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0

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

1 Breaking the population down into subpopulations and

2 applying different sample selection methods to the subpopulations

6

Stratified sampling is used to...

Minimize the variance within the overall population

7

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

Extreme values

8

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

10

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

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

11

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

13

Probabilities relate...

2) what do they not relate to?

More directly to reliability,

2) not tolerable rate

14

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

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

15

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

More than the expected error rate

16

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

The allowable risk of assessing control risk too high

17

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

Deviation need not necessarily result in misstatement

18

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

Be a transaction that is properly authorized and recorded
Thus necessarily resulting in misstatement

19

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

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?

Planned allowance for sampling risk =
Tolerable rate - expected deviation rate
7% - 2.5% = 4.5%

22

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%.

Adjusted allowance based on sample results =
Upper precision limit - actual deviations found
8% - 3.5% = 4.5%

23

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

Both variables sampling and attribute sampling

24

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

Attributes sampling only

25

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

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

27

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

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

Stratified sampling is used to...2

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

29

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

30

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

Audited to book value amounts as a measure of standard
deviation in its sample size computation

31

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

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

34

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

There is no book value to make a comparison to

35

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

Measures the difference between book values and audit values

36

The difference and ratio estimation methods are...

Efficient

37

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

The differences between audit and book values are expected to
Vary less than actual items in the population

38

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

39

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

Smaller the required sample to provide an estimate of the
population

40

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

Be the same as the number of items in the population for the
Direct estimation method

41

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

Audit and book value are the same

42

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

Audit and book value are the same

43

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

How do you calculate the upper limit on misstatement?

Upper limit on misstatement =
projected misstatement + basic precision + incremental allowance

44

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

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

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

49

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.

Baker failed to consider the allowable risk of assessing control
Risk too low (risk of overreliance) in determining sample size

50

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.

Increase in population size has little or no effect on determining
Sample size

51

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

52

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.

Baker's reasoning concerning the decision that the sample
supported a low assessed level of control risk was erroneous

53

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

54

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

1 Tolerable misstatement was not considered in calculating the
Sample size

2 expected (anticipated) misstatement was not considered in
Calculating the sample size

55

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

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

57

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...Another account with an audited amount of $2,000 had been recorded at $1,900. Mead did not count the $100 difference because the purpose of the test was to detect overstatements.

The difference in the understated account should not have been
Omitted from calculation of projected misstatement