Flashcards in Mod 7 Wrong Answers Deck (58):

0

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Identify 3 advantages of statistical sampling over nonstatistical sampling:

Statistical sampling helps an auditor to...

###
1 design an efficient sample

2 measures sufficiency of evidential matter obtained

3 evaluate the sample results

1

## Both statistical and nonstatistical sampling require the use...

### Of judgement

2

## If certain forms are not consecutively numbered...

### Systematic sampling may be appropriate

3

## Random number tables can be used even though...

### The forms are not consecutively numbered

4

## In random number tables, if random numbers are selected for which there are no forms...

### They are ignored

5

## Stratified sampling is a technique of...2

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1 Breaking the population down into subpopulations and

2 applying different sample selection methods to the subpopulations

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## Stratified sampling is used to...

### Minimize the variance within the overall population

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## As variance increases so does required sample size because of...

### Extreme values

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## Stratification allows the selection of subpopulations to...

### Reduce the effect of dispersion of the population

9

## Give an example of a deviation from control procedures that does not necessarily result in an error

### Lack of documentation of transaction approval

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## Lack of documentation of transaction approval, deviation from the control procedure exists even though...

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The entry was authorized and proper, so it might not result in

Financial statement error

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## A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material error. This is...

### Not an example of a deviation of a control

12

## The objective of the tolerable rate of sampling, tolerable rate is calculated to...

### Determine the range of procedural deviations in the population

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Probabilities relate...

2) what do they not relate to?

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More directly to reliability,

2) not tolerable rate

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Determine the relationship between the tolerable rate of deviations and the expected rate of deviations for a test of a control:

Tolerable rate of deviations is...2

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1 The maximum rate of deviations from a prescribed control

procedure that an auditor would be willing to accept

2 unless expected error rate is lower, reliance on internal control

Is not justified

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## To perform tests of controls one must assume that the tolerable rate of deviations is...

### More than the expected error rate

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## An auditor will consider the likely rate of deviations, but will not ordinarily consider...

### The allowable risk of assessing control risk too high

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## While deviations from pertinent control procedures increase the risk of material misstatements, any specific...

### Deviation need not necessarily result in misstatement

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## A recorded disbursement that does not show evidence of required approval might...

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Be a transaction that is properly authorized and recorded

Thus necessarily resulting in misstatement

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## When determining the tolerable rate...

### The auditor does not yet have the required sample size

20

## When considering the allowance for sampling risk, one may consider both...2

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1 planned allowance for sampling risk or

2 adjusted allowance based on sample results

21

## Assume the tolerable rate is 7%, the auditor estimated that 2.5% of invoices lacked approval from past experience, there were 7 errors in 200 documents actually examined and the auditor determined the upper precision limit to be 8%. How do you calculate planned allowance for sampling risk?

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Planned allowance for sampling risk =

Tolerable rate - expected deviation rate

7% - 2.5% = 4.5%

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## Assume the tolerable rate is 7%, the auditor estimated that 2.5% of invoices lacked approval from past experience, there were 7 errors in 200 documents actually examined and the auditor determined the upper precision limit to be 8%.

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Adjusted allowance based on sample results =

Upper precision limit - actual deviations found

8% - 3.5% = 4.5%

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## The auditor must set an acceptable level of risk for...

### Both variables sampling and attribute sampling

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## The rate of error in the population relates to...

### Attributes sampling only

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## When using probability proportional to size (PPS) sampling, the auditor...

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Controls the risk of incorrect acceptance by specifying a risk

Level when planning the sample

26

## In probability proportional to size (PPS) sampling, how is the sampling interval calculated?

### Sampling interval = book value of population/ sample size

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## How do you compute the sample size under probability proportional to size (PPS) sampling. 2 steps

###
Tolerable misstatements/reliability factors of over statements = x

Sample size = population BV/x

28

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Identify the circumstance in which an auditor most likely would stratify population into meaningful groups:

Stratified sampling is used to...2

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1 minimize the effect on sample size of variation within the overall

Population and

2 results in the largest savings for populations with high variability

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## probability proportional to size (PPS) sampling may in essence stratify a population, the items selected, other than those larger than the sampling interval are...

### Not in meaningful groups

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## The ratio estimation sampling technique uses the ratio between...

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Audited to book value amounts as a measure of standard

deviation in its sample size computation

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## Determine when ratio estimation sampling is most effective...2

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1 When audit difference are approximately proportional to account

size, the standard deviation of the ratio is small

2 And it results in a relatively small required sample size

32

## Absolute size of differences does not...

### Make the ratio method most effective

33

## It is necessary to obtain an estimate of a population's standard deviation (variability)...

###
When calculating the required sample size and when using

Sampling techniques

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## The ratio estimation sampling technique can't be used when...

### There is no book value to make a comparison to

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## Difference estimation method is a variable statistical method that...

### Measures the difference between book values and audit values

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## The difference and ratio estimation methods are...

### Efficient

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## The difference and ratio estimation methods are more efficient because...

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The differences between audit and book values are expected to

Vary less than actual items in the population

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## In both difference and ratio estimation methods, the differences between audit and book values should not be great, therefore the population of these differences will have...

### Little variance

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## In statistical sampling, the less variation in a population, the...

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Smaller the required sample to provide an estimate of the

population

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## The number of members in the population for differences or ratio methods would...

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Be the same as the number of items in the population for the

Direct estimation method

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## In difference sampling many items would be zero because...

### Audit and book value are the same

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## In ratio sampling, many members would be one because...

### Audit and book value are the same

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In Probability-proportional-to-size (PPS) sampling:

How do you calculate the upper limit on misstatement?

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Upper limit on misstatement =

projected misstatement + basic precision + incremental allowance

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In Probability-proportional-to-size (PPS) sampling:

How do you calculate the allowance for sampling risk?

### Allowance for sampling risk = basic precision + incremental allowance

45

## because the precision uses a 3.0 factor the risk of incorrect acceptance is...

### 5%

46

## Size of a PPS sample is not based on...

### The estimated variation of audited amounts

47

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Problem A, determine if correct, or why the statement is incorrect:

After obtaining an understanding of Mill's internal control, Baker decided to obtain evidential matter about the effectiveness of both the design and operation of the controls that may support a low assessed level of control risk concerning Mill's shipping and billing functions.

### Correct

48

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Problem A, determine if correct, or why the statement is incorrect:

Baker decided to defer consideration of allowable risk of assessing control risk too low (risk of overreliance) until evaluating the sample results.

### Correct

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Problem A, determine if correct, or why the statement is incorrect:

Baker used the tolerable rate, population size, and the expected error rate to determine sample size of eighty would be sufficient.

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Baker failed to consider the allowable risk of assessing control

Risk too low (risk of overreliance) in determining sample size

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Problem A, determine if correct, or why the statement is incorrect:

When it was subsequently determined that the actual population was about 10,000 shipping documents, Baker increased the sample size to 100.

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Increase in population size has little or no effect on determining

Sample size

51

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Problem A, determine if correct, or why the statement is incorrect:

In evaluating sample results Baker made the initial determination that a reliability level of 95% (risk of assessing control risk too low 5%)...Baker then calculated the allowance for sampling risk to be 5%

### Allowance for sampling risk is not correctly determined

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Problem A, determine if correct, or why the statement is incorrect:

Baker reasoned that the actual sample deviation (8%) plus allowance for sampling risk (5%) was less than the achieved UPL (14%); therefore, the sample supported a low level of control risk.

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Baker's reasoning concerning the decision that the sample

supported a low assessed level of control risk was erroneous

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Problem B, determine if correct, or why the statement is incorrect:

During the prior years' audit Mead used classical variables sampling in performing tests of controls on Jiffy's accounts receivable.

### Classical variables sampling is not designed for tests of controls

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Problem B, determine if correct, or why the statement is incorrect:

Mead computed the sample size using the risk of incorrect acceptance, the total recorded book amount of the receivables, and the number of misstated accounts allowed.2

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1 Tolerable misstatement was not considered in calculating the

Sample size

2 expected (anticipated) misstatement was not considered in

Calculating the sample size

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Problem B, determine if correct, or why the statement is incorrect:

Mead divided the total recorded book amount of the receivables by the sample size to determine the sampling interval

### Correct

56

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Problem B, determine if correct, or why the statement is incorrect:

Mead's calculated sample size was sixty and the sampling interval was determined to be $10,000...The confirmation process revealed two differences. One account with an audited amount of $3,000 had been recorded at $4,000. Mead projected this to be a $1,000 misstatement.

###
Incorrect

Projected misstatement = [(BV - AV)/BV] X sampling interval

$2,500 = ($1,000/$4,000) X $10,000

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