sampling is not used for which type of audit evidence: A. Inquiry.B. Inspection of tangible assets.C. Reperformance.D. Recalculation.

Short Answer Questions

57. Why must an auditor use sampling? What tradeoffs occur when an auditor uses sampling?

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58. "Technology has steadily reduced the number of situations in which audit sampling is necessary and in the future technology will probably eliminate the need for auditors to rely on sampling." Defend or refute the preceding statement.

59. Define Type I and Type II errors.

60. Define sampling risk and nonsampling risk.

61. When determining the sample size of accounts receivable to test, what are three factors that are important for you to consider?

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62. Your manager, Sally, believes that nonstatistical sampling is the best method to use on the audit of YaYa Corporation. You, however, believe that statistical sampling is by far the best method. In addition, you have a great deal of training in the proper use of sampling techniques. Prepare an argument to convince Sally why statistical sampling should be used.

63. Indicate which of the following audit procedures, used as tests of controls, do not involve audit sampling.1. Observing and evaluating segregation of duties.2. Testing of whether sales invoices are supported by authorized customer orders and shipping documents.3. Reviewing client's procedures for accounting for the numerical sequence of shipping documents.4. Examining sales orders for proper credit approval.5. Recomputing the information on copies of sales invoices.6. Comparing the average days outstanding in accounts receivable with industry averages.

64. For a particular audit, the sample size for testing controls over the revenue cycle is relatively large. What can you infer about the desired confidence level, the tolerable deviation rate, and the expected population deviation rate?

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65. Before performing sampling procedures in an audit of controls, Sue set the tolerable deviation rate at 4.0%. After the procedures, she computes a computed upper deviation rate of 5.4%. What can Sue conclude about the client's controls?

66. Your uncle Bob, a CPA, has recently started auditing and he wants your advice on some tests of sales transactions he is conducting. Bob selected a haphazard sample of 15 sales with a total book value of $75,000. In his sample, he found a total of $500 in net overstatement errors. The total sales balance per books is $10,000,000. Overall materiality for the engagement is $300,000. Tolerable misstatement for sales is $70,000. If the sample results indicate that Bob's best estimate of total misstatement in sales is $35,000, could Bob safely conclude that no additional work is needed in this area? Include in your answer a clear discussion of how sample results are compared to tolerable misstatement.

67. Identify the types of audit evidence that are tested using audit sampling techniques.

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Chapter 08 Audit Sampling: An Overview and Application to Tests of Controls Answer Key

True / False Questions

1. Auditing standards permit both statistical and nonstatistical methods of audit sampling. TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: KnowledgeDifficulty: EasyLearning Objective: 1

2. A Type I error is the risk of incorrect acceptance. FALSE

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: KnowledgeDifficulty: EasyLearning Objective: 2

3. A Type II error is the risk of incorrect acceptance. TRUE


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4. Confidence level is the complement of sampling risk. TRUE

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ComprehensionDifficulty: EasyLearning Objective: 2

5. Confidence level and sampling risk are related to sample size. TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: AnalysisDifficulty: EasyLearning Objective: 2

6. The larger the sample, the lower the confidence level and the lower the sampling risk. FALSE


7. Audit sampling is commonly used to gather confirmation audit evidence. TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Risk AnalysisBloom's: ApplicationDifficulty: EasyLearning Objective: 2

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8. Audit sampling is commonly used to gather scanning audit evidence. FALSE


9. Attribute sampling is used to estimate the proportion of a population that possesses a specified characteristic. TRUE


10. With a nonstatistical sampling application, the auditor relies on professional judgment rather than the laws of probability to reach a conclusion about the audit test. TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Risk AnalysisBloom's: ComprehensionDifficulty: EasyLearning Objective: 4Learning Objective: 8

Multiple Choice Questions

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11. 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 (regarding the characteristic being tested).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.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ComprehensionDifficulty: EasyLearning Objective: 2

12. Jones, CPA, believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices Jones should use A. Discovery samplingB. Attributes samplingC. Stratified samplingD. Variables sampling

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: EasyLearning Objective: 3Learning Objective: 4

13. The tolerable deviation rate for a test of controls is generally A. Lower than the expected rate of deviations in the related accounting recordsB. Higher than the expected rate of deviations in the related accounting recordsC. Identical to the expected rate of deviations in the related accounting recordsD. Unrelated to the expected rate of deviations in the related accounting records

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: AnalysisDifficulty: EasyLearning Objective: 3Learning Objective: 6

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14. The risk of incorrect acceptance relates to the A. Effectiveness of the auditB. Efficiency of the auditC. Preliminary estimates of materiality levelsD. Tolerable misstatement


15. The likelihood of assessing control risk too high is the risk that the sample selected to test controls A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessmentB. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classesC. Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a wholeD. Does not support the tolerable misstatement for some or all of management's assertions

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ComprehensionDifficulty: EasyLearning Objective: 2

16. For which of the following audit tests would an auditor most likely use attributes sampling? A. Making an independent estimate of the amount of LIFO inventoryB. Examining invoices in support of the valuation of fixed asset additionsC. Selecting accounts receivable balances for confirmationD. Inspecting employee time cards for proper approval by supervisors

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: EasyLearning Objective: 4

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17. Harvey Jones, CPA, uses statistical sampling to test control procedures. What is a benefit of using statistical sampling? A. It provides a means of mathematically measuring the sampling risk that result from examining only a part of the dataB. It eliminates the use of judgment required of Jones because the AICPA has established numerical criteria for this type of testingC. It increases Jones' knowledge of the client's prescribed procedures and their limitationsD. It is required by generally accepted auditing standards

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ComprehensionDifficulty: EasyLearning Objective: 4Learning Objective: 5

18. In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was A. The only deviation discovered in the sampleB. Identical to a deviation discovered during the prior year's auditC. Caused by an employee's oversightD. Initially concealed by a forged document


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19. An underlying feature of random-based selection of items is that each A. Stratum of the accounting population be given equal representation in the sampleB. Item in the accounting population be randomly orderedC. Item in the accounting population should have an opportunity to be selectedD. Item must be systematically selected using replacement


20. An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client's internal control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and A. Evaluate the results as if the sample size had been 19B. Treat the missing check as a deviation for the purpose of evaluating the sampleC. 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

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ApplicationDifficulty: EasyLearning Objective: 6

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21. An auditor is testing internal control procedures that are evidenced on an entity's vouchers. To select the vouchers for testing, the auditor obtains random numbers between the first and last voucher number in the period. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher A. Constitutes a deviationB. Has been properly voidedC. Cannot be locatedD. Represents an immaterial dollar amount


22. Which of the following statements is correct concerning statistical sampling in compliance testing? A. The population size has little or no effect on determining sample size except for very small populationsB. The expected population deviation rate has little or no effect on determining sample size except for very small populationsC. As the population size doubles, the sample size also should doubleD. For a given tolerable deviation rate, a larger sample size should be selected as the expected population deviation rate decreases


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23. In determining the sample size for a test of controls, an auditor should consider the expected deviation rate, desired confidence level, and the A. Tolerable deviation rateB. Risk of incorrect acceptanceC. Nature and cause of deviationsD. Population size


24. In attributes sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample? A. Population sizeB. Tolerable deviation rateC. Expected population deviation rateD. Standard deviation


25. The computed upper deviation rate is A. The maximum rate of deviations that the auditor is willing to accept before deciding not to rely on the controlB. The rate of deviations that the auditor expects to occur in the populationC. A point estimate of the population deviation rateD. The sum of the sample deviation rate and an appropriate allowance for sampling risk.


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26. In attributes sampling, population size has little or no effect on sample size once the population exceeds approximately A. 500B. 5,000C. 100,000D. 1,000,000


27. A control is deemed to be more important than thought at the time that attributes sampling parameters were set. The auditor is most likely to respond by A. Decreasing the risk of assessing control risk too highB. Increasing population sizeC. Decreasing the tolerable deviation rateD. Decreasing the expected deviation rate


28. If auditors conducting attributes sampling found that the client deviated from a prescribed control in nine of the first 10 items examined, the auditor is most likely to A. Increase sample sizeB. Increase the computed upper deviation rateC. Decrease the tolerable deviation rateD. Stop the test and increase control risk

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ApplicationDifficulty: EasyLearning Objective: 6Learning Objective: 7

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29. When testing automated IT controls, the auditor is most likely to do all of the following except A. Examine the IT softwareB. Increase sample size because the tolerable deviation rate tends to be higher for automated IT controlsC. Test one or a few of each type of transactionD. Test general controls over system and program changes

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBloom's: ApplicationDifficulty: ModerateLearning Objective: 3

30. In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis? A. Tolerable deviation is large and expected deviation is lowB. Tolerable deviation is small and expected deviation is highC. Tolerable deviation is large and expected deviation is highD. Tolerable deviation is small and expected deviation is low

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: AnalysisDifficulty: ModerateLearning Objective: 6

31. Which of the following factors does an auditor generally need to consider in planning a particular audit sample for a test of controls? A. Number of items in the populationB. Total dollar amount of the items to be sampledC. Desired confidence levelD. Risk of assessing control risk too high

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ApplicationDifficulty: ModerateLearning Objective: 2

8-27


32. As a result of tests of controls, an auditor incorrectly assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was A. More than the risk of assessing control risk too low based on the auditor's sampleB. More than the deviation rate in the auditor's sampleC. Less than the risk of assessing control risk too low based on the auditor's sampleD. Less than the deviation rate in the auditor's sample


33. As a result of tests of controls, an auditor over relied on internal control and decreased substantive testing. This overreliance occurred because the true deviation rate in the population was A. Less than the risk of assessing control risk too low on the auditor's sampleB. Less than the deviation rate in the auditor's sampleC. More than the risk of assessing control risk too low on the auditor's sampleD. More than the deviation rate in the auditor's sample


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34. If the expected deviation rate exceeds the tolerable deviation rate, the auditor is most likely to A. Have a large sample sizeB. Set control risk at the maximum without samplingC. Set control risk at the minimum without samplingD. Pick a lower risk of assessing control risk too low to increase sample size

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: AnalysisDifficulty: ModerateLearning Objective: 3Learning Objective: 6

35. For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3% and the desired confidence level is 95%. What is the allowance for sampling risk included in the computed upper deviation rate? A. 2%B. 3%C. 4%D. 5%

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ApplicationDifficulty: ModerateLearning Objective: 3Learning Objective: 6Learning Objective: 7

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36. Based on a 5% risk of assessing control risk too low, how would an auditor interpret a computed upper deviation rate of 7%? A. The auditor is willing to accept a deviation rate of 7% before deciding not to rely on the controlB. There is a 5% chance that the deviation rate in the population is less than 7%C. There is a 5% chance that the deviation rate in the population exceeds 7%D. There is a 95% chance that the deviation rate in the population equals 7%

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ApplicationDifficulty: ModerateLearning Objective: 3Learning Objective: 6Learning Objective: 7

37. Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its unique ability to A. Define the precision required to provide audit satisfactionB. Mathematically measure uncertaintyC. Establish conclusive audit evidence with decreased audit effortD. Promote a more legally defensible procedural approach

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ComprehensionDifficulty: ModerateLearning Objective: 4

38. Which of the following best describes the distinguishing feature of statistical sampling? A. It requires the examination of a smaller number of supporting documentsB. It provides a means for measuring mathematically the degree of uncertainty that results from examining only part of a populationC. It reduces the problems associated with the auditor's judgment concerning materialityD. It is evaluated in terms of two parameters: statistical mean and random selection

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: KnowledgeDifficulty: ModerateLearning Objective: 4

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39. Statistical sampling provides a technique for A. Exactly defining materialityB. Greatly reducing the amount of substantive testingC. Eliminating judgment in testingD. Measuring the sufficiency of evidential matter


40. Auditors who prefer statistical sampling to nonstatistical sampling may do so because statistical sampling helps the auditor A. Measure the sufficiency of the evidential matter obtainedB. Eliminate subjectivity in the evaluation of sampling resultsC. Reduce the level of tolerable misstatement to a relatively low amountD. Minimize the failure to detect a material misstatement due to nonsampling risk


41. An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods A. Afford greater assurance than a nonstatistical sample of equal sizeB. Provide an objective basis for quantitatively evaluating sample risksC. Can more easily convert the sample into a dual-purpose test useful for substantive testingD. Eliminate the need to use judgment in determining appropriate sample sizes

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ComprehensionDifficulty: ModerateLearning Objective: 4

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42. An auditor who uses statistical sampling for attributes in testing internal controls is most likely to reduce the planned reliance on a prescribed control when the A. Sample deviation rate plus the allowance for sampling risk equals the tolerable deviation rateB. Sample deviation rate is less than the expected population deviation rate used in planning the sampleC. Tolerable deviation rate less the allowance for sampling risk exceeds the sample deviation rateD. Sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: AnalysisDifficulty: ModerateLearning Objective: 4Learning Objective: 6

43. If the size of the sample to be used in a particular test of controls has not been determined by utilizing statistical concepts, but the sample has been chosen in accordance with random selection procedures A. No inferences can be drawn from the sampleB. The auditor has committed a nonsampling errorC. Depending on the size of the sample chosen, the auditor may actually achieve desired precisionD. The auditor will have to evaluate the results by reference to the principles of discovery sampling

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: AnalysisDifficulty: HardLearning Objective: 4Learning Objective: 6

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44. When performing a test of controls with respect to control over cash receipts, an auditor 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 population A. Must be systematically replaced in the population after samplingB. May systematically occur more than once in the sampleC. Must be recorded in a systematic pattern before the sample can be drawnD. May occur in a systematic pattern, thus destroying the sample randomness

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ComprehensionDifficulty: ModerateLearning Objective: 6

45. For attributes sampling, of the three factors that enter into sample size determination, which two factors can the auditor adjust to reflect the importance of the control? A. Tolerable deviation rate and confidence levelB. Expected deviation rate and confidence levelC. Population size and tolerable deviation rateD. Tolerable deviation rate and expected deviation rate


46. Which of the following combinations guarantees a larger sample size? A. Decrease the desired confidence level and decrease the tolerable deviation rateB. Increase the desired confidence level and decrease the tolerable deviation rateC. Decrease the desired confidence level and increase the expected deviation rateD. Increase the tolerable deviation rate and increase the expected deviation rate


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47. For a large population of cash disbursement transactions, Smith, CPA is testing controls by using attribute sampling techniques. Anticipating an expected deviation rate of 3 percent, Smith found from a table that the required sample size is 400 with a tolerable deviation rate of 5 percent and a desired confidence level of 95 percent. If Smith anticipated an expected deviation rate of only 2 percent but wanted to maintain the same tolerable deviation rate and confidence level, the sample size would be closest to A. 200B. 400C. 533D. 800

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: ApplicationDifficulty: ModerateLearning Objective: 6Learning Objective: 7

48. In non-statistical sampling for tests of controls, increasing the desired confidence level results in a A. Higher tolerable deviation rateB. Lower expected deviation rateC. Larger sample sizeD. Smaller sample size


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49. To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the desired confidence level, and the A. Expected population deviation rate.B. Computed upper precision limit.C. Risk of assessing control risk too high.D. Risk of incorrect rejection.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: KnowledgeDifficulty: ModerateLearning Objective: 3Learning Objective: 6

50. Which of the following statements is correct concerning statistical sampling in tests of controls? A. As the population size increases, the sample size should increase proportionatelyB. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rateC. There is an inverse relationship between the expected population deviation rate and the sample sizeD. In determining tolerable deviation rate, an auditor considers detection risk and the sample size


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51. For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control risk too low is 5%. Which of the following is true? A. The auditor must increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rateB. The auditor is likely to increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rateC. The auditor must increase control risk because the computed upper deviation rate is greater than the tolerable deviation rateD. The auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate


52. Which of the following risks is related to effectiveness of testing? A. The risk of incorrect rejection.B. Inherent risk.C. The risk of incorrect acceptance.D. None of the above.


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53. Which of the following risks is related to efficiency of testing? A. The risk of incorrect rejection.B. Inherent risk.C. The risk of incorrect acceptance.D. None of the above.


54. The term precision relates to: A. The difference between confidence level and estimated error.B. The difference between confidence level and tolerable error.C. The difference between expected and tolerable deviation rate.D. The difference between expected and sample deviation rate.


55. Audit sampling is commonly used for which type of audit evidence: A. Inquiry.B. Analytical procedures.C. Reperformance.D. Observation.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Risk AnalysisBloom's: KnowledgeDifficulty: EasyLearning Objective: 3

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56. Audit sampling is not used for which type of audit evidence: A. Inquiry.B. Inspection of tangible assets.C. Reperformance.D. Recalculation.


Short Answer Questions

57. Why must an auditor use sampling? What tradeoffs occur when an auditor uses sampling?

An auditor must use sampling because to examine every accounting record and all the supporting documentation would take too much time and money. An audit of a large company without sampling would not be possible. As a result of sampling, the auditor can only provide a reasonable, not an absolute, assurance that the financial statements are fairly presented. Further, the market would not pay for the minor incremental assurance that came from examining all transactions and records.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ComprehensionDifficulty: EasyLearning Objective: 1

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58. "Technology has steadily reduced the number of situations in which audit sampling is necessary and in the future technology will probably eliminate the need for auditors to rely on sampling." Defend or refute the preceding statement.

Technology will not likely eliminate the need for auditors to rely on sampling to some degree because (1) many control processes require human involvement to operate effectively, (2) many testing procedures require the auditor to physically examine certain items (such as tangible assets), and (3) in many cases auditors are required to obtain and examine evidence from third parties. In a large population, these situations all require both sampling and an auditor's "hands-on" attention.

AACSB: TechnologyAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyBloom's: SynthesisDifficulty: ModerateLearning Objective: 1

59. Define Type I and Type II errors.

A Type I error is equivalent to incorrectly rejecting a population. In terms of an audit, this means that the sample supports a conclusion that an effective control is not operating effectively or an account is materially misstated when in fact it is not. In terms of internal control, this risk is referred to as the risk of underreliance or the risk of assessing the control risk too high. This error relates to the efficiency of the audit.A Type II error is a risk of incorrect acceptance. In terms of an audit, this means that the sample supports a conclusion that an ineffective control is operating effectively or an account is not materially misstated when in fact it is not. In terms of internal control, this risk is referred to as the risk of overreliance or the risk of assessing the control risk too low. This error relates to the effectiveness of the audit.


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60. Define sampling risk and nonsampling risk.

Sampling risk refers to the possibility that the sample drawn is not representative of the population and that, as a result, the auditor will reach an incorrect conclusion about the account balance or class of transactions based on the sample.Nonsampling risk is the risk of auditor error and arises from the possibility that the auditor may sample the wrong population to test an assertion, fail to detect a misstatement when applying an audit procedure or misinterpret an audit result. The uncertainty related to nonsampling risk can be controlled by adequate training, proper planning, and effective supervision.


61. When determining the sample size of accounts receivable to test, what are three factors that are important for you to consider?

Three important inputs to determine sample size are (1) desired level of assurance in the results (or confidence level), (2) acceptable defect rate (or tolerable error), and (3) historical defect rate (or estimated error).


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62. Your manager, Sally, believes that nonstatistical sampling is the best method to use on the audit of YaYa Corporation. You, however, believe that statistical sampling is by far the best method. In addition, you have a great deal of training in the proper use of sampling techniques. Prepare an argument to convince Sally why statistical sampling should be used.

Statistical sampling permits the auditor to use the most efficient sample size and to quantify the sampling risk for the purpose of reaching a statistical conclusion about the population. The major advantages of statistical sampling versus nonstatistical sampling are that it helps the auditor (1) design an efficient sample, (2) measure the sufficiency of evidence obtained, and (3) quantify sampling risk). Disadvantages include the additional costs of (1) training auditors in the proper use of sampling techniques, (2) designing and conducting the sampling application, and (3) lack of consistent application across audit teams due to the complexity of the underlying concepts. Fortunately, this audit includes an auditor with training in statistical sampling, which will reduce these disadvantageous costs. Nonstatistical sampling may result in testing that is not as effective as statistical sampling due to a lack of knowledge of statistical principles and theory.

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationDifficulty: ModerateLearning Objective: 4

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63. Indicate which of the following audit procedures, used as tests of controls, do not involve audit sampling.1. Observing and evaluating segregation of duties.2. Testing of whether sales invoices are supported by authorized customer orders and shipping documents.3. Reviewing client's procedures for accounting for the numerical sequence of shipping documents.4. Examining sales orders for proper credit approval.5. Recomputing the information on copies of sales invoices.6. Comparing the average days outstanding in accounts receivable with industry averages.

1. Does not involve sampling.2. Involves sampling.3. Does not involve sampling.4. Involves sampling.5. Involves sampling.6. Does not involve sampling.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBloom's: ApplicationDifficulty: ModerateLearning Objective: 2

64. For a particular audit, the sample size for testing controls over the revenue cycle is relatively large. What can you infer about the desired confidence level, the tolerable deviation rate, and the expected population deviation rate?

There is a direct relationship between the confidence level and sample size. Therefore, one can infer from a large sample size that the auditor would like a higher confidence level. The tolerable deviation rate, on the other hand is inversely related to the sample size. Therefore, the tolerable deviation rate must have been relatively low. The expected population deviation rate has a direct relationship to sample size, so there must be a larger expected population deviation rate.


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65. Before performing sampling procedures in an audit of controls, Sue set the tolerable deviation rate at 4.0%. After the procedures, she computes a computed upper deviation rate of 5.4%. What can Sue conclude about the client's controls?

Sue must conclude that the controls are not operating at an acceptable level, because the computed upper deviation rate exceeds the tolerable deviation rate.


66. Your uncle Bob, a CPA, has recently started auditing and he wants your advice on some tests of sales transactions he is conducting. Bob selected a haphazard sample of 15 sales with a total book value of $75,000. In his sample, he found a total of $500 in net overstatement errors. The total sales balance per books is $10,000,000. Overall materiality for the engagement is $300,000. Tolerable misstatement for sales is $70,000. If the sample results indicate that Bob's best estimate of total misstatement in sales is $35,000, could Bob safely conclude that no additional work is needed in this area? Include in your answer a clear discussion of how sample results are compared to tolerable misstatement.

No, Bob cannot safely conclude that no additional work is needed. Bob has not considered sampling risk. His best estimate is a projected misstatement to the population. He has only sampled 15 transactions which amounted to less than 1% of the balance. Because this is a relatively small sample, the risk that the sample is not representative of the population is significant. If the true misstatement rate in the remainder of the population is higher, total misstatement could easily exceed tolerable misstatement. The approach that should be taken is to project the misstatement (that is, calculate the best estimate of total misstatement in the population) and incorporate an amount in consideration of sampling risk. There is an inverse relationship between sample size and sampling risk. Without statistical methods, judgments about sampling risk are difficult to make. Thus, sampling risk must be considered.

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: SynthesisDifficulty: ModerateLearning Objective: 2

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67. Identify the types of audit evidence that are tested using audit sampling techniques.

Some audit procedures involve sampling, while others do not. The following types of audit evidence can be tested using audit sampling techniques:1. Inspection of tangible assets2. Inspection of records or documents3. Reperformance4. Recalculation5. Confirmation


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