AT.12 Audit Sampling for Test of Details of Balances Drill

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

Choices:

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Choice A

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Choice B

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Choice C

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Choice D

Choice B

Feedback: Answer (b) is correct because both the expected amount of misstatement and the tolerable misstatement affect sample size. Increases in the expected amount of misstatements increase sample size, while increases in the tolerable misstatement decrease sample size.

Use of the ratio estimation sampling technique to estimate peso amounts is inappropriate when

Choices:

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The total book value is known and corresponds to the sum of all the individual book values.

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A book value for each sample item is unknown.

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There are some observed differences between audited values and book values.

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The audited values are nearly proportional to the book values.

A book value for each sample item is unknown.

Feedback: This answer is correct because the ratio estimation sampling technique is based upon comparing the ratio of the book value to the audited value of the sampled items. This method cannot be used when book values for the sample items are unknown.

The use of the ratio estimation sampling technique is most effective when

Choices:

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

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A relatively small number of differences exist in the population.

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Estimating populations whose records consist of quantities, but not book values.

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Large overstatement differences and large understatement differences exist in the population.

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

Feedback: This is correct because 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.

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

Choices:

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Allowable risk of tolerable misstatement.

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Preliminary estimates of materiality levels.

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Efficiency of the audit.

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Effectiveness of the audit.

Effectiveness of the audit.

The size of a sample designed for dual-purpose testing should be

Choices:

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The larger of the samples that would otherwise have been designed for the two separate purposes.

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The smaller of the samples that would otherwise have been designed for the two separate purposes.

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The combined total of the samples that would otherwise have been designed for the two separate purposes.

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More than the larger of the samples that would otherwise have been designated for the two separate purposes, but less than the combined total of the samples that would otherwise have been designed for the two separate purposes.

The larger of the samples that would otherwise have been designed for the two separate purposes.

There are many kinds of statistical estimates that an auditor may find useful, but basically every accounting estimate is either of a quantity or of an error rate. The statistical terms that roughly correspond to "quantities" and "error rate," respectively, are

Choices:

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Attributes and variables.

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Variables and attributes.

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Constants and attributes.

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Constants and variables.

Variables and attributes.

The major reason that the difference and ratio estimation methods would be expected to produce audit efficiency is that the

Choices:

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Number of members of the populations of differences or ratios is smaller than the number of members of the population of book values.

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Beta risk may be completely ignored.

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Calculations required in using difference or ratio estimation are less arduous and fewer than those required when using direct estimation.

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Variability of the populations of differences or ratios is less than that of the populations of book values or audited values.

Variability of the populations of differences or ratios is less than that of the populations of book values or audited values.

Feedback: Difference and ratio estimation methods are statistical sampling methods. They measure the difference between audit and book values or the ratio of audit to book values. As these differences should not be great, the population of these differences will have little variance. In statistical sampling, the less variation in a population, the smaller the required sample to provide an estimate of the population. In other words, difference and ratio estimation methods are more efficient because the differences between audit and book values are expected to vary less than the actual items in the population.

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

Choices:

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Identify whether inventory items are properly priced.

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Estimate whether the dollar amount of inventory is reasonable.

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Discover whether misstatements exist in inventory records.

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Determine whether discounts for inventory are properly recorded.

Estimate whether the dollar amount of inventory is reasonable.

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

Choices:

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Probability-proportional-to-size (PPS) sampling is used.

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The population has highly variable recorded amounts.

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The auditor's estimated tolerable misstatement is extremely small.

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The standard deviation of recorded amounts is relatively small.

The population has highly variable recorded amounts.

While performing a test of details during an audit, an 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

Choices:

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Assessing control risk too high.

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Assessing control risk too low.

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Incorrect rejection.

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Incorrect acceptance.

Incorrect rejection.

Feedback: Answer (c) is correct because the risk of incorrect rejection is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when the account is not misstated. Answers (a) and (b) are incorrect because the risk of assessing control risk too high and the risk of assessing control risk too low relate to tests of controls, and not to substantive tests of details. Answer (d) is incorrect because the risk of incorrect acceptance is the risk that the sample support the conclusion that the account is not misstated when in fact it is misstated.