Deck 13: Audit Sampling in Substantive Tests

Question 1

Audit sampling applies to control risk and detection risk.

Answer 1

True

Question 2

If the auditor expects no misstatements, PPS sampling will usually result in a smaller sample size than under classical variables sampling.

Answer 2

True

Question 3

One disadvantage of PPS sampling is that when overstatements are identified, the evaluation of the sample may require special consideration.

Answer 3

False

Question 4

In PPS sampling, the amount of the book value has a direct effect on the sample size.

Question 5

In PPS sampling plans, all logical sampling units that are greater than or equal to the sampling interval must be treated separately.

Question 6

Stating the expansion factor is required in all PPS sampling plans.

Question 7

In PPS sampling, the auditor chooses a logical sampling unit compatible with the nature of the auditing procedures to be performed.

Question 8

In MPU sampling, the auditor should consider the qualitative aspects of the sample results prior to reaching an overall conclusion.

Question 9

The size of a PPS sample is dependent on the variance of the population.

Question 10

The finite correction factor is recommended in classical variable sampling whenever the auditor samples without replacement.

Question 11

The sampling unit in PPS sampling is an individual dollar.

Question 12

The steps in PPS sampling are identical to those used in attribute sampling.

Question 13

In evaluating sample results, if the upper misstatement limit is less than or equal to projected misstatement, the sample results support the conclusion that the population book value is not materially misstated.

Question 14

In PPS sampling plans, sample size is usually determined using tables.

Question 15

The most common objective of PPS sampling plans is to obtain evidence that a recorded account balance is not materially misstated.

Question 16

In the selection process for PPS sampling plans, it is necessary to determine the cumulative balance of the book values of the logical units.

Question 17

Audit sampling in substantive tests is subject to both sampling risk and nonsampling risk.

Question 18

Judgment is not required when the auditor uses statistical sampling.

Question 19

To calculate the incremental allowance for sampling risk in a PPS sampling plan, the auditor must consider separately the logical units with book values less than the sampling interval and those that are not.

Question 20

Tolerable misstatement is the minimum misstatement that can exist in an account before it is considered materially misstated.

Question 21

Probability-proportional-to-size (PPS) sampling should not be used when:

A) few or no misstatements are expected.
B) any misstatements are expected to be overstatements.
C) testing investment securities.
D) performing inventory price tests when few differences are anticipated.
E) there are some zero-balance items in the population.

Question 22

In PPS sampling plans, the risk of incorrect rejection is:

A) stated explicitly in the model.
B) not controlled at all.
C) directly related to sample size.
D) controlled indirectly by specifying anticipated misstatement.
E) always quantified.

Question 23

Classical variables sampling is more complex that PPS sampling.

Question 24

In determining sample size in nonstatistical sampling, the auditor should consider the same factors used in statistical sampling.

Question 25

In PPS sampling plans, the effect population book value has on sample size is:

A) negligible.
B) direct.
C) indirect.
D) inverse.
E) ignored completely.

Question 26

Nonstatistical sampling is most effective for larger populations.

Question 27

Tolerable deviation rate is the maximum rate of deviation from a control that an auditor is willing to accept and still use the planned control risk.

Question 28

In PPS sampling:

A) every dollar in the population has an equally likely chance of being selected.
B) every logical sampling unit must have an equally likely chance of being selected.
C) the auditor examines only the individual dollars selected.
D) the sampling unit is usually a document.
E) every sampling unit must have an equally likely chance of being selected.

Question 29

When using classical variables sampling, zero balances and different sign balances require special design consideration.

Question 30

The anticipated misstatement in a PPS sampling plan is:

A) inversely related to sample size and directly related to risk of incorrect rejection.
B) directly related to sample size and directly related to risk of incorrect rejection.
C) inversely related to sample size and inversely related to risk of incorrect rejection.
D) inversely related to sample size and directly related to risk of incorrect acceptance.
E) directly related to sample size and inversely related to risk of incorrect rejection.

Question 31

Probability-proportional-to-size (PPS) sampling should not be used when:

A) the number of units in the population is unknown at the start of sampling.
B) the variability of the population is unknown.
C) book values for sampling units are not available.
D) transactions and balances are tested for overstatement.
E) testing plant asset additions.

Question 32

In the audit risk model, audit sampling applies to:

A) detection risk.
B) inherent risk and control risk.
C) control risk and detection risk.
D) inherent risk and detection risk.
E) control risk.

Question 33

Nonstatistical sampling is becoming the norm for tests of controls.

Question 34

Probability-proportional-to-size (PPS) sampling would most likely not be cost-effective in:

A) estimating the amount of dollar error caused by deviations from a particular control.
B) confirming accounts receivable when unapplied credits to customer accounts are insignificant.
C) independently estimating the value of a certain class of transactions.
D) testing investment securities for overstatements.
E) testing additions to plant assets for overstatements.

Question 35

The most common objective of PPS sampling plans is to:

A) determine the rate of deviation from a control procedure.
B) estimate the true dollar value in an unrecorded account.
C) establish that the rate of deviation from a control procedure does not exceed the established tolerable rate.
D) independently estimate the value of a class of transactions.
E) obtain evidence that a recorded account balance is not materially misstated.

Question 36

In PPS sampling plans, tolerable misstatement:

A) is stated as a percentage.
B) has an inverse effect on sample size.
C) is equal to materiality at the financial statement level.
D) is normally set at zero.
E) is the minimum misstatement that can exist in an account before it is considered to be materially misstated.

Question 37

In an MPU sampling plan, the achieved allowance for sampling risk is sometimes referred to as the precision interval.

Question 38

The auditor has decided to use PPS sampling in the confirmation of individual sales transactions with customers. The population and the logical sampling unit are most likely to be, respectively:

A) all customer accounts and the individual dollars in the accounts.
B) customer accounts with debit balances and individual dollars in the accounts.
C) the sales invoice file and the individual dollars on the invoices.
D) all recorded sales during the year and individual sales invoices.
E) all sales invoices during the year and individual sales orders.

Question 39

Which of the following is not an advantage of probability-proportional-to-size (PPS) sampling?

A) PPS systematic sample selection automatically identifies any item that is individually significant if its value is less than an upper monetary cutoff.
B) PPS sampling, if the auditor expects no misstatements, will usually result in a smaller sample size than under classical variables sampling.
C) PPS sampling automatically results in a stratified sample.
D) It is generally easier to use than classical variables sampling.
E) The size of a PPS sample is not based on any measure of the estimated variation of audit values.

Question 40

Audit sampling in involved whenever an auditor:

A) examines 100% of the population.
B) makes an inference about a population characteristic based on a partial examination of that population.
C) performs tests of controls.
D) performs tests of details.
E) performs substantive tests.

Question 41

Which of the following sampling plans does not use normal distribution theory?

A) PPS sampling
B) mean-per-unit sampling
C) difference sampling
D) ratio sampling
E) classical variables sampling

Question 42

In specifying an acceptable level of risk of incorrect acceptance, the auditor should consider the:

A) assessed level of detection risk.
B) assessed level of control risk.
C) acceptable level of inherent risk.
D) results of tests of controls.
E) acceptable level of rejection risk.

Question 43

When the sample results do not support the recorded account balance, the least likely action the auditor might take is:

A) perform alternative substantive procedures.
B) examine additional sampling units.
C) increase the sample size.
D) change the assessed level of control risk.
E) request the client to investigate the misstatements.

Question 44

In the evaluation of an MPU sampling plan where misstatements have been found, the auditor will not calculate:

A) the estimated population value.
B) the tainting percentage.
C) achieved allowance for sampling risk.
D) precision.
E) adjusted achieved allowance for sampling risk.

Question 45

Which of the following statements is true about the determination whether to use statistical attribute sampling or nonstatistical sampling?

A) Statistical attribute sampling is usually the best way to select exception reports to test the effectiveness of the manual followup procedure.
B) For controls that function infrequently, such as controls over management discretion in financial reporting that occur only quarterly, nonstatistical sampling is probably the most efficient way to determine how often the auditor wants to test the effectiveness of the control.
C) Nonstatistical sampling is most effective for larger populations.
D) Statistical sampling has become the norm for tests of controls.
E) Statistical sampling should always be used in tests of general controls, such as inspecting logs that document program changes, were the auditor wants to review the entire population but uses sampling to choose specific items to investigate a sample of the individual items.

Question 46

Which of the following is least likely to be listed as an advantage of PPS sampling over classical variables sampling?

A) easier to use
B) automatic stratification of the population
C) more accurate statement of ASR even when misstatements are found
D) usually results in a smaller sample size if no misstatements are expected
E) sample selection may begin even before the complete population is available

Question 47

In a comparison between MPU sampling and PPS sampling, an explicit statement is required in MPU plans, but not PPS plans, for:

A) tolerable misstatement.
B) risk of incorrect rejection.
C) population standard deviation.
D) risk of incorrect rejection and population standard deviation.
E) tolerable misstatement and risk of incorrect rejection.

Question 48

In the PPS sample size formula, which of the following is in the numerator?

A) reliability factor (RF)
B) expansion factor (EF)
C) tolerable misstatement (TM)
D) anticipated misstatement (AM)
E) estimated misstatement (EM)

Question 49

When no misstatements are found in a PPS sampling plan:

A) allowance for sampling risk must be adjusted upward to compensate.
B) projected misstatement in the population is zero.
C) sampling must continue until at least one deviation is found.
D) the auditor should use a lower risk of incorrect acceptance in evaluating the sample than used in determining sample size.
E) the expansion factor can always be ignored.

Question 50

The efficiency gained from stratification of a population is based on the fact that:

A) the subpopulations can be examined by different audit personnel.
B) it is inherently easier to test several sets of fewer items.
C) the groupings are more homogeneous.
D) more errors are normally found in the largest and the smallest items of a population.
E) a change in the variability of a population affects sample size by the square root of the relative change.

Question 51

In PPS sampling plans, basic precision is:

A) the allowance for sampling risk when the sample contains no misstatements.
B) the sum of the sampling interval and the reliability factor.
C) equal to the sampling interval when the sample contains no misstatements.
D) the total deviation found in the sample.
E) the sum of the sampling interval and the expansion factor.

Question 52

The most common selection method used in PPS sampling is:

A) random selection.
B) haphazard selection.
C) systematic selection.
D) indiscriminate selection.
E) automatic selection.

Question 53

The expansion factor is:

A) used to indirectly affect the sample size.
B) added to the anticipated misstatement.
C) inversely related to sample size.
D) directly related to the risk of incorrect acceptance.
E) required only when misstatements are anticipated.

Question 54

The normal distribution underlies:

A) PPS sampling.
B) classical attribute sampling.
C) discovery sampling.
D) both classical attribute and variables sampling.
E) classical variables sampling.

Question 55

In mean-per-unit-sampling, population size is:

A) inversely related to sample size.
B) ignored in determining sample size.
C) critical.
D) assumed to be infinite by the statistical model used.
E) negligible.

Question 56

Whenever sampling is used in an audit procedure, uncertainty will be present. The two sources of this uncertainty are:

A) sampling risk and nonsampling risk.
B) compliance risk and substantive risk.
C) inherent risk and control risk.
D) detection risk and occurrence risk.
E) detection risk and inherent risk.

Question 57

Which of the following approaches would not be acceptable in estimating the population standard deviation?

A) use the exact amount found in last year's audit.
B) use available book values.
C) adjust the amount found last year based on changed conditions.
D) use the rate found in a preliminary sample of approximately five to ten items.
E) use the rate found in a preliminary sample of approximately thirty to fifty items.

Question 58

The tainting percentage must be computed in evaluating the results of a PPS sampling plan whenever:

A) no misstatements are found in the sample.
B) this sample plan is used.
C) misstatements are found in logical sampling units greater than or equal to the sampling interval.
D) misstatements are found in logical sampling units smaller than the sampling interval.
E) misstatements are found in logical sampling units greater than the sampling interval.

Question 59

In an MPU sampling plan, there is an inverse relationship between sample size and:

A) population variation.
B) planned allowance for sampling risk.
C) risk of incorrect rejection.
D) population size and planned allowance for sampling risk.
E) planned allowance for sampling risk and risk of incorrect rejection.

Question 60

The reliability factor is based on the risk of:

A) incorrect acceptance and zero misstatements.
B) incorrect rejection and zero misstatements.
C) incorrect acceptance and expected misstatements.
D) incorrect rejection and expected misstatements.
E) correct acceptance and expected misstatements.

Question 61

The main disadvantage of nonstatistical over statistical sampling in substantive testing is the inability, when using nonstatistical sampling, to:

A) calculate allowance for sampling risk for a measurable level of risk.
B) justify the acceptance or rejection of the population.
C) use random selection in drawing the sample.
D) explicitly state the upper misstatement level.
E) perceive the difference between projected and tolerable misstatement as an allowance for sampling risk.

Question 62

Which of the following is most likely to be given as an advantage of classical variables sampling over PPS sampling?

A) easier to use
B) more efficient in almost all cases
C) an estimate of the standard deviation is not necessary in determining sample size
D) less complex
E) easier to expand the sample when necessary

Question 63

The population consists of many individual items for which a book value is known for each. Very few differences between this recorded value and the audited value are expected, but any difference is most likely to be an overstatement. Which of the following statistical sampling techniques would be most appropriate under these conditions?

A) MPU estimation
B) ratio estimation
C) PPS sampling
D) difference estimation
E) discovery sampling

Question 64

The population consists of many individual items for which a book value is recorded for each. Many difference are expected, including some items which may be erroneously valued at zero. Which of the following statistical sampling techniques would not be appropriate under these conditions?

A) mean-per-unit estimation
B) PPS sampling
C) ratio estimation
D) difference estimation
E) MPU sampling

Question 65

Careful consideration of sample design must be made to achieve efficient and effective statistical samples. This is accomplished through explicit specification of key factors and relating them through mathematical models. Consideration of the same factors in nonstatistical samples may help to produce more efficient and effective samples, even if the factors are not explicitly quantified.
REQUIRED: For each of the factors listed below, indicate its effect on sample size by inserting a D (for direct) or an I (for inverse) in the appropriate column(s).

Question 66

How does the auditor determine allowance for sampling risk in nonstatistical sampling?

Question 67

Short Answer 13-3 (5 minutes)
1.Identify the calculations that are required in making a quantitative assessment of the sample results in an MPU sampling plan.
2.Indicate the purpose and the formula for calculating the adjusted achieved allowance for sampling risk.

Question 68

The greatest impact on audit efficiency comes from the risk(s) of:

A) assessing control risk too high or too low.
B) assessing control risk too low and incorrect acceptance.
C) incorrect acceptance and incorrect rejection.
D) assessing control risk too high and incorrect acceptance.
E) assessing control risk too high and incorrect rejection.

Question 69

Which of the following conditions is indispensable in using difference estimation?

A) Audit values are known.
B) Subsidiary records are not in agreement with control totals.
C) Very few differences between the audit and book values are expected.
D) Book values are known.
E) Total population book value does not correspond to individual item book values.

Question 70

Identify the factors in the PPS sample size formula that have:
1.a direct effect and
2.an inverse effect on sample size.