Audit Chapters E/F

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

	A.	Can more easily convert the sample into a dual-purpose test useful for substantive testing.
	B.	Eliminate the need to use judgment in determining appropriate sample sizes.
	C.	Afford greater assurance than a nonstatistical sample of equal size.
	D.	Provide an objective basis for quantitatively evaluating sample risk.

D.	Provide an objective basis for quantitatively evaluating sample risk.

For which of the following audit tests would an auditor most likely use attribute sampling?

	A.	Selecting accounts receivable for confirmation of account balances.
	B.	Inspecting employee time cards for proper approval by supervisors.
	C.	Making an independent estimate of the amount of a LIFO inventory.
	D.	Examining invoices in support of the valuation of fixed asset additions.

B.	Inspecting employee time cards for proper approval by supervisors.

Which of the following statements is correct concerning statistical sampling in tests of controls?

	A.	As the population size increases, the sample size should increase proportionately.
	B.	Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.
	C.	There is an inverse relationship between the expected population deviation rate and the sample size.
	D.	In determining tolerable rate, an auditor considers detection risk and the sample size.

B.	Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.

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.

A.	The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

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

	A.	Allowable risk of tolerable misstatement.
	B.	Preliminary estimates of materiality levels.
	C.	Efficiency of the audit.
	D.	Effectiveness of the audit.

D.	Effectiveness of the audit.

An auditor examining inventory most likely would use variables sampling rather than attributes sampling to:

	A.	Identify whether inventory items are properly priced.
	B.	Estimate whether the dollar amount of inventory is reasonable.
	C.	Discover whether misstatements exist in inventory records.
	D.	Determine whether discounts for inventory are properly recorded.

B.	Estimate whether the dollar amount of inventory is reasonable.

An auditor is selecting vouchers for testing an entity's control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher:

	A.	Cannot be located in the voucher file.
	B.	Represents a dollar amount that is material.
	C.	Indicates a deviation from the prescribed activity.
	D.	Has been properly voided.

D.	Has been properly voided.

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the:

I.	Likely rate of deviations.
II.	Allowable risk of assessing control risk too high.

	A.	I only.
	B.	II only.
	C.	Both I and II.
	D.	Either I or II.

A.

I only.

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the:

		Variability in the dollar amounts of inventory items	Risk of incorrect acceptance
	A.	Yes	Yes
	B.	Yes	No
	C.	No	Yes
	D.	No	No

A.

Yes

Yes

An auditor uses variables sampling techniques to project the inventory balance each year for comparison with the client's assertion regarding the inventory balance in the financial statements. In 20X7, the auditor’s sample size was 112 inventory items. In 20X8, the number of units in inventory, the tolerable misstatement, and the required confidence were the same as in 20X7; however, the population variability increased due to the introduction of a new product line. The 20X8 required sample size would, therefore, be:

	A.	Larger than the 20X7 required sample size.
	B.	Smaller than the 20X7 required sample size.
	C.	The same as the required sample size in 20X7.
	D.	Indeterminate based on the information provided.

A.	Larger than the 20X7 required sample size.

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.

The allowance for sampling risk was:

	A.	5.5%
	B.	4.5%
	C.	3.5%
	D.	1%

B.

4.5%

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

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

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

An auditor uses an attribute sampling plan to determine whether large expenditures are being properly approved. The auditor is willing to accept a 2% risk of assessing control risk too low, and has a tolerable rate of 5%. A sample of 100 invoices is selected, and only one is found to be lacking appropriate approval. One invoice selected by the auditor cannot be located. Which statement is true?

	A.	Since the sample deviation rate is less than the tolerable rate, the auditor should rely on this control.
	B.	There is not enough information given to determine whether the auditor should rely on this control.
	C.	Since the auditor has a tolerable rate of 5%, he or she can be 95% certain that he or she will make a correct decision.
	D.	The invoice selected by the auditor that cannot be located is ignored in the calculation of the sample deviation rate.

B.	There is not enough information given to determine whether the auditor should rely on this control.

Henderson, CPA has decided to use probability-proportional-to-size (PPS) sampling, sometimes referred to as dollar-unit or cumulative-dollar-amount sampling, in the audit of a client's accounts receivable. Henderson will use the following PPS sampling table:

Reliability Factors for Errors of Overstatement
Number of Overstatement Misstatements	Risk of Incorrect Acceptance
	1%	5%	10%
0	4.61	3.00	2.31
1	6.64	4.75	3.89
2	8.41	6.30	5.33
3	10.05	7.76	6.69
4	11.61	9.16	8.00

Additional Information

Tolerable misstatement (net of effect of expected misstatement)	126,000
Risk of incorrect acceptance	5%
Number of misstatements allowed	2
Recorded amount of accounts receivable	700,000
Number of accounts	500

What sample size should Henderson use?

	A.	35
	B.	140
	C.	126
	D.	70

A.

35

The reliability factor, as determined from the table, is 6.3. Sampling interval is then calculated as tolerable misstatement divided by the reliability factor, or $126,000 / 6.3 = $20,000. In a population of $700,000 with a sampling interval of $20,000, the sample size will be $700,000 / $20,000, or 35 accounts.

Which of the following conditions necessitates a larger sample size?

	A.	A high level of detection risk.
	B.	A low frequency of misstatement.
	C.	A low level of tolerable misstatement.
	D.	A low assessed level of control risk.

C.	A low level of tolerable misstatement.

Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?

	A.	The sampling distribution should approximate the normal distribution.
	B.	Overstated units have a lower probability of sample selection than units that are understated.
	C.	The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
	D.	The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

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

The use of the ratio estimation sampling as compared to other sampling techniques is most effective when:

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

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

Which of the following objectives is achieved when an auditor decides to employ classical variable sampling?

	A.	To determine the reliability of voucher processing.
	B.	To determine the completeness of billing transactions.
	C.	To determine the inventory quantities on hand.
	D.	To determine the efficiency of the payroll system.

C.	To determine the inventory quantities on hand.

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

	A.	Attribute sampling.
	B.	Stop-or-go sampling.
	C.	Variables sampling.
	D.	Random-number sampling.

C.	Variables sampling.

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?

	A.	Variables.
	B.	Stratified.
	C.	Ratio estimation.
	D.	Attributes.

D.	Attributes.

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

Characteristics of Population 1 Relative to Population 2			Audit Specifications as to a Sample from Population 1 Relative to a Sample from Population 2
	Size	Variability	Specified Tolerable Misstatement	Specified Risk of Incorrect Acceptance
Case 1	Equal	Equal	Equal	Lower
Case 2	Equal	Larger	Larger	Equal
Case 3	Larger	Equal	Smaller	Higher
Case 4	Smaller	Smaller	Equal	Higher
Case 5	Larger	Equal	Equal	Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 3 the required sample size from population 1 is:

	A.	Larger than the required sample size from population 2.
	B.	Equal to the required sample size from population 2.
	C.	Smaller than the required sample size from population 2.
	D.	Indeterminate relative to the required sample size from population 2.

D.	Indeterminate relative to the required sample size from population 2.

The sample size of a test of controls varies inversely with:

		Expected population deviation rate	Tolerable rate
	A.	Yes	Yes
	B.	No	No
	C.	Yes	No
	D.	No	Yes

D.

No

Yes

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?

	A.	Set the tolerable rate of deviation at a lower level than originally planned.
	B.	Stratify the cash disbursements population so that the unusually large disbursements are selected.
	C.	Increase the sample size to reduce the effect of the unusually large disbursements.
	D.	Continue to draw new samples until all the unusually large disbursements appear in the sample.

B.	Stratify the cash disbursements population so that the unusually large disbursements are selected.

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:

	A.	There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.
	B.	There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements.
	C.	The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.
	D.	The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.

A.	There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%.

In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:

	A.	Tolerable rate (7%) was less than the upper deviation rate (8%).
	B.	Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).
	C.	Upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%).
	D.	Expected deviation rate (2.5%) was less than the tolerable rate (7%).

A.	Tolerable rate (7%) was less than the upper deviation rate (8%).

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

	A.	Preliminary judgments about materiality levels.
	B.	The amount of accounts receivable write-offs in the prior year.
	C.	The size of the intercompany receivable balance.
	D.	The auditor's allowable risk of assessing control risk is too low.

A.	Preliminary judgments about materiality levels.

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

Characteristics of Population 1 Relative to Population 2			Audit Specifications as to as Sample from Population 1 Relative to a Sample from Population 2
	Size	Variability	Specified Tolerable Misstatement	Specified Risk of Incorrect Acceptance
Case 1	Equal	Equal	Equal	Lower
Case 2	Equal	Larger	Larger	Equal
Case 3	Larger	Equal	Smaller	Higher
Case 4	Smaller	Smaller	Equal	Higher
Case 5	Larger	Equal	Equal	Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 4 the required sample size from population 1 is:

	A.	Larger than the required sample size from population 2.
	B.	Equal to the required sample size from population 2.
	C.	Smaller than the required sample size from population 2.
	D.	Indeterminate relative to the required sample size from population 2.

C.	Smaller than the required sample size from population 2.

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

Characteristics of Population 1 Relative to Population 2			Audit Specifications as to a Sample from Population 1 Relative to a Sample from Population 2
	Size	Variability	Specified Tolerable Misstatement	Specified Risk of Incorrect Acceptance
Case 1	Equal	Equal	Equal	Lower
Case 2	Equal	Larger	Larger	Equal
Case 3	Larger	Equal	Smaller	Higher
Case 4	Smaller	Smaller	Equal	Higher
Case 5	Larger	Equal	Equal	Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 1 the required sample size from population 1 is:

	A.	Larger than the required sample size from population 2.
	B.	Equal to the required sample size from population 2.
	C.	Smaller than the required sample size from population 2.
	D.	Indeterminate relative to the required sample size from population 2.

A.	Larger than the required sample size from population 2.

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

		Increase in tolerable misstatement	Increase in assessed level of control risk
	A.	Increase sample size	Increase sample size
	B.	Increase sample size	Decrease sample size
	C.	Decrease sample size	Increase sample size
	D.	Decrease sample size	Decrease sample size

C.

Decrease sample size

Increase sample size

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:

	A.	Precision.
	B.	Reliability.
	C.	Projected error.
	D.	Standard deviation.

A.	Precision.

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

Characteristics of Population 1 Relative to Population 2			Audit Specifications as to a Sample from Population 1 Relative to a Sample from Population 2
	Size	Variability	Specified Tolerable Misstatement	Specified Risk of Incorrect Acceptance
Case 1	Equal	Equal	Equal	Lower
Case 2	Equal	Larger	Larger	Equal
Case 3	Larger	Equal	Smaller	Higher
Case 4	Smaller	Smaller	Equal	Higher
Case 5	Larger	Equal	Equal	Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 5 the required sample size from population 1 is:

	A.	Larger than the required sample size from population 2.
	B.	Equal to the required sample size from population 2.
	C.	Smaller than the required sample size from population 2.
	D.	Indeterminate relative to the required sample size from population 2.

A.	Larger than the required sample size from population 2.

A lower risk of incorrect acceptance results in an increase in sample size. Note that the number of items in the population is generally assumed to have virtually no effect on sample size.

Samples to test internal control are intended to provide a basis for an auditor to conclude whether:

	A.	The control activities are operating effectively.
	B.	The financial statements are materially misstated.
	C.	The risk of incorrect acceptance is too high.
	D.	Materiality for planning purposes is at a sufficiently low level.

A.	The control activities are operating effectively.

Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually:

	A.	May be applied to populations where many monetary errors are expected to occur.
	B.	Produces an estimate having a desired level of precision with a smaller sample size.
	C.	Increases the variability among items in a stratum by grouping sampling units with similar characteristics.
	D.	Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.

B.	Produces an estimate having a desired level of precision with a smaller sample size.

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:

	A.	Risk of overreliance.
	B.	Tolerable rate.
	C.	Expected population deviation rate.
	D.	Sample size.

D.	Sample size.

An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations.

Characteristics of Population 1 Relative to Population 2			Audit Specifications as to a Sample from Population 1 Relative to a Sample from Population 2
	Size	Variability	Specified Tolerable Misstatement	Specified Risk of Incorrect Acceptance
Case 1	Equal	Equal	Equal	Lower
Case 2	Equal	Larger	Larger	Equal
Case 3	Larger	Equal	Smaller	Higher
Case 4	Smaller	Smaller	Equal	Higher
Case 5	Larger	Equal	Equal	Lower

You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2.

In case 2 the required sample size from population 1 is:

	A.	Larger than the required sample size from population 2.
	B.	Equal to the required sample size from population 2.
	C.	Smaller than the required sample size from population 2.
	D.	Indeterminate relative to the required sample size from population 2.

D.	Indeterminate relative to the required sample size from population 2.

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 audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:

	A.	$1,000
	B.	$2,000
	C.	$5,000
	D.	$10,000

B.

$2,000

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?

		Expected amount of misstatements	Measure of tolerable misstatement
	A.	No	No
	B.	Yes	Yes
	C.	No	Yes
	D.	Yes	No

B.

Yes

Yes

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:

	A.	Tolerable deviation rate.
	B.	Risk of incorrect acceptance.
	C.	Nature and cause of deviations.
	D.	Population size.

A.	Tolerable deviation rate.