SAMPLING

Question 1

In a random sample of 1,000 records, a CPA determines that the rate of occurrence of errors is 3%. He can state that the error rate in the population is

Not less than 3%.
Not more than 4%.
Probably about 3%.
Not less than 2%.

Answer 1

Probably about 3%.

Sampling generally deals with ranges within which error rates will fall, and about 3% would be the best answer.

Question 2

In an audit of financial statements, a CPA will generally find stratified sampling techniques to be most applicable to

Confirming accounts receivables for customers at a large retail store.
Recomputing net wage and accrued payroll for employees.
Reviewing supporting documents for capital acquisitions.
Tracing hours worked from the payroll summary back to individual time cards

Answer 2

Confirming accounts receivables for customers at a large retail store.

Since accounts receivable from customers will have a great deal of variation in amounts, using stratified sampling will minimize the effect on sample size of the variation within the population. Additionally, the auditor will be able to emphasize the larger account balances by stratifying the population.

Question 3

Physical access controls include all but the following

Clamps or chains
Regular backup
Control over access from outside
User reconciliations

Answer 3

User reconciliations

Clamps or chains to prevent removal of hard disks or internal boards, regular backup and control over access from outside are all forms of physical access controls. Reconciliations are typically an accounting process.

Question 4

An advantage of using statistical sampling techniques is that such techniques:

Eliminate the need for judgmental decisions.
Mathematically measure risk.
Have been proven by GAAS to be superior to all other methods.
Define the value for reliability and precision required for ‘due professional care’ in an audit.

Answer 4

Mathematically measure risk.

Statistical sampling differs from nonstatistical sampling in that, by applying mathematical rules, the auditor can quantify sampling risk in planning the sample and evaluating the results.

Question 5

If all other factors specified in the sample remain constant, changing the tolerable exception risk from 8% to 12% will cause the required sample size to

Increase.
Decrease.
Remain the same.
Become irrelevant.

Answer 5

Decrease.

Tolerable exception rate represents the highest exception rate the auditor will permit in the control being tested and still be willing to conclude that the control is operating effectively. Tolerable exception rate can have a significant inverse impact on sample size–a smaller sample size is needed for a high tolerable exception rate than for a low tolerable exception rate.

Question 6

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if

The standard deviation of the recorded amounts is relatively small.
The auditor’s estimated tolerable misstatement is extremely small.
The population has highly variable recorded amounts.
Probability-proportional-to-size (PPS) sampling is used.

Answer 6

The population has highly variable recorded amounts.

Stratification enables the auditor to emphasize certain population items and deemphasize others. Stratified sampling is used to minimize the effect on sample size of the variation within the population.

Question 7

In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $4,000. If this were the only error discovered by the auditor, the projected error of this sample would be

$1,000
$2,000
$5,000
$10,000

Answer 7

$2,000

The answer $2,000 is correct since, when the sampling interval ($10,000) exceeds the account’s recorded amount ($5,000), the projected error is determined , first by dividing the amount of misstatement by the recorded amount [($5,000-$4,000) /$5,000 = 0.2] The result times the sampling interval is the projected error. [0.2 x$10000 = $2,000].

Question 8

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the

Effectiveness of an audit.
Efficiency of the audit.
Preliminary estimates of materiality levels.
Allowable risk of tolerable error.

Answer 8

Effectiveness of an audit.

AU 350.14 states, “The risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement.”

Question 9

A company uses computer processing to calculate and print out employee paychecks each period. The company is worried that data will be entered into the system incorrectly so that one or more paychecks will be overstated as a means of stealing money from the company. Which of the following is most likely to detect such fraud?

Control totals are calculated for significant figures.
All paychecks must be hand delivered to the employee by a paymaster.
A system is devised so that employees who are overpaid can file a form to reimburse the company.
Checks that are not picked up by an employee are given to a person in authority to uncover the reason.

Answer 9

Control totals are calculated for significant figures.

Companies worry that numbers such as hours worked or pay rates will be increased in a scheme so that employees can steal money. For example, if 50 hours is entered rather than 40 hours for an employee, that person will get 25 percent more than has been earned. Thus, company officials determine control figures before computations are made and then verify those totals after the computations are made to ensure that no unauthorized changes have been made. Answers B and D are important controls but they are verifying that paychecks are written to actual employees rather than that the amounts have not been manipulated.

Question 10

The monetary unit sampling selection process appeals to auditors because

It provides a statistical solution rather than a nonstatistical one.
It reduces the cost of doing the audit testing because several sample items are test at once.
It automatically increases the likelihood of selecting high dollar items from the population being audited.
All of the above are correct.

Answer 10

All of the above are correct.

Monetary unit sampling is the most commonly used statistical method of sampling for tests of details of balances because it has the statistical simplicity of attribute sampling yet provides a statistical result expressed in dollars.

Question 11

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the

Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.
Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation.
Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.
Sample rate of deviation is less than the expected rate of deviation used in planning the sample.

Answer 11

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

In a test of controls, the auditor takes a sample, determines the sample deviation rate, compares this rate to the maximum rate he can tolerate and still rely on the control, and decides whether to rely on the control as planned or not.

Question 12

Which function is generally responsible for the daily computer operations?

Operator
Database Administrator
Systems Analyst
Systems programmer

Answer 12

Operator

The Operator is responsible for the daily computer operations of both the hardware and software. The Operator mounts tapes, supervises operations on a console, accepts inputs and distributes outputs. The Operator should have documentation available to run programs but is not responsible for detailed program information.

Question 13

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

Random-number sampling.
Variables sampling.
Attributes sampling.
Population sampling.

Answer 13

Variables sampling.

Variables sampling estimates numerical measures of a population, such as the quantity of units or a dollar value. Attributes sampling is used when testing internal control and estimates the percentage of items in the population that possess a desired attribute, not a dollar value.

Question 14

Physical access controls prevent damage or other loss including all but the following

Unauthorized access by service pesonnel
Theft
Disgruntled employees
Online or electronic fraud

Answer 14

Online or electronic fraud

Physical access controls prevent damage or other loss including theft, unauthorized acess, disgruntled employees or others.

Question 15

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?

The sample size would be irrelevant.
The sample size would be higher.
The sample size would be lower.
The sample size would be unaffected.

Answer 15

The sample size would be lower.

If a CPA has decided to reduce control risk, the impact on substantive testing sample size if all other factors remain constant, the sample size would be lower.

The higher the control risk is, the larger the sample size needs to be because there are expected to be more errors in the population. Therefore, the lower the control risk is, the smaller the sample size needs to be because there are expected to be fewer errors in the population.

Question 16

Three types of IT controls are

Require applications to be adequately tested before use, backup of files and control access to appropriate users
Require backup of files, adequate documentation and printer logs
Control access to appropriate users, application controls and decision trees
Adequate documentation, application controls and local area networks

Answer 16

Require applications to be adequately tested before use, backup of files and control access to appropriate users

Requiring applications to be adequately tested before use, backup of files, control access to appropriate users, adequate documentation, and application controls are all examples of IT controls. Printer logs, decision trees and local area networks are not.

Question 17

One of the primary purposes of a generalized computer audit program is to allow the auditor to do which of the following?

Test the logic of computer programs used in the client’s electronic data processing systems.
Independently process client electronic data processing records.
Test the logic of computer programs used in the client’s HR systems.
Use the client’s employees to perform routine audit checks of the electronic data processing records that otherwise would be done by the auditor’s staff accountants.

Answer 17

Independently process client electronic data processing records.

The primary use of a generalized computer audit program is to allow the auditor to independently process and verify client electronic data processing records.

Question 18

An independent auditor is looking at accounts receivable. More specifically, the auditor seeks to determine whether appropriate steps are taken when the company chooses to write off an account as uncollectible. The auditor expects errors to be made in 2 percent of these cases. The auditor can tolerate a rate as high as 5 percent. Based on these judgments, an appropriate sample size of 140 is computed. Which of the following statements is true?

If the expected rate changes to 1 percent, the sample size will be smaller.
If the tolerable rate changes to 4 percent, the sample size will be smaller.
Judgments cannot be used in a properly planned statistical sampling test.
This is an example of a variables sampling plan.

Answer 18

If the expected rate changes to 1 percent, the sample size will be smaller.

Judgments such as the expected error rate and the maximum tolerable rate are necessary to form the basis for a statistical sampling test. Since an error rate is being estimated, this testing falls under sampling for attributes. Sampling for variables attempts to estimate a total such as an account balance. Sample size varies directly with the expected error rate. Thus, the more expected errors, the larger the sample size, and the less expected errors, the smaller the sample size. Sample size varies inversely with the tolerable error rate. The larger the rate that you can tolerate, the smaller the sample size will be. The smaller the rate you can tolerate, the larger the sample size will be.

Question 19

Three types of system documentation used by auditors and analysts are

Data Flow Diagrams, System Flowcharts and Entity Relationship Diagrams
Program Flowcharts, System Flowcharts and Process Flow Diagrams
Swim Lanes, Gantt Charts and PERT Charts
Run Charts, Error Logs and System Cycle Time Charts

Answer 19

Data Flow Diagrams, System Flowcharts and Entity Relationship Diagrams

Auditors and analysts document information systems to understand, explain, and improve complex business processes and operations. Three main types of system documentation used by auditors and analysts are (a) Data Flow Diagrams (DFDs) that illustrate the system components and functions, data flows among the components and sources, destinations and storage of the data; (b) System Flowcharts that illustrate Informational Processes (such as logic flows, inputs, outputs, data storage), Operational Processes (such as physical flows) and (c) Entity Relationship Diagrams that illustrate the system’s key entities and the relationships among those entities.

Question 20

In a probability-proportional-to-size sampling interval of $5,000, 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 error of this sample would be

$1,000
$2,000
$4,000
$5,000

Answer 20

$2,000

The requirement is to determine the projected error of misstatement of a PPS sample with a sampling interval of $5,000, when the auditor has discovered a recorded amount ($10,000) in excess of the sampling interval ($5,000). When an account recorded amount exceeds the sampling error, the projected error equals the actual misstatement, in this case, $2,000 ($10,000 - $8,000).

Question 21

The use of ratio estimation sampling technique is most effective when

The calculated audit amounts are approximately proportional to the client’s book amounts.
A relative small number of differences exist in the population.
Estimating populations whose records consist of quantities but not book values.
Large overstatement differences and large understatement differences exist in the population.

Answer 21

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

When audit differences are approximately proportional to account size the standard deviation of the ratio is small and this results in a relatively small required sample size.

Question 22

If all other factors specified in a sampling plan remain constant, changing the estimated occurrence rate from 3% to 5% would cause the required sample size to

Increase.
Decrease.
Remain the same.
Indeterminable.

Answer 22

Increase.

Increasing the estimated occurrence rate will directly increase the sample size, all other factors remaining the same.

Question 23

Jim, CPA decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted random sampling is to

Allow the auditor to emphasize larger items from the population.
Reduce as much as possible the degree of variability in the population.
Give every item in the population an equal chance of being included in the sample.
Allow the person selecting the sample to use personal judgment in deciding which elements should be included in the sample.

Answer 23

Allow the auditor to emphasize larger items from the population.

Stratification enables the auditor to emphasize certain population items and deemphasize others. Stratified sampling is used to minimize the effect on sample size of the variation within the population.

Question 24

Which of the following functions is responsible for implementing, debugging and modifying software?

Systems Analyst
Database Administrator
Systems Programmer
Applications Programmer

Answer 24

Systems Programmer

The systems programmer is responsible implementing, modifying and debugging the software required to interface with the hardware. Examples include but are not limited to the operating systems, telecommunications monitoring and database management systems.

Question 25

Analytical procedures in which current financial statements are compared with budgets or previous statements are primarily intended to determine the Adequacy of financial statement disclosure. Existence of specific errors or omissions. Overall reasonableness of statement contents. Use of an erroneous cutoff date.

Answer 25

Overall reasonableness of statement contents. Adequacy of financial statement disclosure. Analytical procedures have to do with the relationship among information. Analytical procedures will not determine the adequacy of financial statement disclosures. Existence of specific errors or omissions. Analytical procedures have to do with the relationship among information, not the existence of specific errors or omissions. Use of an erroneous cutoff date. Analytical procedures have to do with the relationship among data. Analytical procedures will not help detect the use of an erroneous cutoff date. Overall reasonableness of statement contents. Analytical procedures provide internal auditors with an efficient and effective means of assessing and evaluating information collected in an engagement. Analytical procedures are useful in identifying, among other things, differences that are not expected, the absence of differences when they are expected, potential errors, potential irregularities or illegal acts, or other unusual or nonrecurring transactions or events. A comparison of current financial statements with budgets will help the internal auditor determine the overall reasonableness of the statement information.

Question 26

Which of the following would NOT be considered an analytical procedure? Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. Developing the expected current-year sales based on the sales trend of the prior five years. Computing accounts receivable turnover by dividing credit sales by the average net receivable and comparing it to prior periods. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.

Answer 26

Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data, and involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Projecting error rates based on sample results relates more to tests of controls, rather than to analytical procedures. REFERENCE

Question 27

In a probability-proportional-to-size sample with a sampling interval of $5,000, 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 error of this sample would be $1,000 $2,000 $4,000 $5,000

Answer 27

$2,000 The answer $2,000 is correct since, when an account's recorded amount exceeds the sampling interval ($5,000), the projected error equals the actual misstatement, here $2,000 ($10,000 - $8,000).

Question 28

Which of the following statements is correct concerning statistical sampling in tests of controls? There is an inverse relationship between the expected population deviation rate and the sample size. As the population size increases, the sample size should increase proportionately. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate. All of the above are correct.

Answer 28

Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate. Auditing literature states that in assessing the tolerable rate of deviations, the auditor should consider that, while deviations from pertinent control structure policies or procedures increase the risk of material misstatements in the accounting records, such deviations do not necessarily result in misstatements. Deviations would result in misstatements in the accounting records only if the deviations and the misstatements occurred on the same transactions.

Question 29

An auditor is assessing control risk in connection with a company’s payroll system. Two employees are supposed to sign every authorization of a payroll change. The auditors want to estimate how often the proper procedure is not followed. Which of the following statements is true? Variables sampling is most likely to be used. Mean per unit sampling is most likely to be used. Probability proportional to size sampling is most likely to be used. Attribute sampling is most likely to be used.

Answer 29

Attribute sampling is most likely to be used. Variables sampling is used when an amount (such as a dollar figure) is being estimated. Mean-per-unit and probability-proportional-to-size sampling are simply specific types of variables sampling. In contrast, attribute sampling estimates a percentage, often an error rate. In this question, the auditor wants to know the error rate for this particular procedure. Attribute sampling is used for that purposes.

Question 30

Invalid, incomplete, or inaccurate input data, data processing, updating of master file or creation of output is An example of risk related to the Security principle An example of risk related to the Availability principle An example of risk related to the Processing Integrity principle An example of risk related to the Online Privacy principle

Answer 30

An example of risk related to the Processing Integrity principle The Processing Integrity principle of the AICPA's Trust Services Framework requires that the system processing is complete, accurate, timely and authorized.

Question 31

Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling The sampling distribution should approximate the normal distribution. Overstated units have a lower probability of sample selection than units that are understated. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The sample interval is calculated by dividing the number of physical units in the population by the sample size.

Answer 31

The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. 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.

Question 32

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods Afford greater assurance than a nonstatistical sample of equal size. Provide an objective basis for quantitatively evaluating sample risk. Eliminate the need to use judgment in the selection of the sample. Reduce the sampling risk to zero.

Answer 32

Provide an objective basis for quantitatively evaluating sample risk. When sampling, the auditor runs sampling risk, which is the risk that the sample is not representative of the population. If the sample is not representative, the auditor may reach incorrect conclusions about the population. Statistical sampling, which is based on the laws of probability, can quantitatively measure the sampling risk. This allowance for sampling risk can then provide the auditor with an objective basis for evaluating sample results. A nonstatistical sample is selected based upon an auditor's judgment and experience.

Question 33

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should Be related to the auditor's business risk. Not be adjusted for qualitative factors. Be related to preliminary judgments about materiality levels. Not be changed during the audit process.

Answer 33

Be related to preliminary judgments about materiality levels. The consideration of tolerable misstatement is related to preliminary judgment in a manner such that when the auditor's preliminary judgment about the tolerable misstatement levels for accounts or transaction types are combined for the entire audit plan, the preliminary judgments about materiality levels for the financial statements are not exceeded.

Question 34

Which of the following is an example of a tool used by a Systems Analyst? PERT Chart Gantt Chart Systems Flowchart Decision Tree

Answer 34

Systems Flowchart The systems analyst analyzes the user environment and requirements and may recommend changes to the current system, the purchase of a new system or design a new system. The analyst is responsible for ensuring programming and that end user needs are met. A systems flowchart is a tool or diagram used by the systems analyst to define system requirements.

Question 35

The sampling unit in the tests of controls pertaining to the existence of payroll transactions ordinarily is a(n) Clock card or time ticket. Employee Form W-2. Employee personnel record. Payroll register entry.

Answer 35

Payroll register entry. In testing existence or occurrence, the auditor normally begins with a recorded transaction and then seeks adequate evidence that the event took place. Here, the recorded event is the recognition of salary which is entered into the payroll register. The auditor takes a sample of those events and then seeks evidence that they did exist or occur.

Question 36

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to Eliminate the risk of nonsampling error. Reduce the level of audit risk and materiality to a relatively low amount. Mathematically measure the sufficiency of the audit evidence obtained. Minimize the failure to detect errors and fraud.

Answer 36

Mathematically measure the sufficiency of the audit evidence obtained. Both statistical and nonstatistical sampling plans can provide sufficient audit evidence if properly applied. The distinguishing features of statistical sampling methods as opposed to nonstatistical methods is that the user is able to provide a mathematical measurement of the degree of uncertainty that results from examining part of the population.

Question 37

A number of factors influences the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? Greater reliance on analytical review procedures. Greater reliance on internal accounting controls. Smaller measure of tolerable error. Smaller expected frequency of errors.

Answer 37

Smaller measure of tolerable error. There is an inverse relationship between sample size and tolerable error. As the tolerable error is decreased the sample size would increase because of the need to examine more items to discover smaller errors if they exist.

Question 38

Examples of input validation or edit controls include all but the following Preprinted forms, check digits, control., batch and proof totals; hash totals, record counts and limit or reasonable tests Menu driven input, field and validity checks, missing data and field size checks and logic checks Redundant data checks and closed loop verification Segregation controls, physical access controls and hardware and software access controls

Answer 38

Segregation controls, physical access controls and hardware and software access controls Options A, B and C are all examples of input validation or edit controls. Option D lists examples of methods that control access to programs and data.

Question 39

An auditor is performing substantive tests 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? Probability-proportional-to-size. Stop or go. Unstratified mean-per-unit. Ratio estimation.

Answer 39

Ratio estimation. Ratio estimation is used to measure the total estimated error amount in a population. This sampling method is most appropriate when the size of the errors are proportionate to the recorded amounts. Since the auditor is performing tests of pricing and extensions of inventory and the auditor expects numerous errors, the auditor is most interested in estimating the total dollar error and the ratio estimation approach would be the best choice of those listed.

Question 40

It may be easier for an auditor to audit smaller systems because The auditor may be familiar with the software There are fewer tests to run Additional controls are in place There are fewer company personnel with access

Answer 40

The auditor may be familiar with the software The size of a computer system may affect the accounting systems because a firm may purchase software for small systems but develop their own software for larger systems. The auditor may be familiar with the purchased software and the "exception reports" may be standard and well tested. The auditor may not be familiar with "in house" developed software and although exception reports may exist, controls should be tested to a greater extent.

Question 41

Which of the following statements regarding an audit trail is NOT true? The audit trail is a record left by the accounting information system of movements in individual transaction data. This record provides a trail of the processing of transactions and other events. An audit trail does not allow for means to trace back to individual business events from the general ledger. An audit trail may start from the moment data about the event is entered into the system until the final entry is made in the financial statements. The audit trail of a sales transaction may enable the tracing of the movement in data concerning the transaction from the time the order is placed by the customer until the time the payment data is entered in the general ledger accounts.

Answer 41

An audit trail does not allow for means to trace back to individual business events from the general ledger. The audit trail is a record left by the accounting information system of movements in individual transaction data. This record, in the form of references to the processing of the data, provides a trail of the processing of transactions and other events entered into by the entity. Note that while some accounting information systems provide a visible and complete audit trail, others may provide an invisible and/or incomplete trail. Depending on the accounting information system, the trail may start from the moment data about the event is first captured within the system to the time of its ultimate disposition in the financial statements. For example, the audit trail of a sales transaction may enable the tracing of the movement in data concerning the transaction from the time the order is placed by the customer until the time the transaction data is included in the appropriate general ledger accounts. An audit trail should allow for a means to trace back to individual business events from the general ledger. An auditor may follow the audit trail of a transaction as part of a systems "walk through".

Question 42

For which of the following would the auditor most likely use attribute sampling? Selection of accounts receivable for the confirmation of account balances. Inspecting employee time cards for the proper approval by supervisors. Making an independent estimate of the amount if FIFO inventory. Examining invoices to support the acquisition of capital assets.

Answer 42

Inspecting employee time cards for the proper approval by supervisors. The auditor will most likely use attribute sampling for inspecting employee time cards for the proper approval by supervisors. Attribute sampling is used to estimate the percent of items in a population containing a characteristic or attribute of interest. Typically, deviations from client's established controls, misstatements in populations of transaction data and populations of account balance details.

Question 43

Which of the following best describes the distinguishing feature of statistical sampling? It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data. It allows the auditor to have the same degree of confidence as with judgment sampling, but with substantially less work. It allows the auditor to substitute sampling techniques for audit judgment. It provides for measuring the actual misstatement in financial statements in terms of reliability and precision.

Answer 43

It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data. The distinguishing feature of statistical sampling is that it measures the sampling risk associated with the sampling procedure, while nonstatistical sampling does not quantify sample risk.

Question 44

Which of the following best illustrates the concept of sampling risk? An auditor may fail to recognize errors in the documents from the sample. An auditor may select procedures that are not appropriate to achieve the specific objective. A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest. The documents related to the chosen sample may not be available to the auditor for inspection.

Answer 44

A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest. Sampling risk is the risk that an auditor reaches an incorrect conclusion because the sample is not representative of the population. Sampling risk is an inherent part of sampling that results from testing less than the entire population.

Question 45

Which of the following most likely represents a weakness in the internal control structure of an EDP system? The control clerk establishes control over data received by the EDP department and reconciles control totals after processing. The systems programmer designs the operating and control functions of programs and participates in testing operating systems. The systems analyst reviews output and controls the distribution of output from the EDP department. The accounts payable clerk prepares data for computer processing and enters the data into the computer.

Answer 45

The systems analyst reviews output and controls the distribution of output from the EDP department. A data control group should review output and control the distribution of output from the EDP department. The systems analyst designs and evaluates systems and prepares program specifications for programmers. These two functions should be separated.

Question 46

Which of the following would most likely be an advantage in using classical variable sampling rather than probability-proportional-to-size sampling? An estimation of the standard deviation of the population's recorded amounts are not required. The auditor rarely needs the assistance of a computer program to design an efficient sample. Inclusion of zero and negative balances generally does not require special design consideration. Any amount that is individually significant is automatically identified and selected.

Answer 46

Inclusion of zero and negative balances generally does not require special design consideration. Inclusion of zero and negative balances generally does not require special design consideration when using classical sampling, while it does when using probability-proportional-to-size sampling.

Question 47

Jones, a CPA, believes the industry-wide occurrence rate of client billing errors is 3% and has established a maximum acceptable occurrence rate of 5%. In the review of client invoices, Jones should use Discovery sampling. Attribute sampling. Stratified sampling. Variable sampling.

Answer 47

Attribute sampling. The sampling plan generally used to determine the rate of deviation within an acceptable range is acceptance sampling, which is a method of attribute sampling. Discovery sampling is another method of attribute sampling used to detect a single deviation when the expected error rate is near zero. Stratified sampling is a sample selection method that divides a population into subpopulations that have similar characteristics to reduce the effects of variances within the population. Variable sampling is a used in substantive audit tests to test for dollar (or quantity) of an account balance, not error rates.

Question 48

The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk? The auditor selecting inappropriate auditing procedures. The internal control being more effective than the auditor believes. The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated. The internal control not being as effective as the auditor believes.

Answer 48

The auditor selecting inappropriate auditing procedures. AS 2315.11 Nonsampling risk includes all the aspects of audit risk that are not due to sampling. An auditor may apply a procedure to all transactions or balances and still fail to detect a material misstatement. Nonsampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective. For example, confirming recorded receivables cannot be relied on to reveal unrecorded receivables. Nonsampling risk also arises because the auditor may fail to recognize misstatements included in documents that he examines, which would make that procedure ineffective even if he were to examine all items. Nonsampling risk can be reduced to a negligible level through such factors as adequate planning and supervision and proper conduct of a firm's audit practice.

Question 49

The Atlantis Corporation is currently being audited by Finch and Turner CPAs. The auditors are attempting to assess the control risk associated with the company’s accounts receivable system before beginning substantive testing. During the current year, 500,000 sales invoices were created and recorded by the company’s accounting system. A sample of 600 of these documents is selected randomly and 6 errors discovered. Based on prior audits and an evaluation of the complexity of the tasks involved, the auditors believe that the population contains errors at a rate of 1.5 percent. They have decided to view control risk at an acceptably low level if the population of invoices contained 4.0 percent errors or less. Using statistical sampling techniques applied to the sample of 600 items, an upper deviation, or precision, rate of 3.5 percent was ascertained. What was the allowance for sampling risk? 1. 0 percent 2. 5 percent 3. 5 percent 4. 0 percent

Answer 49

2.5 percent The sample drawn by the auditor found that errors occurred at a rate of 1 percent (6 out of 600). Statistical sampling techniques indicated that the population could actually contain errors at a rate as high as 3.5 percent (its upper rate). The difference between the deviation rate of the sample (1 percent) and the possible upper rate for the population (3.5 percent) is known as the allowance for sampling risk. Here, the allowance is 2.5 percent (3.5 percent minus 1 percent). Statistically, the sample is not expected to be more than 2.5 percent away from the actual population characteristics. Although it is not addressed in this question, the auditor should accept this population as having a reasonably low error rate because the upper deviation rate of the population (3.5 percent) is lower than the auditor’s tolerable deviation rate of 4.0 percent. Based on just this one test, control risk appears to be acceptably low.

Question 50

Which function should maintain documentation as to the details of an applications program? Operations Applications Programmer Database Administrator End User

Answer 50

Applications Programmer The Applications Programmer is responsible for writing testing and debugging applications software. The Operator mounts tapes, supervises operations on a console, accepts inputs and distributes outputs. The Operator should have documentation available to run programs but is not responsible for detailed program information. The Database Administrator or DBA is responsible for maintaining the database and restricting access to the database to authorized users only. The End User may be responsible for the data but not the programs that run the data.

Question 51

Which of the following statistical selection techniques is least desirable for use by an auditor? Systematic selection. Stratified selection. Block selection. Sequential selection.

Answer 51

Block selection. Only block sampling does not meet the requirements for a "representative" sample. It is a system of sampling in which the auditor chooses segments of sequential transactions.

Question 52

A company has asked one of its computer programmers to create a new program to compute and print payroll checks for each of its 8,000 hourly employees. In writing this program, the programmer includes a step where an error report must be produced for any employee who is to receive payment based on a rate that is below the federal minimum wage rate. What is this type of control called? Legality implementation control Minimal control Limit test Pay incentive test

Answer 52

Legality implementation control In writing computer programs, programmers often insert high and low barriers to make sure that any errors are caught if they are especially large. These controls are referred to as limit tests because they place limits around the amounts that can be entered at certain points. Therefore, the programmer might well require that additional processing would be necessary if a paycheck was (for example) above $50.00 per hour or below the minimum federal wage rate. Those would be limit tests.

Question 53

Which of the following audit procedures most likely will involve sampling? Risk assessment procedures performed to obtain an understanding of internal control. Tests of automated application controls when effective information technology general controls are present. Analyses of controls to determine the appropriate segregation of duties. Testing of process for approval of credit to customers for sales on account.

Answer 53

Testing of process for approval of credit to customers for sales on account. Testing of process for approval of credit to customers for sales on account is the audit procedures that will most likely involve sampling. Sampling is where the auditor tests only a portion of existing items and then draws a conclusion about the population as a whole. Sampling is an effective and efficient method of testing account balances or groups of transactions.

Question 54

Which of the following statements is correct about sample size in statistical sampling when testing internal controls? The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. As the likely rate of deviation decreases, the auditor should increase the planned sample size. The allowable risk of assessing control risk too low has no effect on the planned sample size. Of all the factors to be considered, the population size has the greatest effect on the sample size.

Answer 54

The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. An increase in the tolerable rate of deviation would allow a reduction in sample size. As the likely rate of deviation decreases, the auditor may decrease the planned sample size. The allowable risk of assessing control risk too low has an inverse effect on sample size. Of all the factors to be considered, population size has the least effect on the sample size.

Question 55

The use of ratio estimation sampling technique to establish dollar amounts is inappropriate when The book value is known and corresponds to the sum of all the individual book values. A book value for each sample item is unknown. There are some observed differences between audited values and book values. The audited values are nearly proportional to the book values.

Answer 55

A book value for each sample item is unknown. Ratio estimation sampling technique is based on comparing the ratio of the book value to the audited value of the sampled items; this method can not be used when there is no book value with which to make the comparison.

Question 56

The audit firm of Jennifer and Lawrence is gathering evidence about the possibility of material misstatements in a client company’s accounts receivable. The company has 10,000 accounts receivable that the CPAs have split into two groups: one for balances under $500 and another for balances of $500 or more. The CPAs tested 5 percent of the first group and 20 percent of the second. Which of the following statements is true? The audit firm cannot split accounts receivable in this way because the balance must be examined as a whole. The audit firm has stratified the population in hopes of reducing the necessary sample size. The audit firm can split the group as it pleases but the same number of items must be selected from each group. The audit firm can split the group as it pleases but must sample at least 30 percent of the total number of items.

Answer 56

The audit firm has stratified the population in hopes of reducing the necessary sample size. One of the problems in doing statistical sampling is that sample size is affected by the variability of the items in the population. Thus, a lot of variability may necessitate a very large sample size (requiring a large amount of cost and effort). That problem can be alleviated somewhat by dividing a population into several smaller populations based on dollar amounts – a process known as stratification. The variability of each of these smaller populations is reduced so that the overall sampling size can be smaller saving time and cost.

Question 57

Turner Corp. serves a wide spectrum of business clients, from sole proprietorships to multinational corporations. At present, Susan Wiggins, CPA is auditing the company’s high standard deviation accounts receivable balance and wishes to minimize the required sample size. Which of the following sampling methods is she LEAST likely to use? Probability proportional to size. Cumulative monetary amount. Stratified. Attribute.

Answer 57

Attribute. Standard deviation is a measure of variability, with higher variability populations typically requiring larger sample sizes. Probability proportional to size, cumulative monetary amount, and stratified are all types of variable sampling that can help mitigate a high variability population. A population’s standard deviation is irrelevant to attribute sample size which is normally used in auditing to estimate an error rate or the occurrence rate of some other attribute (rather than the size of an account balance).

Question 58

Which of the following is NOT a disadvantage of monetary unit sampling in comparison to classical variable sampling? Effectiveness of the sampling is reduced for understated accounts. Effectiveness of the sampling is reduced for zero balance or negative balance accounts. Highly variable account balances might require larger sample sizes. Numerous misstatements in the population might require larger sample sizes.

Answer 58

Highly variable account balances might require larger sample sizes. Monetary unit sampling (also referred to as dollar unit, cumulative monetary amount, or probability proportional to size sampling) is more likely than classical variable sampling to select high balance accounts. This results in smaller sample sizes when some accounts are much larger than others. That is a primary advantage. However, the evaluation of understated, zero, or negative account balances using this method requires special consideration. Numerous misstatements normally cause a larger sample size for all methods of sampling.

Question 59

Auditors often utilize sampling methods when performing tests of controls. Which of the following sampling methods is most useful when testing controls? Attribute sampling. Variables sampling. Unrestricted random sampling with replacement. Stratified random sampling.

Answer 59

Attribute sampling. In performing tests of controls to evaluate the effectiveness of internal control policies and procedures, the auditor is frequently interested in determining the rate of deviation from prescribed internal control policies and procedures. The sampling plan generally used in this situation is attribute sampling. REFERENCE

Question 60

Which of the following factors determine the initial sample size for audit sampling Tolerable exception rate. Population size. Estimated population exception rate All of the above are correct.

Answer 60

All of the above are correct. The initial sample size for audit sampling is determined by four factors: population size; the tolerable exception rate; the auditor's measure of sampling risk, defined as the acceptable risk of assessing control risk too low (ARACR); and the estimated population exception rate. Population size is not nearly as significant a factor as the others and typically can be ignored, especially for large populations.