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Flashcards in A5-1 Deck (60)
1

In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:

a.

$10,000

b.

$1,000

c.

$5,000

d.

$2,000

Choice "d" is correct. The sample error of $1,000 ($5,000 − $4,000) is projected to the entire interval through use of a "tainting factor" of 20% ($1,000 / $5,000). If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be 20% of $10,000, or $2,000.

Choice "b" is incorrect, as the sample error of $1,000 needs to be projected to the entire interval.

Choices "c" and "a" are incorrect, per the above explanation.

2

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:

a.

There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements.

b.

The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.

c.

There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.

d.

The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.

Choice "c" is correct. Selection of every twentieth item results in a sample that is 5% (1/20 = .05) of the population. The sample results indicate a net overstatement of $3,500 (= $3,700 − $200), which is then projected to the total population as $70,000 (= $3,500 / .05). (Alternatively, 3,500 × 20 = 70,000). Since the projected misstatement of $70,000 exceeds the tolerable misstatement of $60,000, there is an unacceptably high risk that the actual misstatement in the population will exceed the tolerable misstatement.

Choice "a" is incorrect. Tolerable misstatement is compared to the projected misstatement, not to the actual error in the sample.

Choices "b" and "d" are incorrect. The asset account is not fairly stated because the projected misstatement exceeds the tolerable misstatement.

3

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider:

~The average dollar value of the check requests
~The allowable risk of assessing control risk too low
a.

No

No

b.

Yes

No

c.

No

Yes

d.

Yes

Yes

Choice "c" is correct. The sample size in an attribute sampling application is affected by the allowable risk of assessing control risk too low, the tolerable deviation rate, and the expected deviation rate. The average dollar value of the check requests has no effect on the sample size.

Choices "d", "b", and "a" are incorrect, per the above explanation.

4

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the:

~Variability in the dollar amounts of inventory items
~Risk of incorrect acceptance
a.

Yes

No

b.

No

No

c.

Yes

Yes

d.

No

Yes

Choice "c" is correct. The sample size in a variables sampling application is affected by the variability in the population (generally represented by the standard deviation), the acceptable level of risk (i.e., the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement.

Choices "a", "d", and "b" are incorrect, per the above explanation.

5

For which of the following audit tests would an auditor most likely use attribute sampling?

a.

Examining invoices in support of the valuation of fixed asset additions.

b.

Making an independent estimate of the amount of a LIFO inventory.

c.

Inspecting employee time cards for proper approval by supervisors.

d.

Selecting accounts receivable for confirmation of account balances.

Choice "c" is correct. Attribute sampling is used to test controls. Inspecting employee time cards for proper approval by supervisors is a test of controls. Controls often relate to authorization, validity, completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period. Look for these terms in identifying which option is a test of controls. Words such as account balance, amount, valuation, presentation, and disclosure are more likely to relate to substantive tests.

Choice "d" is incorrect. Selecting accounts receivable for confirmation of accounts balances is a substantive test.

Choice "b" is incorrect. Making an independent estimate of the amount of a LIFO inventory is a substantive test.

Choice "a" is incorrect. Examining invoices in support of the valuation of fixed asset additions is a substantive test.

6

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:

a.

Preliminary estimates of materiality levels.

b.

Efficiency of the audit.

c.

Effectiveness of the audit.

d.

Allowable risk of tolerable misstatement.

Choice "c" is correct. Both the risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement.

Choice "d" is incorrect. Allowable risk of tolerable misstatement does not exist.

Choice "a" is incorrect. The risk of incorrect acceptance and risk of assessing control risk too low are unrelated to preliminary estimates of materiality.

Choice "b" is incorrect. The efficiency of the audit is related to the risk of incorrect rejection and the risk of assessing control risk too high.

7

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the:

a.

Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation.

b.

Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.

c.

Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

d.

Sample rate of deviation is less than the expected rate of deviation used in planning the sample.

Choice "c" is correct. The auditor will reduce reliance on a control if the upper deviation rate exceeds the tolerable rate. The upper deviation rate consists of the sample deviation rate plus an allowance for sampling risk. Therefore, if the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate, that is equivalent to the upper deviation rate exceeding the tolerable rate.

Choice "b" is incorrect. If the sample deviation rate plus the allowance for sampling risk equals the tolerable rate, the auditor may still place the planned amount of reliance on the control.

Choice "d" is incorrect. Whether the actual sample deviation rate is less than the expected deviation rate is irrelevant for making decisions about planned reliance levels.

Choice "a" is incorrect. If the tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation, then the upper deviation rate is less than the tolerable rate. This situation supports the planned reliance, and no reduction in planned reliance would be necessary.

8

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.

Initially concealed by a forged document.

b.

Caused by an employee's misunderstanding of instructions.

c.

The only deviation discovered in the sample.

d.

Identical to a deviation discovered during the prior year's audit

Choice "a" is correct. The auditor should consider both the qualitative and the quantitative aspects of deviations in tests of controls. Qualitative aspects might include whether deviations are indicative of an error or fraud. Such an evaluation is important because fraud is intentional, has implications beyond the direct monetary effect, and requires consideration of the implications for other aspects of the audit. Thus, a deviation initially concealed by a forged document is very serious and deserves broader consideration than a deviation of the same dollar amount due to an error.

Choice "c" is incorrect. The fact that a deviation was the only one discovered would have no importance beyond its impact on the computation of the upper deviation rate.

Choice "d" is incorrect. Discovery of a deviation identical to one discovered during the prior year's audit is not necessarily cause for additional concern.

Choice "b" is incorrect. Employee misunderstanding of instructions is an inherent limitation of internal control and is not necessarily cause for concern.

9

Which of the following factors is (are) considered in determining the sample size for a test of controls?

~Expected deviation rate
~Tolerable deviation rate
a.

No

No

b.

Yes

Yes

c.

No

Yes

d.

Yes

No

Choice "b" is correct. To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider the tolerable rate of deviation from the controls being tested, the likely rate of deviations (expected deviation rate), and the allowable risk of assessing control risk too low.

Choices "a", "c", and "d" are incorrect, per the above explanation.

10

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

~Increase in tolerable misstatement
~Increase in assessed level of control risk
a.

Decrease sample size

Increase sample size

b.

Decrease sample size

Decrease sample size

c.

Increase sample size

Decrease sample size

d.

Increase sample size

Increase sample size

Choice "a" is correct. An increase in tolerable misstatement results in a smaller sample size. An increase in the assessed level of control risk leads to an increase in sample size.

Choices "d", "c", and "b" are incorrect, per the above explanation.

11

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:

a.

Eliminate the risk of nonsampling errors.

b.

Reduce the level of audit risk and materiality to a relatively low amount.

c.

Minimize the failure to detect errors and fraud.

d.

Measure the sufficiency of the audit evidence obtained.

Choice "d" is correct. Statistical sampling helps the auditor to measure the sufficiency of the audit evidence because the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level.

Choice "a" is incorrect. Nonsampling errors relate to the improper evaluation of evidence by the auditor and are not dependent on the sampling method used.

Choice "b" is incorrect. Audit risk can be reduced to a relatively low level with non-statistical sampling. Materiality is not affected by the sampling method used.

Choice "c" is incorrect. The use of statistical sampling does not necessarily minimize the failure to detect errors and fraud.

12

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was:

a.

Less than the deviation rate in the auditor's sample.

b.

More than the deviation rate in the auditor's sample.

c.

Less than the risk of assessing control risk too low, based on the auditor's sample.

d.

More than the risk of assessing control risk too low, based on the auditor's sample.

Choice "b" is correct. If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be understated, since the control will be less effective than sample results would indicate.

Choice "c" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low.

Choice "a" is incorrect. If the true deviation rate is lower than the deviation rate in the sample, control risk may be assessed at a rate that is too high, potentially leading to audit inefficiencies.

Choice "d" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low.

13

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:

a.

Population size.

b.

Nature and cause of deviations.

c.

Risk of incorrect acceptance.

d.

Tolerable deviation rate.

Choice "d" is correct. The auditor should consider the tolerable rate of deviation from the control structure policies or procedures being tested, the likely rate of deviations, and the allowable risk of assessing control risk too low.

Choice "c" is incorrect. The risk of incorrect acceptance is relevant for substantive tests of details rather than tests of controls.

Choice "b" is incorrect. The nature and cause of the deviation is not considered in determining a sample size for tests of controls.

Choice "a" is incorrect. The population size is generally not considered in determining a sample size for tests of controls.

14

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

a.

Can more easily convert the sample into a dual-purpose test useful for substantive testing.

b.

Provide an objective basis for quantitatively evaluating sample risk.

c.

Afford greater assurance than a nonstatistical sample of equal size.

d.

Eliminate the need to use judgment in determining appropriate sample sizes.

Choice "b" is correct. By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable.

Choice "a" is incorrect. Statistical sampling does not provide any advantage with respect to converting the test into a dual-purpose test.

Choice "d" is incorrect. Statistical sampling still requires judgment to determine sample sizes. The tolerable rate of deviation, the likely rate of deviation, and the allowable risk of assessing control risk too low are all determined by the auditor's professional judgment.

Choice "c" is incorrect. Statistical sampling does not afford greater assurance than a nonstatistical sample of the same size. It only provides the auditor with a better measure of the sufficiency of the evidence found, and helps to evaluate the results found.

15

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:

a.

The population has highly variable recorded amounts.

b.

The auditor's estimated tolerable misstatement is extremely small.

c.

The standard deviation of recorded amounts is relatively small.

d.

Probability proportional to size (PPS) sampling is used.

Choice "a" is correct. The auditor may be able to reduce the required sample size by separating items subject to sampling into relatively homogenous groups on the basis of some characteristic related to the specific audit objective.

Choice "d" is incorrect. While PPS sampling results in a stratified sample, it is a result of the sampling method employed and does not require the auditor to perform stratification since it occurs automatically.

Choice "b" is incorrect. The estimated tolerable misstatement does not affect the decision to stratify.

Choice "c" is incorrect. The standard deviation of the recorded amounts represents the population's variability. Therefore, the auditor would be most likely to stratify when the standard deviation is high, not low.

16

The use of the ratio estimation sampling as compared to other sampling techniques is most effective when:

a.

Estimating populations whose records consist of quantities, but not book values.

b.

The calculated audit amounts are approximately proportional to the client's book amounts.

c.

Large overstatement differences and large understatement differences exist in the population.

d.

A relatively small number of differences exist in the population.

Choice "b" is correct. Ratio estimation is most effective if there is a correlation between book values and audit amounts.

Choice "d" is incorrect. A relatively small number of differences do not improve the effectiveness of ratio estimation sampling relative to other techniques.

Choice "a" is incorrect. Whether populations are stated in terms of quantities or book values is irrelevant in determining the effectiveness of ratio estimation.

Choice "c" is incorrect. Large overstatement and understatement errors do not give the ratio estimation sampling technique an advantage in effectiveness relative to other sampling techniques.

17

Which of the following statements is correct concerning statistical sampling in tests of controls?

a.

In determining tolerable rate, an auditor considers detection risk and the sample size.

b.

There is an inverse relationship between the expected population deviation rate and the sample size.

c.

As the population size increases, the sample size should increase proportionately.

d.

Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.

Choice "d" is correct. Deviations from control activities do not necessarily result in misstatements. Therefore, deviations from pertinent control activities at a given rate would ordinarily be expected to result in misstatements at a lower rate.

Choice "c" is incorrect. In tests of controls, population size has virtually no effect on sample size unless the population is small.

Choice "b" is incorrect. There is a direct relationship between expected deviation rate and sample size.

Choice "a" is incorrect. Detection risk and sample size are not factors in determining the tolerable deviation rate in a test of controls. The tolerable rate is simply the maximum rate that the auditor is willing to accept without altering his or her planned level of reliance.

18

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 assessment.

b.

Does not support the tolerable error for some or all of management's assertions.

c.

Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes.

d.

Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole.


Explanation

Choice "a" is correct. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control.

Choice "c" is incorrect. Tests of controls are not designed to directly detect misstatements. Tests of controls directed toward the operating effectiveness of an internal control are concerned with how the control was applied, the consistency with which it was applied during the audit period, and by whom it was applied.

Choice "d" is incorrect. The risk that the sample contains proportionately fewer monetary errors or deviations than exist in the class as a whole is the risk of assessing control risk too low.

Choice "b" is incorrect. Tolerable misstatements (errors) are related to the results of substantive tests of details, not tests of controls.

19

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

a.

Stop-or-go sampling.

b.

Variables sampling.

c.

Attribute sampling.

d.

Random-number sampling.

Choice "b" is correct. Variables sampling is normally used to estimate a numerical measurement of a population.

Choice "c" is incorrect. Attribute sampling is used when testing controls as part of the auditor's evaluation of a company's internal control.

Choice "a" is incorrect. Stop-or-go sampling is a type of attribute sampling used when testing controls.

Choice "d" is incorrect. Random number sampling is a technique used to select a sample

20

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?

a.

Continue to draw new samples until all the unusually large disbursements appear in the sample.

b.

Stratify the cash disbursements population so that the unusually large disbursements are selected.

c.

Increase the sample size to reduce the effect of the unusually large disbursements.

d.

Set the tolerable rate of deviation at a lower level than originally planned.

Choice "b" is correct. Stratification involves the grouping of transactions sharing some characteristic (such as recorded amounts). The goal of stratification is to ensure selection of items for which potential misstatements may individually equal or exceed tolerable misstatement. Thus, the auditor should stratify the sample such that the unusually large transactions are selected.

Choice "d" is incorrect. The tolerable rate of deviation refers to test of controls, rather than substantive tests.

Choice "c" is incorrect. Certain items should be individually examined; for example, the auditor should examine those items for which potential misstatements may individually equal or exceed tolerable misstatement. Stratifying the sample is more efficient than increasing the sample size.

Choice "a" is incorrect. By stratifying the sample, the auditor can examine each of the unusually large transactions and also reduce the sample size.

21

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?

~Expected amount of misstatements
~Measure of tolerable misstatement
a.

Yes

Yes

b.

Yes

No

c.

No

No

d.

No

Yes

Choice "a" is correct. When planning a particular sample for a substantive test of details, the auditor should consider how much monetary misstatement in the account might exist without causing the financial statements to be materially misstated (tolerable misstatement) as well as the expected size and frequency of misstatements.

Choices "c", "d", and "b" are incorrect, per the above explanation.

22

For which of the following audit tests would an auditor most likely use attribute sampling?

a.

Inspecting employee time cards for proper approval by supervisors.

b.

Selecting accounts receivable for confirmation of account balances.

c.

Examining invoices in support of the valuation of fixed asset additions.

d.

Making an independent estimate of the amount of a LIFO inventory.

Choice "a" is correct. Attribute sampling examines the rate of occurrence in a sample: the attribute either exists or does not exist. Therefore, attribute sampling is more useful for tests of controls, such as the examination of time cards for proper approval.

Choice "d" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.

Choice "c" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.

Choice "b" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.

23

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

a.

Assessing control risk too high.

b.

Incorrect acceptance.

c.

Incorrect rejection.

d.

Assessing control risk too low.

Choice "c" is correct. Erroneously concluding that an account balance is materially misstated is an example of incorrect rejection.

Choice "a" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing).

Choice "d" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing).

Choice "b" is incorrect. If the auditor had concluded that the account was fairly presented when, in fact, it was not, it would be an example of incorrect acceptance.

24

The sample size of a test of controls varies inversely with:

~Expected population deviation rate

~Tolerable rate
a.

Yes

No

b.

No

Yes

c.

Yes

Yes

d.

No

No

Choice "b" is correct. The sample size for a test of controls varies directly with the expected deviation rate and inversely with the tolerable rate. If the auditor expects more errors, he or she would increase sample size; conversely, if the tolerable rate of deviation increases, not as many items need to be selected.

Choices "c", "d", and "a" are incorrect, per the above explanation.

25

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 that:

a.

The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than 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 rates of both the auditor's sample and the population exceed the tolerable rate.

d.

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.

Choice "d" is correct. The situation given is an example of sampling risk, or the probability that the sample chosen is not representative of the population as a whole. This is illustrated by the fact that the sample deviation rate is less than the tolerable rate, but the true deviation rate exceeds the tolerable rate.

Choice "c" is incorrect. If both the deviation rates of the sample and the population exceed the tolerable rate, the auditor would assess control risk at the appropriate level.

Choice "b" is incorrect. If both the deviation rates of the sample and the population are less than the tolerable rate, the auditor would assess control risk at the appropriate level.

Choice "a" is incorrect. If the sample deviation rate exceeds the tolerable rate, but the deviation rate in the population does not, this would also result in sampling risk. In this case, however, the auditor would assess control risk at a level higher than appropriate.

26

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?

a.

Stratified.

b.

Attributes.

c.

Ratio estimation.

d.

Variables.


Explanation

Choice "b" is correct. Attributes sampling is the statistical sampling method used when testing controls.

Choice "d" is incorrect. Variables sampling is used in substantive testing, not in tests of controls.

Choice "a" is incorrect. Stratified sampling is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls.

Choice "c" is incorrect. Ratio estimation is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls.

27

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

a.

Inclusion of zero and negative balances generally does not require special design considerations.

b.

The auditor rarely needs the assistance of a computer program to design an efficient sample.

c.

Any amount that is individually significant is automatically identified and selected.

d.

An estimate of the standard deviation of the population's recorded amounts is notrequired.

Choice "a" is correct. Inclusion of zero and negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling.

Choice "d" is incorrect. An estimate of the standard deviation of the population's recorded amounts is required for classical variables sampling, but not for PPS sampling.

Choice "b" is incorrect. The auditor is less likely to need a computer program to design an efficient sample for PPS sampling than for classical variables sampling.

Choice "c" is incorrect. Any amount that is individually significant is more likely to be identified and selected when using PPS sampling than when using classical variables sampling.

28

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.

In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:

a.

Upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%).

b.

Tolerable rate (7%) was less than the upper deviation rate (8%).

c.

Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).

d.

Expected deviation rate (2.5%) was less than the tolerable rate (7%).

Choice "b" is correct. The auditor decided to increase the level of the preliminary assessment of control risk because the 7% tolerable rate (maximum rate of deviations that an auditor would be willing to accept without altering his/her planned reliance on the control) was less than the 8% upper deviation rate.

Choice "c" is incorrect. The expected deviation rate was 2.5%, not 7%.

Choice "a" is incorrect. The upper deviation rate is always more than the percentage of errors in the sample since the sum of the percentage of the errors and the allowance for sampling risk equals the upper deviation rate.

Choice "d" is incorrect. The expected deviation rate is not used in evaluating the sample. It is the upper deviation rate that is compared to the tolerable rate in evaluating a sample.

29

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.

The allowance for sampling risk was:

a.

4.5%

b.

5.5%

c.

1%

d.

3.5%

Choice "a" is correct. The allowance for sampling risk is the excess of the 8% upper deviation rate over the 3.5% (= 7 ÷ 200) sample deviation rate, or 4.5%.

Choices "b", "d", and "c" are incorrect, based on the above explanation.

30

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.

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.

b.

Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate.

c.

Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds 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.

Choice "d" is correct. The auditor's evaluation would be to modify the planned assessed level of control risk because the sample deviation rate of 6% (3/50) plus the allowance for sampling risk of 2% (the sum of which is called the upper deviation rate) exceeded the tolerable rate of 7%.

Choice "c" is incorrect. This option does not consider the actual results of the sample. The sample deviation rate plus the allowance for sampling risk is compared to the tolerable rate.

Choice "a" is incorrect. The sample results cannot be accepted because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

Choice "b" is incorrect. The tolerable rate (7%) less the allowance (2%) should be compared to the actual deviation rate (6%).

31

An auditor is selecting vouchers for testing an entity's internal control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher:

a.

Has been properly voided.

b.

Indicates a deviation from the prescribed activity.

c.

Represents a dollar amount that is material.

d.

Cannot be located in the voucher file.

Choice "a" is correct. If a random number matches a properly voided voucher, the auditor would ordinarily replace this with another voucher in order to attain the desired sample size.

Choice "d" is incorrect. A voucher that cannot be located is normally considered a deviation.

Choice "c" is incorrect. The auditor would be particularly concerned with a voided voucher that represents a material amount, but this fact alone would not cause selection of another voucher. Determination of whether to select another voucher or to instead consider this a deviation would depend on whether the voucher was properly voided.

Choice "b" is incorrect. If the voided voucher indicates a control deviation, then it would be counted as such.

32

An auditor examining inventory most likely would use variables sampling rather than attributes sampling to:

a.

Determine whether discounts for inventory are properly recorded.

b.

Estimate whether the dollar amount of inventory is reasonable.

c.

Discover whether misstatements exist in inventory records.

d.

Identify whether inventory items are properly priced.

Choice "b" is correct. Variables sampling is used to determine whether a given account balance is reasonable.

Choice "d" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if proper procedures with respect to pricing were followed for each item in the sample.

Choice "c" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if inventory was properly recorded for each item in the sample.

Choice "a" is incorrect. Attribute sampling is used to test the attributes, or characteristics, of each item in a sample. In this case, attribute sampling would be used to determine if discounts were properly applied to inventory for each item in the sample.

33

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:

a.

The auditor believes that the control activity relates to the client's assertions when, in fact, it does not.

b.

Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

c.

Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity.

d.

The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not.

Choice "b" is correct. The risk of assessing control risk too high is the risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control.

Choice "c" is incorrect. The risk of assessing control risk too low is the risk that the assessed level of control risk based on the sample is less than the true risk based on the actual operating effectiveness of the control.

Choice "a" is incorrect. Assessing control risk too high relates to an incorrect evaluation of risk by the auditor, not to whether the control activity relates to the client's assertions.

Choice "d" is incorrect. If the auditor believes that a control activity will reduce the extent of substantive testing when, in fact, it will not, this implies that the control risk based on the auditor's sample was less than the true risk based on the actual operating effectiveness of the control. This would be an example of assessing control risk too low, not too high.

34

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that:

a.

The deviation rates of both the auditor's sample and the population are less than the tolerable rate.

b.

The deviation rates of both the auditor's sample and the population exceed the tolerable rate.

c.

The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

d.

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.

Choice "c" is correct. If the deviation rate in the auditor's sample is higher than the tolerable rate, the auditor will assess control risk as unacceptably high. If it turns out that the deviation rate in the population is less than the tolerable rate, the auditor will have made an improper decision by assessing control risk higher than appropriate.

Choice "d" is incorrect. If the deviation rate in the auditor's sample is less than the tolerable rate, the auditor will assess control risk as acceptably low. If it turns out that the deviation rate in the population exceeds the tolerable rate, the auditor will have made an improper decision by assessing control risk lower than appropriate.

Choice "b" is incorrect. When both the deviation rate in the auditor's sample and the deviation rate in the population exceed the tolerable rate, there will be no sampling error and the auditor will assess risk properly.

Choice "a" is incorrect. When both the deviation rate in the auditor's sample and the deviation rate in the population are less than the tolerable rate, there will be no sampling error and the auditor will assess risk properly.

35

Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

a.

The selection of negative balances requires no special design considerations.

b.

The auditor need not consider the preliminary judgments about materiality.

c.

The sampling process can begin before the complete population is available.

d.

The sample will result in a smaller sample size if few errors are expected.

Choice "a" is correct. Inclusion of negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling.

Choice "c" is incorrect. All items in the population should have an equal chance to be included in the sample. Therefore, the sampling process should not begin before the complete population is available, regardless of whether classical variables sampling or PPS sampling is used.

Choice "b" is incorrect. When planning a particular sample for a substantive test of details, the auditor should consider preliminary estimates of materiality.

Choice "d" is incorrect. If no errors are expected, PPS sampling generally requires a smaller sample than other methods.

36

Which of the following is the primary objective of probability proportional to sample size?

a.

To identify zero and negative balances.

b.

To identify items where controls were not properly applied.

c.

To increase the proportion of smaller-value items in the sample.

d.

To identify overstatement errors.

Choice "d" is correct. PPS sampling is a method designed to estimate overstatement errors. Zero balances, negative balances, and understated balances require special design considerations.

Choice "c" is incorrect. PPS sampling emphasizes larger items, which are more likely to be selected for the sample.

Choice "b" is incorrect. PPS sampling is a technique used to estimate a dollar amount of error in a population. It does not identify items where controls were lacking.

Choice "a" is incorrect. PPS sampling does not identify zero and negative balances; however, if such balances exist in the population, special design considerations are required in order to use PPS sampling.

37

In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample?

a.

Degree of assurance desired.

b.

Tolerable rate of deviation.

c.

Planned assessed level of control risk.

d.

Number of items in the population.

Choice "d" is correct. As long as the population is large enough, population size has virtually no impact on sample size.

Choice "b" is incorrect. The tolerable rate of deviation does affect sample size. As the auditor is willing to accept a greater deviation rate, a smaller sample size can be used.

Choice "a" is incorrect. The degree of assurance required does affect sample size. As the auditor desires greater assurance from the sample, a larger sample size should be used.

Choice "c" is incorrect. The planned assessed level of control risk is related to the expected deviation rate (a low expected deviation rate corresponds to a low planned assessed level of control risk). Therefore, changes to this assessment do affect sample size.

38

For which of the following audit tests would a CPA most likely use attribute sampling?

a.

Selecting receivables for confirmation of account balances.

b.

Identifying entries posted to incorrect accounts.

c.

Evaluating the reasonableness of depreciation expense.

d.

Estimating the amount in an expense account.

Choice "b" is correct. Attribute sampling is used to estimate a rate of occurrence, and often involves a yes-no question. Attribute sampling could be used to determine the error rate in posting journal entries, perhaps by asking, "Is the entry posted to the proper account?"

Choice "d" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as the amount in an expense account.

Choice "c" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as a reasonable amount for depreciation expense.

Choice "a" is incorrect. Attribute sampling is used to estimate a rate of occurrence, not to select the items to include in a sample.

39

Which of the following would be a consideration in planning an auditor's sample for a test of controls?

a.

Preliminary judgments about materiality levels.

b.

The auditor's allowable risk of assessing control risk too high.

c.

The auditor's allowable risk of assessing control risk too low.

d.

The level of detection risk for the account.

Choice "c" is correct. The auditor’s allowable risk of assessing control risk too low has an inverse relationship with sample size when planning a sample for a test of controls.

Choice "a" is incorrect. Preliminary judgments about materiality levels might be a consideration in planning an auditor’s sample for a substantive test, but not for a test of controls.

Choice "b" is incorrect. The auditor’s allowable risk of assessing control risk too high is not a factor when planning a sample for a test of controls.

Choice "d" is incorrect. The auditor’s desired level of detection risk might be a consideration in planning an auditor’s sample for a substantive test, but not for a test of controls.

40

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?

a.

The allowable risk of assessing control risk too low has no effect on the planned sample size.

b.

The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

c.

Of all the factors to be considered, the population size has the greatest effect on the sample size.

d.

As the likely rate of deviation decreases, the auditor should increase the planned sample size.

Choice "b" is correct. There is an inverse relationship between the tolerable deviation rate and sample size: as the auditor is willing to accept a greater deviation rate, a smaller sample size can be used.

Choice "d" is incorrect. There is a direct relationship between expected deviation rate and sample size: as the likely rate of deviation decreases, a smaller sample size can be used.

Choice "a" is incorrect. There is an inverse relationship between the risk of assessing control risk too low and sample size: as the allowable level of risk increases, the sample size decreases.

Choice "c" is incorrect. Population size has a relatively small effect on sample size, especially in large populations.

41

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

a.

Preliminary judgments about materiality levels.

b.

The size of the intercompany receivable balance.

c.

The amount of bad debt write-offs in the prior year.

d.

The auditor's allowable risk of assessing control risk is too low.

Choice "a" is correct. When planning a sample for a test of subsequent cash receipts, the auditor should consider preliminary judgments about materiality levels.

Choice "c" is incorrect. The amount of bad debt write-offs in the prior year is not a consideration in planning for a sample for a test of subsequent cash receipts. A test of subsequent cash receipts is performed to assess the valuation of customer/trade accounts receivable.

Choice "b" is incorrect. The size of the intercompany accounts receivable balance is not a consideration in planning a sample for a test of subsequent cash receipts. Intercompany accounts receivable are eliminated upon consolidation and do not impact the valuation of accounts receivable.

Choice "d" is incorrect. The auditor's allowable risk of assessing control risk too low relates to tests of controls and is not a consideration in planning for a sample for a test of subsequent cash receipts. A test of subsequent cash receipts is a substantive test of details.

42

Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls?

a.

As the tolerable deviation rate increases, the sample size should also increase.

b.

The population size has little effect on the sample size.

c.

As the population size doubles, the sample size should also double.

d.

The expected population deviation rate has little effect on determining the sample size.

Choice "b" is correct. Population size is not an issue in determining a sample size, provided the population is relatively large (i.e., greater than 5,000 items).

Choice "d" is incorrect. The expected population deviation rate will have a direct impact on the sample size.

Choice "c" is incorrect. Although the population size may have a direct relationship with the sample size, it generally will not be in exact proportion.

Choice "a" is incorrect. As the tolerable deviation rate increases, the sample size will decrease.

43

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?

a.

Assessing control risk too high.

b.

Incorrect acceptance.

c.

Incorrect rejection.

d.

Assessing control risk too low.

Choice "b" is correct. The risk of incorrect acceptance is the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated (i.e., sample results fail to identify an existing material misstatement).

Choice "c" is incorrect. Incorrect rejection would be the opposite of the above situation.

Choice "d" is incorrect. Control risk deals with internal controls, not account balances.

Choice "a" is incorrect. Control risk deals with internal controls, not account balances.

44

An auditor uses an attribute sampling plan to determine whether large expenditures are being properly approved. The auditor is willing to accept a 2% risk of assessing control risk too low, and has a tolerable rate of 5%. A sample of 100 invoices is selected, and only one is found to be lacking appropriate approval. One invoice selected by the auditor cannot be located. Which statement is true?

a.

The invoice selected by the auditor that cannot be located is ignored in the calculation of the sample deviation rate.

b.

There is not enough information given to determine whether the auditor should rely on this control.

c.

Since the sample deviation rate is less than the tolerable rate, the auditor should rely on this control.

d.

Since the auditor has a tolerable rate of 5%, he or she can be 95% certain that he or she will make a correct decision.

Choice "b" is correct. The missing invoice should be counted as a deviation, resulting in a 2% sample deviation rate. However, this information alone is not sufficient to determine whether the control can be relied upon. The auditor would also need to know the upper deviation rate (or the allowance for sampling risk, which would allow the auditor to calculate the upper deviation rate). It is the upper deviation rate that needs to be compared to the tolerable rate in making decisions.

Choice "c" is incorrect. It is the upper deviation rate (and not the sample deviation rate) that needs to be compared to the tolerable rate in making decisions.

Choice "d" is incorrect. Since the auditor is willing to accept a 2% risk of assessing control risk too low, this implies that there is a 98% chance that he or she will make a correct decision.

Choice "a" is incorrect. Sample items selected by the auditor that cannot be located are generally considered deviations.

45

Stratified sampling would best be used in a situation where:

a.

There is a lot of variation among items in the population.

b.

The population consists of very few items.

c.

The population has an abnormally small standard deviation.

d.

The population is unusually homogeneous

Choice "a" is correct. When there is a lot of variability within the population, stratification, or separating the population into relatively homogeneous groups, generally results in a reduced sample size and therefore increases efficiency.

Choice "c" is incorrect. A small standard deviation means there is little variability within the population, making it less likely that stratification would be used.

Choice "b" is incorrect. If the population consists of very few items, the auditor will be likely to test each item rather than breaking the population into homogeneous groups.

Choice "d" is incorrect. A population that is unusually homogeneous contains little variability, making it less likely that stratification would be used.

46

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:

a.

Tolerable rate.

b.

Expected population deviation rate.

c.

Risk of overreliance.

d.

Sample size.

Choice "d" is correct. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the sample size.

Choices "c", "a", and "b" are incorrect. The risk of overreliance, the tolerable rate, and the expected population deviation rate are factors considered in determining a statistical sample size.

47

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:

a.

Be related to preliminary judgments about materiality levels.

b.

Be related to the auditor's business risk.

c.

Not be adjusted for qualitative factors.

d.

Not be changed during the audit process.

Choice "a" is correct. Tolerable misstatement is the maximum monetary misstatement in an account balance that may exist without causing the financial statements to be materially misstated. Tolerable misstatement is a planning concept related to the auditor's preliminary judgments about materiality levels.

Choice "b" is incorrect. The auditor's overall business risk is not related to the tolerable misstatement used in planning a sample for a substantive test of details.

Choice "c" is incorrect. The tolerable misstatement should be adjusted for both qualitative and quantitative factors.

Choice "d" is incorrect. The auditor should modify his or her consideration of tolerable misstatement if, during the audit process, information used to determine the initial level of tolerable misstatement changes.

48

Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually:

a.

Produces an estimate having a desired level of precision with a smaller sample size.

b.

May be applied to populations where many monetary errors are expected to occur.

c.

Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.

d.

Increases the variability among items in a stratum by grouping sampling units with similar characteristics.

Choice "a" is correct. A stratified sample generally is more efficient than an unstratified sample since the population is classified in a manner that emphasizes the higher dollar value items. The result is an estimate having a desired level of precision with a smaller sample size.

Choice "b" is incorrect. Both stratified and unstratified MPU may be used for populations where many monetary errors are expected to occur.

Choice "d" is incorrect. Stratified sampling reduces the variability among items in a stratum.

Choice "c" is incorrect. Standard deviations measure variability, and stratification would tend to reduce the strata standard deviations as compared to the overall standard deviation of the population.

49

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:

a.

Risk of incorrect rejection.

b.

Expected deviation rate.

c.

Risk of incorrect acceptance.

d.

Upper deviation rate.

Choice "b" is correct. When determining the sample size for a test of controls, the auditor should consider the expected deviation rate (which is the auditor's best estimate of the deviation rate in the population before the sampling plan is executed), the tolerable deviation rate, and the allowable risk of assessing control risk too low.

Choice "d" is incorrect. The upper deviation rate is used to evaluate a balance after a sampling plan has been performed, not to determine the sample size for a test of controls.

Choices "c" and "a" are incorrect. The risk of incorrect acceptance and risk of incorrect rejection are considered in direct tests of balances (i.e., substantive tests), not in tests of controls.

50

Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?

a.

Overstated units have a lower probability of sample selection than units that are understated.

b.

The sampling distribution should approximate the normal distribution.

c.

The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

d.

The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.

Choice "d" is correct. In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable misstatement, risk of incorrect acceptance, and the recorded amount of the population being sampled.

Choice "b" is incorrect. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used.

Choice "a" is incorrect. Overstated units have a higher (not lower) probability of sample selection than units that are understated, because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount (probability-proportional-to-size).

Choice "c" is incorrect. In PPS sampling, the sampling interval is calculated by dividing the recorded amount of the population (not the number of physical units) by the sample size.

51

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 as:

a.

Standard deviation.

b.

Precision.

c.

Reliability.

d.

Projected error.

Choice "b" is correct. The statistical concept of precision is used to describe the auditor's evaluation of sampling results by calculating the possible error in either direction.

Choice "c" is incorrect. Reliability measures how frequently the procedure used will yield differences between the estimated value and the population value.

Choice "d" is incorrect. Projected error is the auditor's best estimate of the error in the total population based upon evaluating the actual error rate in the sample results. The auditor then adds an allowance for sampling risk to develop a "precision interval" within which the population is expected to fall.

Choice "a" is incorrect. Standard deviation is a measure of the variability of a frequency distribution about its mean.

52

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

a.

Numerical sampling.

b.

Sampling for attributes.

c.

Sampling for variables.

d.

Discovery sampling.

Choice "c" is correct. Variables sampling is used to estimate a numerical measurement of a population, such as the dollar value or the dollar value of errors in the population.

Choice "d" is incorrect. Discovery sampling is a special case of sampling for "attributes" (errors) where the auditor's initial estimate of error occurrence is zero or near zero. It does not sample for dollar value.

Choice "a" is incorrect. The term "numerical sampling" is not used in statistical sampling and is merely a well-designed distractor.

Choice "b" is incorrect. Attribute sampling is sampling for errors (or some other attribute). The auditor determines whether the attribute appears or not, but does not try to estimate a numerical measurement of the population.

53

In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be:

a.

$5,000

b.

$2,000

c.

$1,000

d.

$4,000

Choice "b" is correct. There is a $2,000 projected error in this PPS sample.

Recorded
Amount

Audit
Amount

=

Tainting
Percentage

×

Sample
Interval

=

Projected
Error

$10,000

$8,000

=

N/A

N/A

$2,000

N/A = not applicable, as the actual difference of $2,000 is used when the recorded amount is larger than the sample interval.

Choices "c", "d", and "a" are incorrect, based on the above explanation.

54

Which of the following statements is correct concerning statistical sampling in tests of controls?

a.

Deviations from control procedures at a given rate usually result in misstatements at a higher rate.

b.

As the population size doubles, the sample size should also double.

c.

There is an inverse relationship between the sample size and the tolerable rate.

d.

The qualitative aspects of deviations are not considered by the auditor.

Choice "c" is correct. As the auditor's tolerable rate decreases (the auditor cannot accept as large an error rate), the sample size increases and vice-versa. Therefore, there is an inverse relationship between the sample size and the tolerable rate.

Choice "a" is incorrect. Deviations from control procedures at a given rate usually result in misstatements at a lower rate (i.e., not every deviation from an internal control procedure will necessarily result in a misstatement in the financial statements).

Choice "b" is incorrect. When using statistical sampling for tests of controls, changing the size of the population has very little effect on the sample size (unless the population is very small).

Choice "d" is incorrect. Consideration should be given to the qualitative aspects of deviations, including the nature and cause of deviations and the possible relationship of the deviations to other phases of the audit.

55

An auditor may decide to decrease the acceptable level of risk when:

a.

Increased reliability from the sample is desired.

b.

Initial sample results do not support the planned level of control risk.

c.

The cost and effort of selecting additional sample items is low.

d.

Many differences (audit value minus recorded value) are expected

Choice "c" is correct. Decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless the cost and effort of selecting additional sample items is low.

Choice "a" is incorrect. Decreasing the acceptable level of risk doesn't increase the reliability of a given sample. It does, however, result in selection of a larger sample, which in turn makes it less likely that the auditor will make an incorrect decision.

Choice "d" is incorrect. The auditor's acceptable level of risk is not affected by the extent to which differences are expected.

Choice "b" is incorrect. The auditor should determine the acceptable level of risk prior to selecting and evaluating the sample.

56

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the:

I.

Likely rate of deviations.

II.

Allowable risk of assessing control risk too high.

a.

II only.

b.

I only.

c.

Either I or II.

d.

Both I and II.

Choice "b" is correct. In determining the number of sample items to select in a test of controls, the auditor would also consider the likely rate of deviations. The higher the expected rate, the greater the number of items selected.

Choices "a", "d", and "c" are incorrect. The process of establishing the number of sample items to select in a test of controls would include the consideration of the allowable risk of assessing control risk too low, not too high.

57

For which of the following audit tests would an auditor most likely use attribute sampling?

a.

Making an independent estimate of recorded payroll expense.

b.

Selecting accounts receivable for confirmation of account balances.

c.

Inspecting purchase orders for proper approval by supervisors.

d.

Determining that all payables are recorded at year end.

Choice "c" is correct.  Attribute sampling is used by the auditor to test whether the controls put in place by the client operate effectively. By inspecting purchase orders, the auditor can determine whether adequate approvals are in place (documented) to demonstrate that purchases are properly supervised.

Choice "a" is incorrect.  Sampling is not used to make an independent estimate of payroll expense.

Choice "d" is incorrect. Determining that all payables are recorded at year end would not use attribute sampling because a specific control (or attribute) put in place by the client is not being tested.  The completeness of year-end accounts receivable is typically tested using the search for unrecorded liabilities, which is a substantive procedure. Variables sampling and PPS sampling are typically used in substantive testing.

Choice "b" is incorrect. The selection of confirmations to verify account balances is part of substantive testing and would use variables sampling or PPS sampling, not attributes sampling.

58

Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls?

a.

The population size has little or no effect on the sample size.

b.

There is no relationship between the tolerable error rate and the sample size.

c.

The sample size is inversely proportional to the expected error rate.

d.

As the population size doubles, the sample size should increase by about 67%.

Choice "a" is correct. Unless the population is very small, the population size has virtually no impact on determining the sample size for statistical sampling when testing  internal control using attributes sampling.

Choice "d" is incorrect. A doubling of the population size would not directly result in a 67% increase in sample size.

Choice "c" is incorrect. There is a direct relationship between sample size and theexpected error rate.

Choice "b" is incorrect. The sample size will decrease as the tolerable error rate increases.

59

Which of the following statements about audit sampling risks is correct for a nonissuer?

a.

Nonsampling risk can arise because an auditor failed to recognize misstatements.

b.

Sampling risk includes the possibility of selecting audit procedures that are notappropriate to achieve the specific objective.

c.

Sampling risk is derived from the uncertainty in applying audit procedures to specific risks.

d.

Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.

Choice "a" is correct. Nonsampling risk includes all aspects of audit risk that are not due to sampling. It is always present and cannot be measured; the auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality control of all firm practices. Nonsampling risk can arise because an auditor failed to recognize misstatements in documents examined.

Choice "d" is incorrect. Sampling risk, not nonsampling risk, arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.

Choice "c" is incorrect. Audit risk, not sampling risk, refers to uncertainty in applying audit procedures to specific risks.

Choice "b" is incorrect. Nonsampling risk, not sampling risk, includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.

60

The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk?

a.

The internal control being more effective than the auditor believes.

b.

The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated.

c.

The internal control not being as effective as the auditor believes.

d.

The auditor selecting inappropriate auditing procedures.

Choice "d" is correct. Nonsampling risk includes all aspects of audit risk that are not due to sampling. Examples of nonsampling risk include the auditor selecting inappropriate auditing procedures, using inappropriate audit evidence, and failure by the auditor to recognize misstatements in documents examined.

Choice "a" is incorrect. Sampling risk arises from the possibility that, when a test of controls or substantive test is restricted to a sample, the auditor's conclusions may be different from the conclusions that would have been reached had the tests been applied to all items in the account balance or class of transactions. An example of sampling risk is the internal control being more effective than the auditor believes. This is the risk of assessing control risk too high.

Choice "b" is incorrect. An example of sampling risk is the auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated. This is an example of risk of incorrect acceptance.

Choice "c" is incorrect. An example of sampling risk is the internal control not being as effective as the auditor believes. This is the risk of assessing control risk too low.