CHAPTER MULTIPLE CHOICE b The application of statistical sampling techniques is least related to which of the following generally accepted auditing standards? a The work is to be adequately planned, and assistants, if any, are to be properly supervised b In all matters relating to the assignment, independence in mental attitude is to be maintained by the auditor or auditors c A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed d Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion about the financial statements under audit b An auditor plans to test 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 (AICPA ADAPTED) b The tolerable rate of deviation for tests of controls necessary to justify a control risk assessment depends primarily on which of the following? a The cause of errors b The extent of reliance to be placed on the procedures c The amount of any substantive errors d The limit used in audits of similar clients (AICPA ADAPTED) b Which of the following sampling methods is most useful to auditors when performing tests of controls? a Discovery sampling b Attribute estimation c Variable sampling d Unrestricted random sampling with replacement (AICPA ADAPTED) c a b c d c Given random sampling, the same sample size, and the same tolerable error for the testing of two unequal populations, the risk of assessing control risk too low on the smaller population is a The same as the risk of assessing control risk too low on the larger population b Higher than the risk of assessing control risk too low on the larger population c Lower than the risk of assessing control risk too low on the larger population d Indeterminable relative to the risk of assessing control risk too low on the larger population (AICPA ADAPTED) An underlying feature of random sampling is that each Stratum of the accounting population be given equal representation in the sample Item in the accounting population be randomly ordered Item in the accounting population should have an opportunity to be selected Item must be systematically selected using replacement (AICPA ADAPTED) 49 a At times, a sample may indicate that the auditor's assessed level of control risk for a given control is reasonable when, in fact, the true compliance rate does not justify the assessed level This situation illustrates the risk of a Assessing control risk too low b Assessing control risk too high c Incorrect precision d Incorrect rejection (AICPA ADAPTED) b a b c d b An auditor examining inventory may appropriately apply sampling for attributes in order to estimate the a Average price of inventory items b Percentage of slow-moving inventory items c Dollar value of inventory d Physical quantity of inventory items (AICPA ADAPTED) b 10 a b c d a 11 If the auditor is concerned that a population may contain exceptions, the determination of a sample size sufficient to include at least one such exception is a characteristic of a Discovery sampling b Variables sampling c Random sampling d Probability-proportional-to-size sampling (AICPA ADAPTED) a 12 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 errors in the documents examined for the chosen sample d The documents related to the chosen sample may not be available for inspection (AICPA ADAPTED) a 13 In attributes estimation, a 10 percent change in which of the following factors normally will have the least effect on the size of the statistical sample? a Population size b Precision interval c Reliability d Standard deviation (AICPA ADAPTED) Which of the following is an element of sampling risk? Choosing an audit procedure that is inconsistent with the audit objective Choosing a sample size that is too small to achieve the sampling objective Failing to detect an error on a document that has been inspected by the auditor Failing to perform audit procedures that are required by the sampling plan (AICPA ADAPTED) The tolerable rate of deviations for a test of controls is generally Lower than the expected rate of errors in the related accounting population Higher than the expected rate of errors in the related accounting records Identical to the expected rate of errors in the related accounting records Unrelated to the expected rate of errors in the related accounting records (AICPA ADAPTED) 50 c 14 If the size of the sample to be used in a particular test of attributes has not been determined by utilizing statistical concepts but the sample has been chosen in accordance with random selection procedures, a No inferences can be drawn from the sample b The auditor has committed a nonsampling error c The auditor may or may not achieve desired allowance for sampling risk at the desired level of confidence d The auditor will have to evaluate the results by reference to the principles of discovery sampling (AICPA ADAPTED) d 15 In examining cash disbursements, an auditor plans to choose a sample using systematic selection with a random start The primary advantage of such a systematic selection is that population items a That include irregularities will not be overlooked when the auditor exercises compatible reciprocal options b May occur in a systematic pattern, thus making the sample more representative c May occur more than once in a sample d Do not have to be prenumbered in order for the auditor to use the technique (AICPA ADAPTED) d 16 In attributes estimation, which of the following must be known in order to appraise the results of the auditor's sample? a Estimated dollar value of the population b Standard deviation of the values in the population c Actual occurrence rate of the attribute in the population d Sample size (AICPA ADAPTED) a 17 If all other factors specified in a sampling plan remain constant, changing the expected population deviation rate from percent to percent would cause the required sample size to a Increase b Remain the same c Decrease d Become indeterminate (AICPA ADAPTED) b 18 If a selected random number matches the number of a voided voucher, the voucher ordinarily should be replaced by another voucher in the sample if the voucher a Constitutes a deviation b Has been properly voided c Cannot be located d Represents an immaterial dollar amount (AICPA ADAPTED) c 19 a b c d Discovery sampling should be used to estimate whether a population contains Errors of any kind Noncritical errors Critical deviations No errors (AICPA ADAPTED) 51 a 20 Which of the following factors is generally not considered in determining the sample size for a test of controls? a Population size b Tolerable rate c Risk of assessing control risk too low d Expected population deviation rate (AICPA ADAPTED) b 21 Assuming the tolerable deviation rate is percent, the expected population rate is percent, and the allowance for sampling risk is percent, what should an auditor conclude if tests of 100 randomly selected documents reveals deviations? a Accept the sample results as support for assessing control risk below the maximum because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate b Assess control risk at the maximum because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate c Assess control risk at the maximum because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate d Accept the sample results as support for assessing control risk below the maximum because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate (AICPA ADAPTED) SHORT ANSWER Explain the two components of audit risk Answer: Audit risk is a combination of two components: The risk that material errors will occur in the process by which financial statements are developed The risk that the auditor will not detect any material errors that occur Which two aspects of sampling risk are critical in the tests of controls? Explain why Answer: The risk of assessing control risk too high is the risk that a sample deviation rate supports assessing control risk at the maximum when, unknown to the auditor, the true deviation rate in the population would lead the auditor to assess control risk below the maximum The risk of assessing control risk too low is the opposite of assessing control risk too high It is the risk that a sample supports assessing control risk below the maximum when, unknown to the auditor, the true deviation rate in the population supports assessing control risk at the maximum Explain the difference between statistical sampling plans and nonstatistical sampling plans Answer: Statistical sampling plans apply the laws of probability to aid an auditor in designing an efficient sample, in measuring the sufficiency of evidence obtained, and in evaluating the sample results Nonstatistical sampling plans rely exclusively on judgment to determine sample size and to evaluate sample results The one crucial difference between a statistical and nonstatistical sampling application: Statistical sampling plans allow an auditor to measure sampling risk 52 quantitatively; nonstatistical sampling plans not Explain the difference between a deviation and an attribute Answer: An attribute is a characteristic of a control, and a deviation is the absence of an attribute The risk that material errors may occur and remain undetected is influenced by two categories of uncertainties Name and define these two categories of uncertainties Answer: Sampling risk, which arises from the fact that, unknown to the auditor, a sample may not be representative of the population tested Nonsampling risk includes all aspects of audit risk not due to sampling, i.e human error PROBLEMS List and define five commonly used methods of selecting a sample Answer: Random-Number Sampling – Uses computer-generated random numbers to select sampling units from a population Random number sampling is appropriate both for statistical sampling and for nonstatistical sampling Systematic Sampling – Involves selecting every nth item from a population of sequentially ordered items Systematic selection is useful for nonstatistical sampling and can be useful for statistical sampling if the starting point is selected at random Block Sampling – A block sample is a group of items arranged contiguously within a larger grouping of sampling units Haphazard Sampling – Consists of sampling units selected without special reason, but also without conscious bias Haphazard sampling is inappropriate for statistical sampling but may be useful for nonstatistical sampling Stratified Sampling – Involves subdividing populations into homogeneous subgroups or strata, and selecting (and evaluating) separate samples for each subgroup The samples may be selected by random numbers, systemically, in blocks, or haphazardly Stratified sampling is based on the assumption that items in some population strata are more similar to each other than to any other items in the population In evaluating the results of an auditor’s sample, the auditor will calculate the sample deviation rate Please complete the following requirements in respect to the sample deviation rate a Define the sample deviation rate b Explain how an auditor would arrive at the sample deviation rate c Explain how the sample deviation rate is used in determining the maximum population deviation rate Answer: a The sample deviation rate is the auditor’s estimate of the true but unknown population deviation rate b The sample deviation rate is determined as follows: 53 Sample Deviation Rate = Number of Deviations Observed Sample Size c The estimate of the maximum population deviation rate is determined as follows: Maximum Population Deviation Rate = Sample Deviation Rate 54 + Allowance for Sampling Risk ... populations into homogeneous subgroups or strata, and selecting (and evaluating) separate samples for each subgroup The samples may be selected by random numbers, systemically, in blocks, or haphazardly... sample to be used in a particular test of attributes has not been determined by utilizing statistical concepts but the sample has been chosen in accordance with random selection procedures, a No... results by reference to the principles of discovery sampling (AICPA ADAPTED) d 15 In examining cash disbursements, an auditor plans to choose a sample using systematic selection with a random start