Chapter 9

Front 1

Define: Sampling Risk

Back 1

Term: Risk that the auditors' conclusion based on a sample might be different from the conclusion they would reach if they were to examine the entire population.

Front 2

Sampling ___ is reduced by an increasing size of sample.

Back 2

Risk

Front 3

Define: Nonsampling Risk

Back 3

Term: Risk that the auditors will draw an erroneous conclusion for any reason not related to audit sampling.

Front 4

T/F: Stratification of the population generally results in a more efficient sampling plan.

Back 4

True.

Front 5

T/F: Discovery sampling is equivalent to an attributes sampling plan with a specified expected deviation rate of 0 percent.

Back 5

True.

Front 6

T/F: Increases in the number of deviations in an attributes sample results in an increase in the achieved upper deviation rate of the attributes sample.

Back 6

True

Front 7

T/F: The definition of a "deviation" for a test of a control should include only those deviations that result in misstatements in the financial statements.

Back 7

False

Front 8

T/F: Statistical sampling cannot be used to test all control activities.

Back 8

True

Front 9

T/F: Using ratio and difference estimation for a sample is an example of a dual purpose test.

Back 9

False

Front 10

T/F: Increases in the tolerable misstatement result in a decreased sample size when using mean-per-unit estimation.

Back 10

True

Front 11

The mean book value of the items included in a mean-per-unit sample is not directly used in the evaluation of sample results.

Back 11

True

Front 12

T/F: When evaluating the results of a variables sampling plan, the projected misstatement is calculated and compared to the tolerable misstatement.

Back 12

True

Front 13

T/F: Auditors project the misstatements found in the sample to the population when using statistical sampling, but not when using nonstatistical sampling.

Back 13

False

Front 14

If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude?
A. Since the projected misstatement is less than the tolerable misstatement, the account is not misstated.
B. Since the projected misstatement is less than the tolerable misstatement, the account is misstated.
C. The risk is high that the account is materially misstated.
D. The analysis has been improperly performed since the projected misstatement is unequal to the tolerable misstatement.

Back 14

C

Front 15

A dual purpose test simultaneously.
A. Addresses two different accounts.
B. Functions as a substantive test and as a test of controls.
C. Functions as an analytical procedure and a substantive test.
D. Substantiates an ending balance and the transactions making up the balance.

Back 15

B

Front 16

If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.

Back 16

A

Front 17

If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.

Back 17

A

Front 18

An increase in the tolerable misstatement has what effect on the planned allowance for sampling risk?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

Back 18

A

Front 19

Which of the following is not generally used for selecting samples?
A. Random number tables.
B. Random number generators.
C. Physical representation numbers.
D. Systematic selection.

Back 19

C

Front 20

. In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this year's sample size compared to last year's sample size?
A. This year's sample is larger than last year's sample.
B. This year's sample is smaller than last year's sample.
C. This year's sample is equal to last year's sample.
D. This year's sample is indeterminate in relation to last year's sample.

Back 20

A

Front 21

The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures:
A. Need not consider the risk of assessing control risk too low.
B. Has committed a nonsampling error.
C. Will have to use discovery sampling techniques to evaluate the results.
D. Should compare the deviation rate of the sample to the tolerable rate.

Back 21

D

Front 22

When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate?
A. Attributes.
B. Ratio.
C. Stratified.
D. Variables.

Back 22

A

Front 23

Which of the following statistical sampling techniques involves taking samples in a series of stages?
A. Systematic sampling.
B. Sequential sampling.
C. Continuous sampling.
D. Multiple location sampling.

Back 23

B

Front 24

Which of the following is generally not true about statistical sampling as compared to nonstatistical sampling?
A. Statistical samples are more representative of the population.
B. Statistical sample plans involve additional costs of evaluation.
C. Statistical sampling allows a more objective evaluation of sample results.
D. Statistical sampling may assist the auditors in designing more efficient samples.

Back 24

A

Front 25

When using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample?
A. Sample size.
B. Risk of assessing control risk too low.
C. Number of deviations in the population.
D. Number of deviations found in the sample.

Back 25

C

Front 26

When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that:
A. Designing efficient samples is more difficult.
B. The costs of training staff may be higher.
C. Sampling without replacement must be used.
D. Objectively evaluating results is impossible.

Back 26

B

Front 27

Changing from a sampling plan using random selection with replacement to random selection without replacement has what effect on the required sample size?
A. Increases.
B. Decreases
C. No effect.
D. An indeterminate effect.

Back 27

B

Front 28

When the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the expected rate of deviations in the sample?
A. Exceed.
B. Equal.
C. Be less than.
D. Indefinite.

Back 28

A

Front 29

Increases in the planned allowance for sampling risk have what effect on required sample size?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

Back 29

B

Front 30

When using sampling for tests of controls, which of the following audit consequences may follow?
A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low.
B. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too high.
C. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the audit is likely to be faulty because of reduced substantive tests.
D. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, control risk will be assessed too low.

Back 30

A

Front 31

The auditors expect a population deviation rate of billing errors of two percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:
A. Attributes sampling.
B. Stratified sequential sampling.
C. Discovery sampling.
D. None, as sampling does not seem appropriate in this situation.

Back 31

A

Front 32

The auditors expect a population deviation rate of billing errors of eight percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:
A. Attributes sampling.
B. Stratified random sampling.
C. Variables sampling.
D. None, as sampling does not seem appropriate in this situation.

Back 32

D

Front 33

Which of the following may be used to reduce the risk of nonsampling errors?
A. Increasing the size of audit samples.
B. Stratifying audit samples.
C. Adequately planning audit samples.
D. Using statistical sampling techniques.

Back 33

C

Front 34

Which of the following types of risk is of critical importance to auditors in performing tests of controls?
A. The risk of assessing control risk too low.
B. The risk of assessing control risk too high.
C. The risk of incorrect acceptance.
D. The risk of incorrect rejection.

Back 34

A

Front 35

The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a:
A. Statistical error.
B. Sampling misstatement.
C. Standard error of the mean.
D. Nonsampling error.

Back 35

D

Front 36

What effect does obtaining a sample with a standard deviation larger than that estimated during planning have on the adjusted allowance for sampling risk?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

Back 36

B

Front 37

Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests?
A. When the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the population is not misstated.
B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement.
C. When the projected misstatement is equal to zero, the auditors may conclude with certainty that no misstatements exist in the account.
D. When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will generally conclude that the population is materially misstated.

Back 37

B

Front 38

The auditors have audited a sample with a standard deviation of audited values larger than they had originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level without increasing the size of the sample, which of the following statements is correct?
A. The adjusted allowance for sampling risk will be smaller than had been planned.
B. The adjusted allowance for sampling risk will be larger than had been planned.
C. The risk of incorrect rejection will necessarily decrease.
D. The size of the population must be decreased.

Back 38

A

Front 39

In the past, the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small misstatements). Which of the following techniques is most likely to be efficient?
A. Mean-per-unit estimation.
B. Ratio estimation.
C. Difference estimation.
D. Sequential sampling estimation.

Back 39

B

Front 40

Which of the following statements is correct concerning the use of nonstatistical sampling for substantive tests?
A. Its use is generally acceptable only for populations with an immaterial book value.
B. It requires the use of structured sample size selection techniques to be acceptable.
C. It may be especially useful in circumstances in which the combination of inherent and control risk is at the maximum level.
D. Results will be projected to the population.

Back 40

D

Front 41

Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests?
A. The projected misstatement exceeds the tolerable misstatement.
B. The allowance for sampling risk exceeds the projected misstatement.
C. The risk of incorrect acceptance exceeds the risk of incorrect rejection.
D. The tolerable misstatement exceeds the sample net misstatement.

Back 41

A

Front 42

During the final planning of the accounts receivable program a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit program. What would be the impact of this change?
A. A decrease in population standard deviation.
B. An increase in sample standard deviation.
C. An increase in required sample size.
D. A decrease in the required sample size.

Back 42

D

Front 43

Which of the following is an advantage of systematic selection over random number selection?
A. It provides a stronger basis for statistical conclusions.
B. It enables the auditor to use the more efficient "sampling with replacement" tables.
C. There may be correlation between the location of items in the population, the feature of sampling interest, and the sampling interval.
D. It does not require establishment of correspondence between random numbers and items in the population.

Back 43

D

Front 44

Statistical sampling generally may be applied to test internal control when the client's internal control procedures:
A. Depend primarily on appropriate segregation of duties.
B. Are carefully reduced to writing and are included in client accounting manuals.
C. Leave an audit trail in the form of evidence of compliance.
D. Enable the detection of material fraud in the accounting records.

Back 44

C

Front 45

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

Back 45

A

Front 46

To determine sample size in an attribute sampling application, what must be specified?
A. Population mean, expected error rate, allowance for sampling risk.
B. Allowance for sampling risk, risk of assessing control risk too low, standard deviation.
C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate.
D. Population mean, standard deviation, allowance for sampling risk.

Back 46

C

Front 47

The tolerable deviation rate in sampling for tests of controls is:
A. Used to determine the probability of the auditor's conclusion based upon reliance factors.
B. The probability that the financial statements are not materially in error.
C. A measure of the reliability of substantive tests.
D. The rate the auditor will tolerate without modifying the planned assessment of control risk.

Back 47

D

Front 48

In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of:
A. Projected misstatement.
B. Sampling error.
C. Standard error.
D. Nonsampling error.

Back 48

D

Front 49

An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage. In using statistical sampling, the auditor's best course of action is to:
A. Eliminate any of the items known to be subject to unusually large amounts of shrinkage.
B. Increase the sample size to lessen the effect of the items subject to unusually large amounts of shrinkage.
C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage are reviewed separately.
D. Continue to draw new samples until a sample is drawn which includes none of the items known to be subject to large amounts of shrinkage.

Back 49

C

Front 50

If all other factors specified in an attributes sampling plan remain constant, changing the specified tolerable rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to 7% would cause the required sample size to:
A. Increase.
B. Remain the same.
C. Decrease.
D. Change by 4%.

Back 50

C

Front 51

Which of the following factors does an auditor need to consider in planning a particular audit sample for a test of control?
A. Number of items in the population.
B. Total dollar amount of the items to be sampled.
C. Acceptable level of risk of assessing control risk too low.
D. Tolerable misstatement.

Back 51

C

Front 52

When using a statistical sampling plan, the auditors would probably require a smaller sample if the:
A. Population increases.
B. Desired allowance for sampling risk decreases.
C. Desired risk of incorrect acceptance increases.
D. Expected deviation rate increases.

Back 52

C

Front 53

Which of the following statements is correct concerning statistical sampling in tests of controls?
A. The population size has little effect on determining sample size except for very small populations.
B. The expected population deviation rate has little or no effect on determining sample size except for very small populations.
C. As the population size doubles, the sample size also should double.
D. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.

Back 53

C

Front 54

An advantage of using statistical sampling techniques is that such techniques:
A. Mathematically measure risk.
B. Eliminate the need for judgmental decisions.
C. Define the values of allowance for sampling risk and tolerable misstatement required to provide audit satisfaction.
D. Have been established in the courts to be superior to judgmental sampling.

Back 54

A

Front 55

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:
A. Efficiency of the audit.
B. Effectiveness of the audit.
C. Selection of the sample.
D. Audit quality controls.

Back 55

A

Front 56

When performing a test of a control over cash disbursements, a CPA 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. Must be recorded in a systematic pattern before the sample can be drawn.
B. May occur in a systematic pattern and destroy the sample randomness.
C. May systematically occur more than once in the sample.
D. Must be systematically replaced in the population after sampling.

Back 56

B

Front 57

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. Incorrect rejection.
C. Assessing control risk too high.
D. Assessing control risk too low.

Back 57

B

Front 58

An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and:
A. Evaluate the results as if the sample size had been 19.
B. Treat the missing check as a deviation for the purpose of evaluating the sample.
C. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not.
D. Choose another check to replace the missing check in the sample.

Back 58

B

Front 59

There are many kinds of statistical estimates that an auditor may find useful, but basically every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "occurrence rate", respectively, are:
A. Attributes and variable.
B. Variables and attributes.
C. Constants and attributes.
D. Constants and variables.

Back 59

B

Front 60

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

Back 60

A

Front 61

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

Back 61

C

Front 62

Various factors influence 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?
A. Lower assessment of control risk.
B. Greater reliance on analytical procedures.
C. Smaller expected frequency of misstatements.
D. Smaller measure of tolerable misstatement.

Back 62

D

Front 63

An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the:
A. Sample mean.
B. Standard deviation.
C. Standard error of the sample mean.
D. Estimated population total minus the actual population total.

Back 63

B

Front 64

In variables estimation sampling, the sample standard deviation is used to calculate the
A. Point estimate of central tendency.
B. Tainting of the sample interval.
C. Risk of incorrect acceptance.
D. Adjusted allowance for sampling risk.

Back 64

D

Front 65

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

Back 65

B

Front 66

Define the term audit sampling.

Back 66

Audit sampling is performing a test on less than 100 percent of an audit population to make a conclusion about a characteristic of the population.

Front 67

List and explain two advantages of the use of statistical sampling as compared to nonstatistical sampling.

Back 67

Statistical sampling may assist the auditors in (only two required):
• Designing efficient samples.
• Measuring the sufficiency of the evidence obtained.
• Objectively evaluating sample results (measuring sampling risk).