Deck 17: Audit Sampling for Tests of Details of Balances

Question 1

You are auditing Raji and Company.You discover an item of inventory with an audited value of $5,000 with a recorded amount of $3,000.If this is the only error you discover the projected misstatement for the sample would be:

A) $5,000.
B) $2,000.
C) $3,000.
D) $4,000.

Answer 1

B

Question 2

In estimating the population misstatement,the first step in projecting from the sample to the population is to:

A) make a point estimate.
B) revise the upper error bound.
C) calculate the precision interval.
D) determine the population mean.

Answer 2

A

Question 3

The auditors principal objective when using a sample of tests of details of balances is whether the:

A) account balance being audited is fairly stated.
B) transactions being audited are free of misstatements.
C) controls being tested are operating effectively.
D) transactions and account balances being audited are fairly stated.

Answer 3

A

Question 4

Which of the following does not have to be considered in determining the initial sample size of a test of details?

A) Tolerable misstatement
B) Acceptable risk of incorrect rejection
C) Estimate of misstatements in the population
D) Acceptable audit risk

Question 5

If an auditor concludes that internal controls are likely to be effective,the preliminary assessment of control risk can be reduced,leading to which of the following impacts on the acceptable risk of incorrect acceptance?

A) The acceptable risk of incorrect acceptance will be reduced.
B) The acceptable risk of incorrect acceptance will be increased.
C) The acceptable risk of incorrect acceptance will be eliminated.
D) The acceptable risk of incorrect acceptance will not be impacted.

Question 6

The risk the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance under audit is greater than the tolerable misstatement is:

A) the upper bound.
B) the tolerable risk.
C) the acceptable risk of incorrect acceptance.
D) the lower bound.

Question 7

Both sampling and nonsampling risks are associated with:

A)
B)
C)
D)

Question 8

The word below that best explains the relationship between required sample size and the acceptable risk of incorrect acceptance is:

A) inverse.
B) direct.
C) proportional.
D) indeterminate.

Question 9

Tests for rates of occurrence are appropriately used in all but which of the following situations?

A)
B)
C)
D)

Question 10

If acceptable audit risk is increased,acceptable risk of incorrect acceptance should be:

A) increased.
B) reduced.
C) unaffected.
D) modified.

Question 11

The most important difference among tests of controls,substantive tests of transactions,and tests of details of balances lies in what the auditor wants to measure.Explain what each type of test attempts to measure.

Question 12

One of the steps involved in planning the sample for the tests of details of balances is to:

A) select the sample.
B) perform the audit procedures.
C) define a misstatement.
D) analyze the misstatements.

Question 13

When selecting a sample size for substantive tests of balances which factor,other factors being equal,would result in a larger sample?

A) A decrease in the tolerable misstatement
B) Small expected misstatements
C) An increase in the tolerable misstatement
D) An increase in the acceptable risk of incorrect acceptance

Question 14

As the amount of misstatements expected in the population approaches tolerable misstatement,the planned sample size will:

A) decrease.
B) increase.
C) vary based on characteristics of the population.
D) be unaffected.

Question 15

The appropriate assumption to make regarding the overall percent of error in those population items containing an error is:

A) determined using random number tables.
B) set after a quantitative analysis of client's internal control system.
C) based on the auditor's personal judgment in the circumstances.
D) based on statistical analysis using confidence limits.

Question 16

An auditor using nonstatistical sampling cannot formally measure sampling error and therefore must subjectively consider the possibility that the true population misstatement exceeds a tolerable amount.Which of the following factors should be considered by the auditor in making this assessment?

A)
B)
C)
D)

Question 17

If an auditor desires a greater level of assurance in auditing a balance,the acceptable risk of incorrect acceptance:

A) is reduced.
B) is increased.
C) is not changed.
D) may be reduced or increased depending upon other circumstances.

Question 18

What is the purpose of applying stratified sampling to a population?

A)
B)
C)
D)

Question 19

Tolerable misstatement is used to:

A)
B)
C)
D)

Question 20

The final step in the evaluation of the audit results is the decision to:

A) accept the population as fairly stated or to require further action.
B) determine sampling error and calculate the estimated total population error.
C) project the point estimate.
D) determine the error in each sample.

Question 21

Consider the steps in sampling for tests of details and for tests of controls.Explain the differences in applying sampling to these two types of tests.

Question 22

The AICPA audit sampling formula for computing nonstatistical tests of details of balances sample size is to multiply the population recorded amount by the ________ and then divide by the ________.

A) confidence factor, ARIA
B) confidence factor, tolerable misstatement
C) ARO, tolerable misstatement
D) risk of incorrect acceptance, confidence factor

Question 23

Which of the following needs to be considered when the auditor generalizes from the sample to the population?

A)
B)
C)
D)

Question 24

If analytical procedures are performed with no indications of likely misstatements,ARIA will ________ and the sample size will ________.

A) remain the same, increase
B) decrease, decrease
C) increase, decrease
D) decrease, increase

Question 25

While performing a substantive test of details during an audit,the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated.Which of the following is the least likely auditor reaction to this discovery?

A) Perform expanded audit tests in the relevant areas.
B) Increase detection risk in the relevant areas.
C) Increase the sample size.
D) Take no action until tests of other audit areas are completed.

Question 26

Identify each of the seven factors that influence sample size for nonstatistical tests of details of balances,and state whether each factor is directly or inversely related to sample size.

Question 27

When selecting a stratified sample,the sample size is:

A) determined for the unstratified population and then apportioned to each stratum.
B) determined for each stratum and selected from that stratum.
C) determined for each stratum and selected randomly from the entire unstratified population.
D) always larger than if unstratified sampling had been used.

Question 28

If no exceptions were found in the substantive tests of transactions:

A) ARIA would stay the same.
B) the sample size would stay the same.
C) ARIA would increase.
D) the sample size would increase.

Question 29

When using nonstatistical sampling,the auditor must subjectively consider whether the true population misstatement exceeds a tolerable amount.This is done by considering five factors.One factor is the difference between the point estimate and tolerable misstatement.State the other four factors the auditor must consider.

Question 30

Factors considered by an auditor to determine the possibility that the true population misstatement exceeds a tolerable amount in a nonstatistical sample include all of the following except for:

A) the extent to which items in the population have been audited 100%.
B) the difference between the point estimate and acceptable control risk.
C) whether misstatements tend to be offsetting or in only one direction.
D) the amounts of individual misstatements.

Question 31

When defining the population and the sampling unit for tests of details of balances:

A) the population is defined as all of the transactions in the journal for the period.
B) the sampling unit must be the same for all balance sheet accounts.
C) if sampling for completeness, the sampling unit will be customers with zero balances.
D) if sampling for completeness, the sampling unit will be the items making up the recorded population.

Question 32

Which of the following is a correct statement?

A) When internal controls are effective, control risk can be reduced, and therefore the auditor will decrease the ARIA.
B) There is a direct relationship between ARIA and the required sample size.
C) A lower control risk risk requires a lower ARO in testing the controls.
D) ARO measures the auditor's desired assurance for an account balance.

Question 33

If the population is not considered acceptable,one step the auditor is likely to take is to:

A) retest all internal controls.
B) ask the client to adjust the account balance.
C) test the entire population.
D) decrease inherent risk.

Question 34

Which of the following conditions would lead to a larger sample size?

A) Larger tolerable misstatement
B) Low inherent risk
C) High control risk
D) Smaller account balance

Question 35

There are 14 steps to audit sampling for details of balances,divided into three sections:
plan the sample,select the sample and perform the audit procedures,and evaluate the results.Discuss 5 of the 9 steps included in the "plan the sample" section for nonstatistical sampling.

Question 36

When errors are found in a sample,auditors in practice generally make the assumption:

A) of a 100% assumption for all errors.
B) that the population errors are larger than the sample errors.
C) that the population errors are smaller than the sample errors.
D) that the actual sample errors are representative of the population errors.

Question 37

The client's trial balance has a balance of $410,000 for merchandise inventory.As the auditor you are willing to accept a balance that is within $20,000 of either side of the recorded balance.You compute a 95% confidence interval of $395,000 to $425,000.You could therefore:

A) reject the trial balance amount.
B) accept the trial balance amount.
C) increase the sample size to assure more precision.
D) use alternative audit procedures to satisfy yourself as to the correct balance.

Question 38

There are 14 steps to audit sampling for details of balances,divided into three sections:
plan the sample,select the sample and perform the audit procedures,and evaluate the results.Discuss each of the steps included in the "evaluate the results" section for nonstatistical sampling.

Question 39

While performing a substantive test of details during an audit,the auditor determined that the sample results supported the conclusion that the recorded account balance was not materially misstated.It was,in fact,materially misstated.This situation illustrates the risk of:

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

Question 40

Discuss each of the six possible courses of action the auditor can take when he or she has concluded that the population is misstated by more than a tolerable amount.

Question 41

An increased sample size will always cause the population to be accepted.

Question 42

Monetary unit sampling is not particularly effective at detecting:

A) overstatements.
B) understatements.
C) errors in current assets.
D) errors in noncurrent assets.

Question 43

Estimated misstatement in the population and sample size are inversely related; that is,as estimated misstatement increases,sample size decreases.

Question 44

In monetary unit sampling,a sampling interval of 900 means that:

A) every 900^th item will be selected.
B) every 900^th dollar in the account will be sampled.
C) expected misstatement is 900.
D) tolerable misstatement is 900.

Question 45

ARIA measures the auditor's desired assurance for an account balance.

Question 46

For stratified sampling,the auditor selects samples independently from each stratum.

Question 47

The larger the sample size,the more confident the auditor can be that the point estimate is close to the true population value.

Question 48

An auditor using nonstatistical sampling cannot formally measure sampling error.

Question 49

Sampling used for tests of details of balances provides results in terms of exception rates.

Question 50

If the misstatement in a population is larger then tolerable misstatement without considering sampling error,the population will be considered unacceptable.

Question 51

The purpose of stratification is to permit auditors to emphasize certain aspects of a population and deemphasize others.

Question 52

The purpose of stratified sampling is to achieve a greater confidence level (lower risk of incorrect acceptance)for a given sample size.

Question 53

Required sample size increases as the auditor's tolerable misstatement for an account balance or class of transactions decreases.

Question 54

Acceptable risk of incorrect acceptance is directly affected by acceptable audit risk.

Question 55

Acceptable risk of incorrect acceptance (ARIA)and sample size are inversely related; that is,as ARIA increases,sample size decreases.

Question 56

The primary factor affecting the auditor's decision about acceptable risk of incorrect acceptance (ARIA)is assessed inherent risk.

Question 57

When using nonstatistical sampling,the larger the sample size,the greater the auditor's confidence that the point estimate is close to the true population value.

Question 58

Acceptable audit risk and acceptable risk of incorrect acceptance are inversely related; that is,as AAR increases,ARIA decreases.

Question 59

The auditor must consider the possibility that the true population misstatement is greater than the amount of misstatement that is tolerable when the auditor is performing:

A)
B)
C)
D)

Question 60

Tolerable misstatement is inversely related to sample size.

Question 61

The statistical methods used to evaluate monetary unit samples:

A) neither exclude nor include units twice.
B) may permit the inclusion of a unit in the sample more than once.
C) do not permit a unit to be included in the sample more than once.
D) ignore the possibility that a unit may be included in a sample more than once.

Question 62

Which of the following is not a disadvantage of monetary unit sampling?

A) It may be difficult to select samples from large population without computer assistance.
B) The total misstatement bounds resulting when misstatements are found may be too low to be useful to the auditor.
C) The total misstatement bounds resulting when misstatements are found may be too high to be useful to the auditor.
D) Each of the above is a disadvantage.

Question 63

Which of the following item(s)are needed to determine the sample size using MUS?

A)
B)
C)
D)

Question 64

PPS samples can be obtained in an efficient manner using all but which of the following?

A) Hand selection by the auditor
B) Computer software
C) Random number tables
D) Systematic sampling techniques

Question 65

When using monetary unit sampling,the recorded dollar population is a definition of all the items in the:

A) population.
B) population which the auditor has included in the sample.
C) population which contain errors.
D) sample which contain errors.

Question 66

An estimate of the largest likely overstatement in a population at a given ARIA,using monetary unit sampling is the:

A) point estimates.
B) precision intervals.
C) confidence intervals.
D) misstatement bounds.

Question 67

Calculating the sample size using monetary unit sampling depends on which of the following factors?

A)
B)
C)
D)

Question 68

In monetary unit sampling,the relationship between tolerable misstatement size and required sample size is:

A) direct.
B) inverse.
C) varied.
D) indeterminable.

Question 69

Why do auditors find MUS appealing?

A) MUS increases the likelihood of selecting a balance of high and low dollar items.
B) MUS is easy to use in the audit environment.
C) MUS provides a nonstatistical, rather than a statistical, conclusion.
D) When misstatements are found, MUS rarely produces bounds in excess of materiality.

Question 70

Which of the following is not a problem with monetary unit selection?

A) Population items with a zero recorded balance
B) Population items that should have a zero balance but do not
C) Accounts with negative balances
D) Accounts with small recorded balances that are significantly understated

Question 71

Which balance-related audit objective cannot be assessed using monetary unit sampling?

A) Accuracy
B) Completeness
C) Existence
D) All of the above can be assessed using monetary unit sampling.

Question 72

The allowance for sampling risk when no misstatements are found in the sample is:

A) tolerable risk of misstatement.
B) basic precision.
C) confidence factor.
D) population variance.

Question 73

The auditor must deal with layers of the computed upper deviation rate from the attributes table because there are different error assumptions for each error.Assume a sample of 100 had found one error,and the computed upper deviation rate is shown in the following table: The precision limit for the layer with one error is:

A) 2.3%.
B) 3.8%
C) 6.1%.
D) 1.5%.

Question 74

An accounts receivable population contains a total of four customers.The accounts,the amounts,and the cumulative total are shown below.Monetary unit sampling is to be used. Based on the information above,the population size is:

A) 4.
B) 574.
C) 1,272.
D) $2,684.

Question 75

Explain the decision rule used in monetary unit sampling to determine whether the population is acceptable.

Question 76

When the sample selection is done using probability proportional to size sample selection (PPS):

A) the actual number of units selected for testing may be more than the computed sample size.
B) the auditor must use systematic selection, rather than random selection of dollars.
C) population items with a zero recorded balance have no chance of being selected.
D) negative balances must be treated as positive balances.

Question 77

Using statistical sampling to assist in verifying the year-end accounts payable balance,an auditor has accumulated the following data: Projecting the misstatement to the population,the auditor's estimate of year-end accounts payable balance would be:

A) $5,050,000.
B) $5,125,000.
C) $6,000,000.
D) $6,150,000.

Question 78

When using monetary unit sampling,evaluating the likelihood of unrecorded items in the population is:

A) unnecessary.
B) impossible.
C) possible but difficult.
D) an automatic outcome of the process.

Question 79

An auditor uses monetary unit sampling with a sampling interval of $20,000 and detects an item with a recorded amount of $10,000 with an audited value of $4,000.The projected misstatement of the sample is:

A) $12,000.
B) $6,000.
C) $10,000.
D) $3,000.

Question 80

The most commonly used method of statistical sampling for tests of details of balances is:

A) attributes sampling.
B) systematic sampling.
C) discovery sampling.
D) monetary unit sampling.