Audit 5 - Audit Sampling

Question 1

Sample Size

Answer 1

Sample Size - Although various factors affect sample size, population size does not siginificantly affect sample size and doubling the size of the population would not cause the sample size to double.

Question 2

Sample Size

Answer 2

Sample Size - The larger the expected deviation rate in the population, the larger the sample size, a direct relationship.

Question 3

Sample Size

Answer 3

Sample Size - The tolerable deviation rate has an inverse relationship with sample size, which increases as the tolerable deviation rate decreases.

Question 4

Nonsampling Risk

Answer 4

Nonsampling Risk - Nonsampling risk is the risk that an auditor will draw an incorrect conclusion from an audit procedure due to a flaw in the procedure or the auditor’s interpretation of results, such as selecting inappropriate audit procedures.

Question 5

Sampling Risk

Answer 5

Sampling Risk - Sampling risk is the risk that there is a flaw with the sample, a nonrepresentative sample, causing the auditor to draw the wrong conclusion.

Question 6

Sampling Risk

Answer 6

Sampling Risk - Sampling risk would cause the auditor to conclude that internal controls are more or less effective than they actually are or concluding that a misstated balance is failry stated or that a fairly stated balance is misstated.

Question 7

Sample Size -

Answer 7

Sample Size - Population size has little to no effect on the sample size and therefore sample size does not increase if population size doubles.

Question 8

Sample Size -

Answer 8

Sample Size - DIRECT RELATIONSHIP - the higher the EXPECTED ERROR RATE, the higher the SS

Question 9

Sample Size

Answer 9

Sample Size - INVERSE RELATIONSHIP - the higher the TOLERABLE ERROR RATE, the SMALLER the SS

Question 10

Incorrect Rejection -

Answer 10

Incorrect Rejection - Rejecting a population because of a projected error that is based on a sample exceeding the tolerable misstatement despite the fact that the error in the population is below the tolerable misstatement.

Question 11

Incorrect Rejection -

Answer 11

Incorrect Rejection - Indicates that the exception or error rate in the sample exceeds the tolerable even though the actual error in the population is at an acceptable level.

Question 12

Incorrect Acceptance

Answer 12

Incorrect Acceptance - When a projected error that is based on a sample is lower than the tolerable misstatement when the actual error in the population is higher.

Question 13

Incorrect Acceptance

Answer 13

Incorrect Acceptance - When an auditor concludes that an error or devaition rate in a population is acceptable based on a sample even though it is not true of the population, it represents a sampling error that results in incorrect acceptance.

Question 14

Type I Efficiency Error -

Answer 14

Type I Efficiency Error - Incorrectly reject account balance based on sample = SAMPLE IS BAD / POPULATION IS GOOD = Risk of underreliance on I/C, RMM (up)

Question 15

Type II Effectiveness Error -

Answer 15

Type II Effectiveness Error - Incorrectly accept account balance based on sample = SAMPLE IS GOOD / POPULATION IS BAD = Risk of overreliance on I/C, RMM (down)

Question 16

Type I Efficiency Error Example -

Answer 16

Type I Efficiency Error Example - When the sample results indicate an intolerable error rate even though the error rate of the population is actually acceptable.

Question 17

Allowable Risk of Assessing CR -

Answer 17

Allowable Risk of Assessing CR - When the auditor’s allowable risk of assessing control risk is very low, the auditor wil perform tests of controls to determine if the control is working effectively.

Question 18

Allowable Risk of Assessing CR

Answer 18

Allowable Risk of Assessing CR - If the auditor’s allowable risk of assessing control risk is too high, the auditor is unlikely to rely on the control and would not test controls.

Question 19

Allowable Risk of Assessing CR

Answer 19

Allowable Risk of Assessing CR - The auditor’s allowable risk of assessing control being too low is a consideration in planning an auditor’s sample for a test of controls.

Question 20

Allowable Risk of Assessing CR -

Answer 20

Allowable Risk of Assessing CR - Materiality is relevent to substantive tests, not tests of controls.

Question 21

Voided Voucher

Answer 21

Voided Voucher - In selecting a sample for a test of internal controls, a voided transaction cannot provide evidence as to whether or not the control is effective and the item would be replaced with another. If an item cannot be located or indicates a deviatino, it hsould be kept in the sample and treated as an exception.

Question 22

Voided Voucher

Answer 22

Voided Voucher - If a random number in a voucher sample matches a voided voucher, the voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher has been properly voided.

Question 23

Inspecting Purchase Orders

Answer 23

Inspecting Purchase Orders - Inspecting purchase orders for proper approval involves determining whether or not the transactions, purchase orders, have a paticular attribute (approval), calling for attribute sampling.

Question 24

Inspecting Purchase Orders -

Answer 24

Inspecting Purchase Orders - Tests involving the amount of an expense, the valuation of an account, or account balances would employ variable estimation sampling since the auditor would be trying to evaluate the appropriateness of an amount.

Question 25

Sample Size

Answer 25

Sample Size - INVERSE relationship for TOLERABLE DEVIATION RATE / SS - The higher the toleration deviation rate for a population, the more likely that the population will have enough devaitions to be acceptable to the auditor and, as a result, a smaller sample size would be sufficient, indicating an inverse relationship.

Question 26

Sample Size

Answer 26

Sample Size - The auditor should consider TOLERABLE RATE OF DEVIATION from the controls being test in determining sample size, because the more errors that are acceptable to the auditor, the less work the auditor will perform to find them.

Question 27

Sample Size

Answer 27

Sample Size - DIRECT relationship for EXPECTED DEVIATION RATE / SS - The higher the expected deviation rate in the population, the more likely the population will be unacceptable and the auditor will want to make certain not to make the error or incorrect acceptance. To avoid this, the auditor will seek more precision, requiring a larger sample size, indicating a direct relationship.

Question 28

Sample Size -

Answer 28

Sample Size - The higher the EXPECTED DEVIATION, the more concerned the auditor would be about incorrect acceptance and would want to make certain the sample was representative, more likely with a large sample, not a lower one.

Question 29

Sample Size

Answer 29

Sample Size - INVERSE relationship for ACCEPTABLE RISK TOO LOW / SS - The higher the acceptable risk of assessing the deviation rate too low, the less precise the auditor needs to be in measuring the deviation rate, indicating a lower sample size and an inverse relationship.

Question 30

Sample Size -

Answer 30

Sample Size - The higher the ALLOWABLE RISK OF ASSESSING CONTROL RISK TOO LOW, the less the auditor will be concernred about making such a mistake and the less work that will be done, resulting in a smaller sample size.

Question 31

Error Rate -

Answer 31

Error Rate - When performing an attribute sample, it is considered a deviation when the client cannot provide a document that the auditor wishes to examine.

Question 32

Error Rate

Answer 32

Error Rate - In a sample population of 100, two vouchers are missing the proper cancellation, while one simply cannot be located. The error rate is 3%.

Question 33

Attribute sampling

Answer 33

Attribute sampling is used to determine whether a populatin has a particular attribute. Identifying entries posted to incorrect accounts involves determining whether or not the transactions, entries posted, have a particular attribute, being posted to appropriate accounts, calling for attribute sampling.

Question 34

PPS vs Variable Sampling

Answer 34

PPS vs Variable Sampling - PPS sampling offers several advantages over variable sampling. Under PPS, sampling can begin before the population is available and fewer errors will results in a smaller sample size. One disadvantage of PPS in relation to classical variable sampling is that PPS requires special handling for zero and negative balances.

Question 35

PPS vs Variable Sampling -

Answer 35

PPS vs Variable Sampling - Both PPS and variable sampling require a preliminary judgment about materiality.

Question 36

PPS vs Variable Sampling -

Answer 36

PPS vs Variable Sampling - One disadvantage of PPS in relation to classical variable sampling is that PPS requires special handling for zero and negative balances, while classical variable sampling requires no special design considerations for negative balances.

Question 37

Variable estimation sampling

Answer 37

Variable estimation sampling is used to estimate a numerical amount that can be compared to a recorded amount, including estimating payables to compare to year-end recorded amounts.

Question 38

Advantages of PPS

Answer 38

Advantages of PPS - Standard deviation is not needed

Question 39

Advantages of PPS -

Answer 39

Advantages of PPS - The sample is automatically stratisfied

Question 40

Advantages of PPS

Answer 40

Advantages of PPS - A smaller sample will often result when few errors are expected

Question 41

Advantages of PPS

Answer 41

Advantages of PPS - A sampling can begin before the entire population is complete.

Question 42

Disadvantages of PPS

Answer 42

Disadvantages - Zero and negative balances require special handling

Question 43

Disadvantages of PPS

Answer 43

Disadvantages - Large sample sizes result when many errors are expected

Question 44

Disadvantages of PPS

Answer 44

Disadvantages - Not useful for detecting understatement

Question 45

Example of PPS -

Answer 45

Example - Under PPS sampling, an interval is determined by dividing the total value of the poplation by the sample size. When an item is selected from an internal that has a value lower than the interval amount, any error is measured as a percentage of the items value and that percentage is applied to the interval resulting in a larger error measure.

Question 46

Example of PPS - When the item has a value that is equal to or greater than the interval amount in PPS sampling, any error identified is assumed to be the projected misstatement without adjustment.

Answer 46

Example - When the item has a value that is equal to or greater than the interval amount in PPS sampling, any error identified is assumed to be the projected misstatement without adjustment.

Question 47

Example of PPS

Answer 47

Example - With an interval of $10,000 and a sample item with a greater recorded amount of $12,000 compared to the audited amount of $11,000, a $1000 error would be considered the projected misstatement.

Question 48

Example of PPS -

Answer 48

Example - A risk of incorrect acceptance of 20% with 1 expected misstatement results in a factor of 3.0, which is divided into the tolerrable misstatement of $24,000, resultin in an interval of $8,000. This is divided into the total value of the poplatin to give a sample size equal to $240,000/$8,000, o r30.