CHAPTER MULTIPLE CHOICE a 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 (AICPA ADAPTED) a If the achieved allowance for sampling risk of a statistical sample at a given reliability level is greater than the desired range, this is an indication that the a Standard deviation was larger than expected b Standard deviation was less than expected c Population was larger than expected d Population was smaller than expected (AICPA ADAPTED) c An auditor initially planned to use unrestricted random sampling with replacement when testing accounts receivable Later, the auditor decided to use unrestricted random sampling without replacement As a result only of this decision, the sample size should a Increase b Remain the same c Decrease d Be recalculated using a binomial distribution (AICPA ADAPTED) b In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis? The measure of tolerable error is a b c d a a b c d Large Small Large Small Error frequency is expected to be Low High High Low (AICPA ADAPTED) An advantage of using statistical sampling is that such techniques Mathematically measure risk Eliminate the need for judgmental decision Define the value of reliability necessary to provide audit assurance Have been established in the courts to be superior to nonstatistical sampling (AICPA ADAPTED) 55 c In comparison with probability-proportional-to-size (PPS) sampling, which of the following is an advantage of classical variables sampling in auditing? a If no errors are expected, classical variables sampling usually results in a smaller sample size than PPS sampling b A classical variables sample can be designed more easily and sample selection can begin before the complete population is available c If there are many individual differences between recorded and audited amounts in the population, classical variables sampling may result in a smaller sample size d Classical variables sampling automatically results in a stratified sample because items are selected in proportion to their dollar amounts d a b c d c In assessing the risk of incorrect acceptance, an auditor should consider each of the following except a Audit risk b The risk that internal control structure fails to detect material errors that occur c Tolerable error d The risk that analytical procedures and other tests fail to detect material errors that occur and that are not detected by internal control a An auditor is evaluating the results of a variables sampling plan Which of the following is not relevant to the auditor's judgment about the sample? a Management's explanations for why errors in the sample occurred b Projecting the sample error to the population c Considering the effects of sampling risk d Qualitative information that lends insight into errors found b 10 Several conditions must be met before an auditor applies either difference or ratio estimation Which of the following is not one of these conditions? a Each population item must have a recorded book value b The auditor must not expect understatement errors c Total population book value must be known and must correspond to the sum of all individual population items d Expected differences between audited and recorded book values must not be too rare a 11 An auditor is applying a difference estimation sampling plan Assuming the risk of incorrect rejection is 10, and the risk of incorrect acceptance is 05, what is the ratio of desired allowance for sampling risk to tolerable error? a .500 b .605 c .561 d Not determinable from the facts given In a variables sampling plan, an auditor must generally consider each of the following except Variation within the population Acceptable risk of incorrect acceptance Tolerable error Population size 56 b 12 An auditor is applying a difference estimation sampling plan Assuming a 10 acceptable risk of incorrect rejection, 05 acceptable risk of incorrect acceptance, and $100,000 tolerable error, what is the auditor's desired allowance for sampling risk? a $ 25,000 b $ 50,000 c $100,000 d Not determinable from the facts given b 13 An auditor is applying a difference estimation sampling plan Recorded book value is $1,000,000, and the auditor estimates a $75,000 understatement difference In this case, the auditor's estimated population value is a $925,000 b $1,075,000 c $1,000,000 d Not determinable from the facts given a 14 An auditor is applying mean-per-unit estimation Assuming estimated audited value is $950,000, the achieved allowance for sampling risk is $75,000, and recorded book value is $925,000, what is the auditor's conclusion? a Recorded book value is not likely misstated by a material amount b Recorded book value is misstated by a material amount c Recorded book value is not likely misstated by a material amount, assuming the client records an adjusting journal entry equal to the allowance for sampling risk d There is insufficient evidence to reach a conclusion a 15 In comparison with classical variables sampling, which of the following is an advantage of probability-proportional-to-size (PPS) sampling? a PPS sampling automatically results in a stratified sample b PPS sampling results in a smaller sample size if many differences are expected between audited and recorded amounts c PPS sampling is particularly appropriate when understatement errors are expected d PPS sampling is less likely to overstate the allowance for sampling risk when errors are found in the sample b 16 An auditor is applying probability-proportional-to-size (PPS) sampling If the population consists of 200 items and is represented by $1,000,000 what is the probability the auditor will select for testing an account recorded at $100,000? a .005 b .100 c .025 d Not determinable from the facts given b 17 An auditor is applying probability-proportional-to-size (PPS) sampling In determining sample size, which of the following is not necessary? a A reliability factor for overstatement errors b A reliability factor for understatement errors c Tolerable error d Anticipated error 57 c 18 a b c d Probability-proportional-to-size (PPS) sampling is most appropriate when The auditor anticipates understatement errors The auditor anticipates overstatement errors The auditor expects no errors The auditor has assessed control risk at the maximum a 19 An auditor is applying probability-proportional-to-size (PPS) sampling Assuming the risk of incorrect acceptance is 10, what is the reliability factor for overstatement differences? a 2.31 b 3.00 c 3.89 d Not determinable from the facts given c 20 An auditor is evaluating the results of a probability-proportional-to-size (PPS) sampling plan Assuming the incremental allowance is $10,500 and the allowance for sampling risk is $45,000, what is basic precision for the sampling plan? a $34,500 b $45,000 c $55,500 d Not determinable from the facts given a 21 Which of the following sampling methods could be designed to estimate the dollar value of an audit population? a Sampling for variables b Sampling for attributes c Discovery sampling d Probability-proportional-to-size sampling (AICPA ADAPTED) a 22 Which of the following statements is correct about statistical sampling? a An auditor needs to estimate the population standard deviation to use classical variables sampling b An assumption of probability-proportional-to-size sampling is that the underlying accounting population be distributed normally c A classical variables sample needs to include negative balances in the sample d The selection of zero balances usually does not require special sample design considerations when using probability-proportional-to-size sampling (AICPA ADAPTED) a 23 If all other factors specified in a variables sampling plan remain constant, increasing the acceptable risk of incorrect acceptance would cause the required sample size to a Decrease b Remain the same c Increase d Become indeterminate (AICPA ADAPTED) 58 d 24 An accounts receivable aging schedule was prepared on 300 pages with each page containing the aging data for 50 accounts The pages were numbered from to 300 and the accounts listed on each were numbered from to 50 An auditor selected accounts receivable for confirmation using a table of numbers as illustrated: Select Column from Table of Numbers 02011 85393 97265 61680 16656 42751 69994 07942 10231 53988 Separate Digits: First Digits, Last Digits 020 - 11 x 853 - 93 * 972 - 65 * 616 - 80 * 166 - 56 * 427 - 51 * 699 - 94 * 079 - 42 y 102 - 31 z 539 - 88 * x Mailed confirmation to account 11 listed on page 20 y Mailed confirmation to account 42 listed on page 79 z Mailed confirmation to account 31 listed on page 102 * Rejected This is an example of which of the following sampling methods? a b c d Block sampling Systematic sampling Haphazard sampling Random-number sampling (AICPA ADAPTED) c 25 In which sampling method is the probability of selecting an item proportional to the size of the value of the item (i.e., a $1,000 item is 10 times more likely to be selected than a $100 item)? a Difference estimation b Mean-per-unit estimation c Probability-proportional-to-size sampling d Nonstatistical sampling for variables (AICPA ADAPTED) c 26 Assume you are auditing a retail department store and want to estimate the dollar amount of errors on sales invoices using probability-proportional-to-size sampling Which of the following is true? a The risks of incorrect acceptance and incorrect rejection are greater than for a classical variables sampling plan b Tolerable error is ignored c An invoice with a large balance has a greater chance of being selected than one with a smaller balance d The estimate will be unreliable if the error rate is small 59 SHORT ANSWER Define the risk of incorrect rejection and the risk of incorrect acceptance and explain the difference between both risks Answer: The risk of incorrect rejection is the risk that an audit sample will support concluding that a recorded account balance is materially misstated when, unknown to the auditor, the account is fairly stated The risk of incorrect acceptance, in contrast, is the risk that an auditor's sample supports concluding that a recorded account balance is fairly stated when, unknown to the auditor, the account is materially misstated Define and contrast an audit population with a sampling unit Answer: An audit population consists of all the items constituting an account balance or class of transactions and should be defined by the auditor's characteristics of interest, since sample results can be generalized only to the population from which a sample is selected In contrast, the sampling unit is any of the individual elements constituting a population Explain when an auditor would select a nonstatistical sampling plan to be used Answer: A nonstatistical sampling plan would be used when: There is no apparent need to quantify sampling risk The cost of designing individual samples to meet statistical sampling requirements exceeds the benefits The cost to select sampling units randomly exceeds the expected benefits List the four steps in determining sample size in variables sampling Answer: Determine the variation within the population Determine the acceptable risk of incorrect rejection Determine the acceptable risk of incorrect acceptance Determine the tolerable error Explain the process the auditor uses to evaluate sample results Answer: An auditor summarizes and evaluates sample results by: Projecting sample error to the population, Considering sampling risk, Considering qualitative information, and Reaching an overall conclusion 60 PROBLEMS AR ? = IC X AP An auditor, when considering the level of audit risk, considers the formula noted above Explain the different components of the formula and the final product that will be derived by the use of this formula Answer: AR = Audit risk: the acceptable risk that an auditor may unknowingly fail to modify his or her opinion on materially misstated financial statements IC = the risk that the internal controls fail to prevent or detect material errors AP = the risk that analytical procedures and other tests fail to detect material errors that occur and are not detected by the internal controls The final product arrived at through the use of this formula would be TD — the acceptable risk of incorrect acceptance Please calculate the sample size for the following account: Recorded account balance Six key-dollar items Tolerable error Assurance factor = $75,000 = $35,000 = $4,000 =4 Answer: n = $75,000 – $35,000 x $4,000 Sample Size = n Sample Size = 40 61 62 ... Tolerable error d The risk that analytical procedures and other tests fail to detect material errors that occur and that are not detected by internal control a An auditor is evaluating the results... material errors AP = the risk that analytical procedures and other tests fail to detect material errors that occur and are not detected by the internal controls The final product arrived at through... (PPS) sampling If the population consists of 200 items and is represented by $1,000,000 what is the probability the auditor will select for testing an account recorded at $100,000? a .005 b .100