Chapter 14

Question 1

All factors equal. What would lead to a larger sample size for a substantive test of details of an account balance?

Answer 1

Smaller measure of tolerable misstatements.

Holding the risk of incorrect acceptance constant, a reduction in acceptable tolerable misstatement would require the auditor to select a larger sample.

The larger sample would reduce the allowance for sampling risk.

Question 2

When using monetary unit sampling, what type of selection is not possible?

Answer 2

The selection of zero or negative balances have no chance of being selected.

Question 3

What type of sampling would an auditor use to have negative balances in the selection?

Answer 3

Special designs that are not necessary with classical variables sampling.

Question 4

What is the primary objective of stratification?

Answer 4

To reduce the effect of high variability by dividing the population into subpopulations.

Reducing the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and confidence level constant.

Question 5

Stratified means per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because?

Answer 5

Stratisfied MPU usually produces an estimate having a desired level of precision with a smaller sample size.

Question 6

When an auditor decides to employ classical variable sampling what is one of the objectives achieved?

Answer 6

To determine the inventory quantity on hand.

After taking a sample and drawing a conclusion about the population, the auditor either accepts or rejects the reported number.

The Classical variable sampling method provides the auditor with evidence to determine the inventory quantities on hand.

Question 7

The risk of under reliance is the risk that the sample selected to test controls

Answer 7

indicates that the controls are less effective than they actually are.

Question 8

Why would an auditor use attribute sampling?

Answer 8

To test the effectiveness of controls.

Attribute sampling allows the auditor to estimate the occurrence rate of deviations and to determine its relation to the tolerable deviation rate.

Question 9

What can be tested by attribute sampling?

Answer 9

Inspecting employee time cards for proper approval by supervisors.

Question 10

What varies inversely with the sample of test of controls?

Answer 10

Tolerable population deviation rate varies inversely with sample size.

As the tolerable population deviation rate decreases, the sample size increases.

Question 11

What directly affects the sample size?

Answer 11

The expected population deviation rate.

As it increases the sample size increases.

Question 12

When is variable sampling used?

Answer 12

By auditors to estimate quantities or dollar amounts in substantive testing.

Question 13

The risk of incorrect acceptance and the risk of over reliance relate to the

Answer 13

Effectiveness of the audit.

Question 14

An auditor decides to increase the risk of incorrect rejections when

Answer 14

The cost of selecting additional sample items are low.

Question 15

Ratio statistical sampling approach is?

Answer 15

Estimates the population misstatement by multiplying the carrying amount of the population by the ratio of the total audit value of the sample items to their total carrying amount.

Ratio or difference estimation is both reliable and efficient when small misstatements predominate and they are not skewed.

Question 16

What is difference estimation statistical sampling?

Answer 16

Difference estimation of population misstatements involves:
1. Determining the differences between the audit and carrying amounts for items in the sample.

2. Adding the differences
3. Calculating the mean difference, and
4. Multiplying the mean by the number of items in the population.

An allowance for population risk is also calculated.

Question 17

Is computing the sample standard deviation required by the auditor when using sampling for substantive test of details?

Answer 17

No computing sample standard deviation is necessary if parametric statistical sampling were used.

Question 18

What is non sampling risk?

Answer 18

A risk that the auditor would draw an erroneous conclusion for any reason not relating to sampling risk.

Example:
The use of inappropriate audit procedures, or misinterpretation of audit evidence and failure to recognize a misstatement or deviation.

Question 19

The use of the ratio estimation sampling technique is most effective when

Answer 19

The calculated audit amounts are approximately proportional to the clients carrying amounts.

Question 20

What is the primary objective of monetary unit sampling?

Answer 20

To identify overstatement errors.

MUS is useful for test of overstatements because a systematic selection method is applied. The larger the transaction or balances the more likely it will be selected.

Question 21

what is an advantage of statistical over non statistical sampling methods?

Answer 21

statistical methods provide an objective basis for quantitatively evaluating sample risks.

Question 22

What is sampling risk?

Answer 22

The risk that the sample selected does not represent the population.

Question 23

Which type of sampling allows an auditor to quantify sampling risk?

Answer 23

Attribute Sampling

The auditor uses statistical sampling (attribute sampling) in tests of controls to test their effectiveness.

Attribute sampling enables the auditor to estimate the occurrence rate of deviations and to determine its relation to the tolerable deviation rate.

Question 24

If stratified random sampling is drawn, the strata should be identified in such a way that

Answer 24

Each stratum differ from the others, but the items within each stratum should be similar.

When the items in a population are heterogeneous it may be advantageous to stratify the population into homogeneous subpopulations.

Question 25

What does it mean to stratify a population?

Answer 25

It means dividing a population into subpopulations thereby permitting application of different sampling techniques to each subpopulation or stratum. Stratifying places greater emphasis on larger or more important items.

Question 26

What is variable sampling?

Answer 26

It is used to estimate the amount of misstatements in or the amount of a population. This process involves estimating the monetary value of an account balance or other accounting totals. The results is often stated in terms of a point estimate plus or minus a stated dollar amount.

Question 27

What is incorrect rejection?

Answer 27

A risk that the auditor determines that the account balance is materially misstated when in fact it is not materially misstated.

Question 28

When does overreliance occur?

Answer 28

If the sample has fewer observed deviations than the true deviation rate in a population.

Question 29

What are the necessary factors to determine sample size in attribute sampling plan for a large population?

Answer 29

1. Tolerable deviation rate 2. The acceptable risk of overreliance 3. The expected deviation rate

Question 30

As a result of sampling procedures applied as test of controls, an auditor incorrectly underrelies on controls. The most likely explanation for this situation is that

Answer 30

The deviation rate of the auditors sample exceeds the tolerable population deviation rate, but the deviation rate in the population is less than the tolerable population deviation rate.

Question 31

In Monetary unit sampling (MUS) with a sample interval of $5000, 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 misstatement of this sample would be?

Answer 31

$2,000 ( $10,000 recorded amount - $8,000 audit amount). The projected misstatement in the sampling method equals the actual misstatement of the sampled item when the recorded amount of the item ($10,000) exceeds the sampling interval ($5,000)

Question 32

What is the formula for Monetary Unit Sampling (MUS) for sample size? 14.4

Answer 32

n = RM x RF ___________ TM - (AM X EF) sample size(n) = Recorded or carrying amount on the account x appropriate reliability factor (Always from the zero line on table 1). ___________________________________ Tolerable misstatements - (Anticipated misstatement x Expansion factor) from table

Question 33

To quantify the risk that sample evidence leads to erroneous conclusions about the sample population

Answer 33

Each item in the sample population must have an equal or known probability of being selected. A probability sample permits the use of statistical methods based on the laws of probability to quantify an estimate of sampling risk.

Question 34

in estimation sampling for variables, what must be known in order to estimate the appropriate sample size required to meet the auditor needs in a given situation?

Answer 34

1. The assessed risk of material misstatements. 2. The assurance provided by other substantive procedures related to the same assertion. 3. Tolerable misstatement 4. Expected misstatement for the population.