Flashcards in Gleim 15 - Sampling Deck (46):

1

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When assessing the tolerable population deviation rate, the auditor should consider that, although control deviations increase the risks of material misstatement, such deviations do not necessarily result in misstatements. This consideration explains why

A. Deviations would result in misstatements in the accounting records only if the deviations and the misstatements occurred on different transactions.

B. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded.

C. Deviations at a given rate ordinarily would be expected to result in misstatements at a higher rate.

D. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement.

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Answer B is correct.

The failure to apply controls does not automatically result in a misstatement of the accounting records. But the deviation does increase the risk of material misstatement.

Graded

2

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Which of the following is the primary objective of monetary-unit sampling (MUS)?

A. To identify zero and negative balances.

B. To identify overstatement errors.

C. To identify items to which controls were not properly applied.

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

###
Answer B is correct.

MUS gives each monetary unit in the population an equal chance of selection. However, the auditor does not examine an individual monetary unit but uses it to identify an entire transaction or balance to audit (the logical sampling unit). MUS is useful only for tests of overstatements (e.g., of assets) because a systematic selection method is applied (every nth monetary unit is selected). Accordingly, the larger the transaction or balance, the more likely it will be selected. This method is inappropriate for testing a population (e.g., liabilities) when understatement is the primary audit consideration.

3

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An auditor is performing tests of details of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate?

A. Ratio or difference estimation.

B. Monetary-unit.

C. Stop or go.

D. Unstratified mean-per-unit.

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Answer A is correct.

Difference estimation of population misstatement 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 sampling risk also is calculated. Ratio estimation is similar except that it 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. It has been demonstrated that ratio or difference estimation is both reliable and efficient when small misstatements predominate and they are not skewed.

4

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The major reason that the difference and ratio estimation methods are expected to produce audit efficiency is that the

A. The risk of incorrect acceptance may be completely ignored.

B. Number of members of the populations of differences or ratios is smaller than the number of members of the population of carrying amounts.

C. Calculations required in using difference or ratio estimation are less arduous and fewer than those required when using direct estimation.

D. Variability of the populations of differences or ratios is less than that of the populations of carrying amounts or audited values.

###
Answer D is correct.

Difference estimation approximates total misstatement in the population by calculating the mean difference between the audited and carrying amounts in the sample and then multiplying by the number of population items. Ratio estimation approximates the total population misstatement by multiplying the proportion of the sample misstatement times the population carrying amount. The variability in both of these estimates is likely to be smaller than the variability within the population. Because the sample size varies directly with the variability of the population, the use of differences or ratios will usually allow for smaller sample sizes and greater efficiency in sampling.

5

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

A. Risk of overreliance.

B. Tolerable deviation rate.

C. Expected population deviation rate.

D. Sample size.

###
Answer D is correct.

Statistical theory permits the auditor to measure sampling risk and to restrict it to an acceptable level. Statistical methods determine the sample size that will accomplish the auditor’s objectives.

6

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

A. Each item in the sampled population must have an equal chance of being selected.

B. The precise number of items in the population must be known.

C. Each item in the sampled population must have a chance of being selected that is proportional to its carrying amount.

D. Each item in the sampled population must have an equal or known probability of being selected.

###
Answer D is correct.

Probability (random) sampling is used in any sampling plan in which every item in the population has an equal (or known) and nonzero probability of being chosen. A probability sample permits the use of statistical methods based on the laws of probability to quantify an estimate of sampling risk.

7

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As lower acceptable levels of the risk of incorrect acceptance and performance materiality are established, the auditor should plan more work on individual accounts to

A. Find larger misstatements.

B. Find smaller misstatements.

C. Increase the tolerable misstatement in the accounts.

D. Decrease the risk of overreliance.

###
Answer B is correct.

A lower performance materiality means that the tolerable misstatement in an account is smaller. As a result, the auditor must plan for a larger sample size and more audit work on the accounts to discover smaller misstatements. For substantive tests of details, the sample size depends on the auditor’s desired assurance (1.0 – the risk of incorrect acceptance) that tolerable misstatement is not less than actual misstatement in the population. The desired assurance may be based on, among other things, the following: (1) the assessed risk of material misstatement, (2) the assurance provided by other substantive procedures related to the same assertion, (3) tolerable misstatement, and (4) expected misstatement for the population. Accordingly, as the acceptable risk of incorrect acceptance decreases, the desired assurance increases, and the auditor decreases the tolerable misstatement.

8

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

A. The calculated audit amounts are approximately proportional to the client’s carrying amounts.

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

C. A relatively small number of differences exist in the population.

D. Estimating populations whose records consist of quantities but not carrying amounts.

###
Answer A is correct.

Ratio estimation calculates the population misstatement by multiplying the carrying amount of the population by the ratio of the total audit amount of the sample items to their total carrying amount. The precision is determined by considering the variances of the ratios of carrying amount to audited amount. Thus, the more homogeneous the ratios, the smaller the precision.

9

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In a sampling application, the group of items about which the auditor wants to estimate some characteristic is called the

A. Population.

B. Sampling unit.

C. Sample.

D. Attribute of interest.

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Answer A is correct.

The population is the group of items about which an auditor wishes to draw conclusions. However, the difference between the targeted population (the population about which information is desired) and the sampled population (the population from which the sample is actually drawn) should be understood.

10

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

B. 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.

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

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

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Answer B is correct.

By taking every twentieth item, the auditor chose a sample containing 5% (1 ÷ 20) of the items in the population. If the sample contains $3,700 of overstatements and $200 of understatements, the projected overstatements and understatements are $74,000 and $4,000, respectively, a projected misstatement of $78,000. Furthermore, sampling risk should be considered. The allowance for sampling risk calculated for a specified level of confidence is an interval around the sample result that is expected to contain the true amount of misstatement. The upper limit of this interval equals $78,000 plus the calculated allowance. Accordingly, given that projected misstatement exceeds tolerable misstatement, the auditor most likely will conclude that the risk that actual misstatement exceeds tolerable misstatement is unacceptably high.

11

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The possibility of the auditor’s failure to recognize a misstatement in an amount or a deviation from a prescribed control arises from

A. Statistical risk.

B. Nonsampling risk.

C. Sampling risk.

D. The standard error of the mean.

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Answer B is correct.

Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm’s audit practice in accordance with the quality control standards (AU-C 530). Sampling risk results from the use of statistical sampling.

12

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The auditor failed to recognize a deviation included in a sample intended to test controls related to a transaction process. This failure best reflects

A. Sampling risk.

B. Nonsampling risk.

C. Statistical risk.

D. Audit risk.

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Answer B is correct.

Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm’s audit practice in accordance with the quality control standards (AU-C 530).

13

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

A. May be applied to populations in which many monetary misstatements are expected to occur.

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

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

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

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Answer B is correct.

The primary objective of stratification is 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.

14

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An auditor suspects that the invoices from a small number of vendors contain serious misstatements and therefore limits the sample to those vendors only. A major disadvantage of selecting such a directed sample of items to examine is the

A. Absence of a normal distribution.

B. Inability to quantify the sampling error related to the total population of vendor invoices.

C. Tendency to sample a greater number of units.

D. Difficulty in obtaining sample items.

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Answer B is correct.

Judgment sampling uses the auditor’s subjective judgment to determine the sample size (number of items examined) and sample selection (which items to examine). This subjectivity is not always a weakness. The auditor, based on other audit work, may be able to test the most material and risky transactions and to emphasize the types of transactions subject to high control risk. Probability (random) sampling provides an objective method of determining sample size and selecting the items to be examined. Unlike judgment sampling, it also provides a means of quantitatively assessing precision and reliability.

15

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A CPA’s client wishes to determine inventory shrinkage by weighing a sample of inventory items. If a stratified random sample is to be drawn, the strata should be identified in such a way that

A. The sample means and standard deviation of each individual stratum will be equal to the means and standard deviations of all other strata.

B. The overall population is divided into subpopulations of equal size so that each subpopulation can be given equal weight when estimates are made.

C. The items in each stratum will follow a normal distribution so that probability theory can be used in making inferences from the sample data.

D. Each stratum differs as much as possible with respect to expected shrinkage, but the shrinkages expected for items within each stratum are as close as possible.

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Answer D is correct.

When the items in a population are heterogeneous, it may be advantageous to stratify the population into homogeneous subpopulations. Each stratum should differ from the others, but the items within each stratum should be similar.

16

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

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

###
Answer B is correct.

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

17

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An auditor initially planned to use unrestricted random sampling with replacement in the audit of accounts receivable. Later, the auditor decided to use unrestricted random sampling without replacement. As a result of this decision, the sample size should

A. Either increase or decrease, but the direction cannot be determined.

B. Remain the same.

C. Increase.

D. Decrease.

###
Answer D is correct.

Unrestricted random sampling means that each item in the population has an equal and nonzero chance of being selected. Sampling with replacement means that an item may be included more than once in the sample. Sampling without replacement removes an item from the population after selection. Thus, sampling without replacement uses information about the population more efficiently. It results in a smaller sample, if other things are held constant, because the sample size formula for sampling with replacement is multiplied by the finite population correction factor (always less than 1.0).

18

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If the size of the sample to be used in a particular test of attributes has not been determined by using statistical concepts, but the sample has been chosen in accordance with random selection procedures,

A. The auditor will have to evaluate the results by reference to the principles of discovery sampling.

B. The auditor has caused nonsampling risk to increase.

C. The auditor may or may not achieve desired precision at the desired level of confidence.

D. No inferences can be drawn from the sample.

###
Answer C is correct.

The determination of sample size for a test of attributes is a function of (1) the allowable risk of overreliance, (2) the tolerable deviation rate, (3) the expected population deviation rate, and (4) the size of the population. When the auditor does not use these criteria to determine sample size, (s)he risks not meeting the audit objectives.

19

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

A. The auditor’s allowable risk of overreliance.

B. The auditor’s allowable risk of underreliance.

C. Preliminary judgments about materiality levels.

D. The level of detection for the account.

###
Answer A is correct.

A test of controls is an application of attribute sampling. The initial size for an attribute sample is based on (1) the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, (2) the tolerable population deviation rate, (3) the expected population deviation rate, and (4) the population size. However, a change in the size of the population has a very small effect on the required sample size when the population is large. Consequently, population size is often not considered unless it is small.

20

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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 population deviation rate minus the allowance for sampling risk exceeds the sample rate of deviation.

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

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

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

###
Answer D is correct.

If the sample deviation rate plus the allowance for sampling risk exceeds the tolerable population deviation rate, the sample results do not support the planned risk of overreliance. Thus, the risk of overreliance should be assessed at a higher level. The result is a lower acceptable level of detection risk for a given audit risk and an increase in the assurance to be provided by substantive testing.

21

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Which of the following factors does an auditor usually need to consider in planning a particular audit sample for a test of controls?

A. Number of items in the population.

B. Total dollar amount of the items to be sampled.

C. Acceptable risk of overreliance.

D. Tolerable misstatement.

###
Answer C is correct.

A test of controls is an application of attribute sampling. The initial size for an attribute sample from a large population is based on the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, the tolerable population deviation rate, and the expected population deviation rate.

22

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In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the prior year’s rate because of the results of the prior year’s tests of controls and the overall control environment. The auditor most likely would then increase the planned

A. Tolerable deviation rate.

B. Allowance for sampling risk.

C. Sample size.

D. Risk of overreliance.

###
Answer C is correct.

To determine the sample size for a test of controls, the auditor considers (1) the tolerable rate of deviations, (2) the expected actual rate of deviations, and (3) the allowable risk of overreliance. An increase in the expected rate has the effect of increasing the degree of assurance to be provided by the sample and therefore increasing the planned sample size.

23

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Which of the following is a true statement about statistical sampling in tests of controls?

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

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

C. Deviations from controls at a given rate usually result in misstatements at a higher rate.

D. The relationship between the sample size and the tolerable population deviation rate is inverse.

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Answer D is correct.

The tolerable population deviation rate is set by the auditor. The auditor seeks to obtain appropriate assurance that this rate is not exceeded by the actual rate. The sample size and the tolerable population deviation rate have an inverse relationship because the degree of assurance to be provided by the sample is higher (lower) when the tolerable population deviation rate is lower (higher).

24

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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 directly consider the

I. Likely rate of deviations

II. Allowable risk of underreliance

A. Either I or II.

B. I only.

C. Both I and II.

D. II only.

###
Answer B is correct.

The factors necessary to determine sample size in an attribute sampling plan for a large population include (1) the tolerable deviation rate, (2) the acceptable risk of overreliance, and (3) the expected deviation rate.

25

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Many statistical estimates may be useful to an auditor. But most are either of a quantity or a deviation rate. The statistical terms that correspond to quantities and deviation rates, respectively, are

A. Constants and variables.

B. Constants and attributes.

C. Variables and attributes.

D. Attributes and variables.

###
Answer C is correct.

Variables sampling is used by auditors to estimate quantities or dollar amounts in substantive testing. Attribute sampling applies to testing of internal controls and is used to estimate a deviation rate (occurrence rate) within a population.

26

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When performing tests of controls with respect to the effectiveness of internal controls related to 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. May occur in a systematic pattern, thus destroying the sample randomness.

B. Must be systematically replaced in the population after sampling.

C. May systematically occur more than once in the sample.

D. Must be recorded in a systematic pattern before the sample can be drawn.

###
Answer A is correct.

Systematic sampling is accomplished by selecting a random start and taking every nth item in the population. The value of n is computed by dividing the population by the size of the sample. The random start should be in the first interval. Because the sampling technique only requires counting in the population, no correspondence between random numbers and the items in the population is necessary as in random number sampling. A systematic sampling plan assumes the items are arranged randomly in the population. If the auditor discovers that this is not true, a random selection method should be used.

27

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Which of the following best describes what the auditor means by the rate of occurrence in an attribute sampling plan?

A. The dollar range within which the true population total can be expected to fall.

B. The number of deviations that can be estimated to be contained in the sample.

C. The degree of confidence that the sample is representative of the population.

D. The estimated frequency with which a certain characteristic occurs within a population.

###
Answer D is correct.

Attribute sampling is used to estimate the rate of occurrence of a specific attribute in a population, e.g., the number of invoices paid twice by a client. In effect, the auditor attempts to estimate the number (or percentage) of times this specified deviation occurred in the population based upon results from the sample.

28

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Fact Pattern: 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 overreliance (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 seven of them were lacking approval. The auditor then determined the achieved upper deviation limit to be 8%.

The allowance for sampling risk was

A. 1%

B. 3.5%

C. 4.5%

D. 5.5%

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Answer C is correct.

The allowance for sampling risk equals the achieved upper deviation limit (8%) minus the sample deviation rate (7 ÷ 200 = 3.5%), or 4.5%.

29

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Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If a computer application control that performs a limit check for each check request is to be subjected to the auditor’s test-data approach, the sample should include

A. A number of test items determined by the auditor to be sufficient under the circumstances.

B. One transaction.

C. A number of test items determined by the auditor’s reference to the appropriate sampling tables.

D. Approximately 1,000 test items.

###
Answer B is correct.

A limit check compares an input with a limit (e.g., the number of the month cannot exceed 12). If the limit is exceeded, an error message is printed. Because this is a mechanical check (done by the computer), only one transaction need be in the sample. The transaction should exceed the limit to verify that the limit check is operating correctly.

30

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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. No...No

C. Yes...No

D. No...Yes

###
A. Yes...Yes

Answer A is correct.

Certain variables sampling plans (e.g., monetary-unit sampling) specifically consider the expected amount of misstatement and the measure of tolerable misstatement or performance materiality in the determination of sample size.

31

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In attribute 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 size.

B. Risk of overreliance.

C. Expected population deviation rate.

D. Tolerable population deviation rate.

###
A. Population size.

Answer A is correct.

A change in the size of the population has a very small effect on the required sample size when the population is large. As the population increases, the sample size also increases but at a decreasing rate.

32

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An auditor may decide to increase the risk of incorrect rejection when

A. The cost and effort of selecting additional sample items are low.

B. Many differences (audit amount minus recorded amount) are expected.

C. Increased reliability from the sample is desired.

D. Initial sample results do not support the assessed risk of material misstatement.

###
A. The cost and effort of selecting additional sample items are low.

Answer A is correct.

The risk of incorrect rejection is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when it is not. This risk relates to the efficiency, not the effectiveness, of the audit. Incorrect rejection ordinarily results in the application of additional procedures that finally lead the auditor to the proper conclusion. If the cost and effort of selecting additional sample items are low, a higher risk of incorrect rejection may be acceptable.

33

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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. Overreliance.

B. Underreliance.

C. Incorrect rejection.

D. Incorrect acceptance.

###
D. Incorrect acceptance.

Answer D is correct.

An auditor is concerned with two aspects of sampling risk in performing substantive tests of details: the risk of incorrect acceptance and the risk of incorrect rejection. The risk of incorrect acceptance is the risk that an auditor erroneously concludes that a material misstatement does not exist when, in fact, it does.

34

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When using sampling for substantive tests of details, the auditor is required to do all but which of the following?

A. Determine the tolerable misstatement.

B. Select a representative sample.

C. Compute the sample standard deviation.

D. Project sample misstatement results to the population.

###
C. Compute the sample standard deviation.

Answer C is correct.

AU-C 530 does not require that the sample standard deviation be calculated. The computation would be necessary if parametric statistical sampling were used, but statistical sampling is not required by AU-C 530.

35

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

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

B. Eliminate the risk of nonsampling errors.

C. Minimize the failure to detect errors and fraud.

D. Measure the sufficiency of the evidence obtained.

###
D. Measure the sufficiency of the evidence obtained.

Answer D is correct.

Statistical sampling helps the auditor to design an efficient sample, to measure the sufficiency of the evidence obtained, and to evaluate the sample results. Auditors are required to obtain sufficient appropriate evidence. Sufficiency is the measure of the quantity of evidence. It relates to the design and size of the sample.

36

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

A. Provide an objective basis for quantitatively evaluating sample risks.

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

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

D. Afford greater assurance than a nonstatistical sample of equal size.

###
A. Provide an objective basis for quantitatively evaluating sample risks.

Answer A is correct.

The results of statistical (probability) sampling are objective and subject to the laws of probability. Hence, sampling risk can be quantified and controlled, and the degree of reliability desired (the confidence level) can be specified. Sampling risk is the risk that the sample selected does not represent the population.

37

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Each time an auditor draws a conclusion based on evidence from a sample, an additional risk, i.e., sampling risk, is introduced. An example of sampling risk is

A. Drawing an erroneous conclusion from sample data.

B. Projecting the results of sampling beyond the population tested.

C. Improperly applying a proper audit procedure to sample data.

D. Properly applying an improper audit procedure to sample data.

###
A. Drawing an erroneous conclusion from sample data.

Answer A is correct.

Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion if the same audit procedure were applied to every item in the population. Sampling risk can result in two types of erroneous conclusions: those affecting effectiveness or those affecting efficiency (AU-C 530).

38

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The risk of underreliance is the risk that the sample selected to test controls

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

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

C. Indicates that the controls are less effective than they actually are.

D. Does not support the tolerable misstatement for some or all financial statement assertions.

###
C. Indicates that the controls are less effective than they actually are.

Answer C is correct.

One aspect of sampling risk in performing tests of controls is the risk of underreliance. It is the risk that the sample indicates that the controls are less effective than they actually are.

39

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While performing a substantive test of details during an audit, the 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. Incorrect acceptance.

B. Overreliance.

C. Incorrect rejection.

D. Underreliance.

###
C. Incorrect rejection.

Answer C is correct.

Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion if the same audit procedure were applied to every item in the population. For a test of details, sampling risk can result in two kinds of erroneous conclusions: (1) a material misstatement does not exist when, in fact, it does (an error affecting audit effectiveness because it is more likely to lead to an inappropriate audit opinion), and (2) a material misstatement exists when, in fact, it does not (an error affecting audit efficiency because it usually results in additional work) (AU-C 530). The second kind of erroneous conclusion is incorrect rejection.

40

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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 standard deviation of recorded amounts is relatively small.

C. The auditor’s estimated tolerable misstatement is extremely small.

D. Monetary-unit sampling (MUS) is used.

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A The population has highly variable recorded amounts.

Answer A is correct.

The primary objective of stratification is to reduce the effect of high variability by dividing the population into subpopulations. Reducing the effect of the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and the confidence level constant.

41

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

A. Provide an objective basis for quantitatively evaluating sample risk.

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

C. Provide greater assurance than a nonstatistical sample of equal size.

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

###
A. Provide an objective basis for quantitatively evaluating sample risk.

Answer A is correct.

Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion when the same procedure is applied to the entire population. Two types of erroneous conclusions may be drawn. One is that controls are more effective than they actually are, or a material misstatement does not exist when in fact it does exist. This type of error affects audit effectiveness and is more likely to result in an inappropriate opinion. The second erroneous conclusion is that controls are less effective than they actually are, or a material misstatement exists when in fact it does not exist. This type of error affects audit efficiency and results in more work. Sampling risk is measured and controlled in statistical sampling.

42

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As a result of tests of controls, an auditor underrelies on controls. This incorrect assessment most likely occurred because

A. The assessed risk of material misstatement based on the auditor’s sample is less than the actual risk.

B. The auditor believes that the controls reduce the extent of substantive testing when, in fact, they do not.

C. Operating effectiveness based on the auditor’s sample is less than the true operating effectiveness of the controls.

D. The auditor believes that the controls relate to management’s assertions when, in fact, they do not.

###
C. Operating effectiveness based on the auditor’s sample is less than the true operating effectiveness of the controls.

Answer C is correct.

The risk of underreliance is that the auditor erroneously concludes that controls are less effective than they actually are. This type of error affects audit efficiency because it generally requires additional work to correct the first conclusion (AU-C 530).

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In which of the following situations is attribute sampling likely to be used?

A. Determining the estimated number of occurrences of improperly authorized cash disbursements.

B. Inquiring of the client the number of occurrences of fraud during the year.

C. Making selections from a cash disbursements journal to test liabilities for understatement.

D. Examining invoices and canceled checks in support of recorded operating expenses.

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A. Determining the estimated number of occurrences of improperly authorized cash disbursements.

Answer A is correct.

The auditor uses attribute sampling to test the effectiveness of control. This sampling method allows the auditor to determine the occurrence rate of deviations and its relation to the tolerable rate of deviation. A control, such as the proper approval and authorization of cash disbursements, can be tested for effectiveness using attribute sampling.

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

C. Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.

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.

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

Answer A is correct.

Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm’s audit practice in accordance with the quality control standards (AU-C 530).

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

A. Sampling for attributes.

B. Discovery sampling.

C. Numerical sampling.

D. Sampling for variables.

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D. Sampling for variables.

Answer D is correct.

Variables sampling is used to estimate the amount of misstatement in or the amount of a population. In auditing, this process involves estimating the monetary value of an account balance or other accounting totals. The result is often stated in terms of a point estimate plus or minus a stated dollar amount (the precision at the desired level of confidence).

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