Deck 6: Sampling and Overview of the Risk Response Phase of the Audit

Question 1

The timing of audit testing refers to the stage of the audit when procedures are performed
and the date that audit evidence relates to.

Answer 1

False

Question 2

An audit plan includes the audit procedures to be used when testing controls and when
conducting detailed substantive audit procedures.

Answer 2

True

Question 3

Projected error refers to the extrapolation of the errors detected when testing a sample to
the population from which the sample was drawn.

Answer 3

True

Question 4

Stratification of the population will result in less efficient sampling and increase the sample
size required.

Question 5

Block selection involves the selection of items that are grouped together within the population
of items available.

Question 6

Non-sampling risk arises when an auditor

A) does not use sampling.
B) uses an inappropriate audit procedure.
C) tests all of the items in a population.
D) spends too much time testing the accounts most at risk of material misstatement.

Question 7

When conducting substantive testing, an increase in the auditor's assessment of the risk of
material misstatement will result in an increase in the size of the sample.

Question 8

Non-sampling risk is the risk that

A) an auditor selects an inappropriate method to select a sample.
B) an auditor reaches an inappropriate conclusion for any reason not related to sampling risk.
C) the sample chosen is not representative of the whole population.
D) none of the above

Question 9

Tolerable error is the minimum error an auditor is willing to accept within the population
tested.

Question 10

Stratification is when an auditor selects a sample for testing by dividing the number of
population items by the sample size, resulting in the sampling interval.

Question 11

Tests of controls are audit procedures designed to detect material misstatements at the
assertion level.

Question 12

Sampling is not required when

A) it is the first year that the auditor has done the audit for a client.
B) the auditor is conducting tests of controls.
C) an audit procedure is conducted on an entire group of transactions.
D) the client requests the auditor not to collect samples of certain transactions.

Question 13

Sampling risk is the risk that the sample chosen by the auditor is not representative of the
population available for testing.

Question 14

Non-statistical sampling involves random selection and probability theory to evaluate the
results.

Question 15

Walter Polonia was explaining to his junior staff the implications of sampling risk when conducting substantive testing. He made the following two statements:
Which statements, if any, were true?

A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) or (ii)

Question 16

The risk that the auditor concludes that a material misstatement exists when it does not is
likely to result in an increase in audit effort when it is not required.

Question 17

When auditors conclude that an internal control is effective, they will rely on the control to
prevent and detect a material misstatement and reduce their detailed substantive procedures.

Question 18

Sampling risk for tests of controls is when

A) audit risk is reduced.
B) an auditor concludes that the audit client's internal control system is effective when it is not.
C) an auditor concludes that material misstatements exist when they do not.
D) audit risk is increased.

Question 19

Sampling is required when an audit procedure is tested on an entire group of transactions or
all items within an account balance.

Question 20

An increase in the number of sampling units in the population will result in a decrease in the
sample size.

Question 21

Which of the following best describes the concept of key item testing?

A) the selection of items that are grouped together within the population of items available
B) the proportion of items tested that did not conform to the client's prescribed control procedure
C) focus is on selecting the largest transactions within a balance to obtain coverage of the total
D) the selection of items that an auditor believes should be included in the sample for testing

Question 22

When testing controls, non-sampling risk is the risk that an auditor

A) designs tests that are ineffective.
B) does not select a sample.
C) both a and b
D) none of the above

Question 23

The risk that an auditor concludes that a material misstatement does not exist when it does will result in an

A) increased risk that the audit will not be effective.
B) increased risk that the audit will be inefficient.
C) increase in the auditor's assessment of the risk of material misstatement.
D) none of the above

Question 24

Which of the following statements regarding statistical sampling is correct?

A) It is easier to use than non-statistical sampling.
B) It involves haphazard selection.
C) It is generally used for low risk accounts.
D) It involves random selection.

Question 25

Before selecting a sample, an auditor will use professional judgment to

A) set the required level of confidence.
B) set the tolerable error rate.
C) select an appropriate population for testing.
D) all of the above

Question 26

Which sampling method involves the selection of items that are grouped together within the population of items available?

A) systematic selection
B) haphazard selection
C) random selection
D) block selection

Question 27

What impact will there be on sample size when there is an increase in the number of sampling units in the population?

A) increase
B) decrease
C) negligible
D) none of the above

Question 28

George Melkonian wanted to determine whether his auditing class knew how different factors influence sample size. He made two statements:
(i) "An increase in the expected rate of deviation of the population to be tested will decrease sample size."
(ii) "An increase in the tolerable rate of deviation will decrease sample size."
George asked his class to indicate which of the statements, if any, were false.

A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) nor (ii)

Question 29

Random selection involves

A) dividing a population into groups of sampling units with similar characteristics.
B) the selection of a sample without the use of a methodical technique.
C) the selection of a sample that is free from bias and where each item in a population has an equal chance of selection.
D) the selection of items that an auditor believes should be included in their sample for testing.

Question 30

When conducting substantive testing, which of the following is not a factor that influences the sample size?

A) an increase in the tolerable rate of deviation
B) an increase in the auditor's assessment of the risk of material misstatement
C) stratification of the population when appropriate
D) an increase in tolerable misstatement

Question 31

When testing controls, sampling risk is the risk that the auditor

A) concludes that their client's internal controls are ineffective when they are effective.
B) concludes that their client's internal controls are effective when they are ineffective.
C) both a and b
D) none of the above

Question 32

Which of the following is a factor that influences the sample size when testing controls?

A) an increase in the auditor's assessment of the risk of material misstatement
B) an increase in the tolerable rate of deviation
C) stratification of the population when appropriate
D) an increase in tolerable misstatement

Question 33

Daniel Beauchamp did not perform a true sample when he went to his client to examine sales invoices. He did not use any specific method for choosing the invoices. He let his eye
Catch the items he thought might make up his sample. What technique did he use?

A) random selection
B) block selection
C) haphazard selection
D) stratified sample selection

Question 34

When testing controls, a decrease in the sample size will occur when there is

A) an increase in the tolerable rate of deviation.
B) a decrease in the tolerable rate of deviation.
C) an increase in the extent to which the auditor's risk assessment takes into account relevant controls.
D) an increase in the number of sampling units in the population.

Question 35

When testing controls, the tolerable error is

A) the tolerable rate of deviation that an auditor will accept before concluding that a control is effective.
B) the minimum rate of deviation that an auditor will accept.
C) the tolerable rate of deviation that an auditor will accept before concluding that a control is ineffective.
D) the maximum amount of error in an account balance that an auditor will accept before concluding that an account is materially misstated.

Question 36

What impact will there be on sample size for substantive testing when there is an increase in the tolerable misstatement?

A) decrease
B) negligible
C) increase
D) none of the above

Question 37

Which of the following statements about statistical sampling is correct?

A) Statistical sampling involves the use of random selection.
B) Statistical sampling uses probability theory to evaluate results.
C) Statistical sampling allows for the measurement of sampling risk.
D) all of the above

Question 38

Which of the following statements is incorrect?

A) When detection risk is set as high, an auditor will require a high level of confidence that the transactions and accounts are not materially misstated.
B) An auditor may decide to stratify the population before selecting a sample from it.
C) An auditor will use professional judgment to determine the tolerable error and required level of confidence.
D) An auditor will use professional judgment when considering what would be considered an error within the population tested.

Question 39

Which of the following factors decreases sample size in tests of controls?

A) an increase in the expected deviation rate in the population
B) an increase in the extent to which an auditor's risk assessment takes into account internal controls
C) an increase in the number of sampling units in the population
D) an increase in the tolerable deviation rate

Question 40

Which of the following is not an advantage of non-statistical sampling?

A) It allows an auditor to select a sample that they believe is appropriate.
B) It allows an auditor to measure sampling risk.
C) It is lower cost than statistical sampling.
D) It requires less staff training.

Question 41

An account is at a higher risk of misstatement when it requires

A) complex calculations.
B) estimation.
C) both a and b
D) simple valuation techniques.

Question 42

Michael Fernandez has decided to perform substantive procedures at a major retailer. Which one of the following is not a substantive procedure?

A) re-performing control procedures to test their effectiveness
B) inspecting documents to verify the dates of the transactions
C) bank confirmations regarding interest rates on borrowings by client
D) recalculating an interest expense using confirmed interest rates

Question 43

Olivia Peralta was training a team of new auditors and delivered some interesting rules of thumb about control risk and detection risk:
Which of the above two statements are true?

A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) nor (ii)

Question 44

Control risk is the risk that:

A) an auditor expresses an inappropriate audit opinion when a financial statement is materially misstated.
B) an auditor's substantive procedures will not detect material misstatements.
C) a client's system of internal controls will not prevent or detect a material misstatement.
D) none of the above

Question 45

Henrietta Lombardi assessed control risk to be low. What is the appropriate audit strategy to adopt?

A) substantive audit approach
B) control testing strategy
C) combined audit strategy
D) substantive year end testing

Question 46

When conducting detailed substantive procedures, auditors search for evidence that

A) the client's internal control system is operating effectively.
B) all transactions have been recorded in the correct accounts.
C) no fraud has occurred during the year.
D) they have remained independent of their clients.

Question 47

Milushka Icaza, who was representing her CPA firm at a conference, made the following statement about assertions: When our auditors conduct substantive procedures, we search for
Evidence that recorded accounts exist and that all accounts that should have been recorded, indeed have been recorded. Which assertions was she talking about?

A) rights and obligations
B) accuracy, valuation, and allocation
C) occurrence and completeness
D) none of the above

Question 48

Tests of controls are conducted to establish that

A) controls operate consistently throughout the period.
B) there are no material misstatements in the financial statements.
C) controls operate effectively.
D) both a and c

Question 49

Where an auditor concludes that the audit client's systems of internal controls are ineffective, he/she will

A) conclude that the client's system of internal controls can be relied upon to detect potential material misstatements.
B) conclude that the client's system of internal controls cannot be relied upon to detect potential material misstatements.
C) reduce the amount of reliance to be placed on substantive tests.
D) project the misstatements to the entire population.

Question 50

If the total projected error in an account balance was $3,248 and the tolerable error was set at $10,000, the auditor would

A) conclude that the errors uncovered are material.
B) decide that further audit work was required.
C) conclude that the errors detected are not material.
D) conduct other tests aimed at the assertion being tested.

Question 51

Corey Hill used analytical procedures at his client, Ultimate Vacations. Which one of these is not an analytical procedure?

A) Send confirmations to major customers.
B) Estimate revenue for Ultimate Vacations by multiplying trips sold by average price of vacation packages.
C) Discuss unusual fluctuations with client personnel.
D) Compare wages month by month for this year and last year.

Question 52

Tests of controls are conducted to

A) make an assessment of detection risk.
B) assess if controls are operating effectively and efficiently throughout the year.
C) determine how the internal controls operate.
D) gain knowledge of the methods and procedures the entity uses to record transactions.

Question 53

Vita Zitkauskas, the senior on the audit of Magna International, was explaining how audit strategy and audit plans have an impact on tests of controls and substantive procedures. She
Made two statements:
Which statements were true, if any?

A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) or (ii)

Question 54

Substantive audit procedures include

A) detailed tests of balances.
B) analytical procedures.
C) detailed tests of transactions.
D) all of the above

Question 55

David Killbear has been involved in testing controls at Highbridge Falls. Which of these control tests would be deemed ineffective?

A) reading a client's policy manual
B) entering invalid passwords to see whether access is denied
C) both a and b
D) none of the above are effective controls

Question 56

When evaluating sample test results, which of the following statements is incorrect?

A) If an auditor discovers errors when testing transactions or account balances, they will need to project the error to the population being tested.
B) An auditor will not consider whether the population was stratified before being sampled.
C) If an error is considered to be unique it will be removed before projecting remaining errors to the population.
D) If the rate of deviation exceeds the tolerable rate the auditor will extend their testing.

Question 57

Kenneth Beach wanted to ensure that all the transactions at his client were recorded. For which assertion was he conducting these detailed substantive procedures?

A) occurrence
B) completeness
C) cut-off
D) none of the above

Question 58

Oliver DiPietro was testing the controls of Blue Coast Wholesale Fish Market. When testing controls, which one of the following evidence gathering procedures is used?

A) vouching of transactions
B) confirmations of accounts receivable
C) tracing of transactions to source documents
D) enquiry of client personnel

Question 59

When control risk is high, the audit strategy is to

A) do little or no tests of controls and increase reliance on substantive testing of transactions and account balances.
B) assume the client's management is dishonest and immediately report them to the Canada Revenue Agency (CRA).
C) increase reliance on tests of controls and reduce reliance on substantive testing of transactions and account balances.
D) refuse to continue with the remainder of the audit due to the high risk of fraud.

Question 60

When errors are discovered upon testing transactions or account balances, the auditor will

A) project the error to the entire population, if possible.
B) assess if the errors constitute an isolated event.
C) consider the impact of the errors.
D) all of the above

Question 61

Identify and explain the factors that influence the sample size for tests of controls.

Question 62

Which audit objective does the recalculation of the wages payable amount address?

A) rights and obligations
B) completeness
C) accuracy
D) occurrence

Question 63

Joe Jones walked out of the Old Rock Bakery operation and chewed on a Cheese Danish. He had chosen random selection to test for proper authorization of purchasing transactions. He had just completed the initial audit testing of the purchasing transactions and had evaluated the results. His conclusion was that the deviation rate of 12 exceptions in a sample of 80 transactions was relatively high.
In addition, Joe was preparing to start the audit of another client, Rohr Industries, an airplane component manufacturer. He had discussed sampling methodology with his audit team and it had been determined that the Rohr Industries systems did not lend themselves easily to statistical sampling techniques. The audit team would have to employ non-statistical sampling.
Required:
a) What is the procedure that Joe Jones would follow when his initial testing showed a relatively high deviation rate for the Old Rock Bakery transactions?
b) What is non-statistical sampling?
c) Describe the non-statistical sampling methods that were open to Joe and his team for the Rohr Industries audit.
d) Which of Joe's two clients' systems would lend themselves to stratification?

Question 64

CGA-CANADA AUDITING 1 EXAMINATION Dec 2001 - Question 2
Explain the differences between attribute sampling and sampling for substantive testing purposes, in terms of the auditor's purpose, the definition of exceptions, and the relevance of materiality to the techniques.

Question 65

An auditor uses professional judgment when determining the nature, timing and extent of audit procedures to use for each audit. Explain why the nature, timing and extent of audit testing are crucial factors in every audit.

Question 66

Describe the major types of sampling techniques available to auditors.

Question 67

Explain sampling risk as it relates to both tests of controls and substantive procedures.

Question 68

Explain how auditors evaluate the results of tests of controls conducted on a sample.

Question 69

Which audit assertion does the audit procedure of obtaining a confirmation from selected accounts receivable of amounts owed to the audit client relate to?

A) existence
B) classification
C) accuracy
D) completeness

Question 70

The most common statistical sample selection method according to the study by Hall et al (2002) is dollar-unit sampling. Explain in detail how this method operates and evaluate the advantages and disadvantages of using it.

Question 71

Explain the differences between the main objectives of tests of controls and substantive procedures.

Question 72

Which assertion does the objective that transactions and events have been recorded in the correct accounting period relate to?

A) cut-off
B) completeness
C) accuracy
D) classification

Question 73

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Helen Holt was explaining to her group partner that the completeness assertion implies that transactions and events that have been recorded have occurred and pertain to the entity.
b) Keith Lake was explaining to Ben Fitz how sampling risk works for the audit team: "Sampling risk is the risk that as auditors we will arrive at a conclusion that has nothing to do with sampling issues."
c) Larry Baneiro was vehemently arguing about the benefits of using non-statistical versus statistical sampling methods for a client in the excavation business. Here is what he had to say about non-statistical sampling: "Non-statistical sampling is easier to use than statistical sampling, it requires less staff training, it has lower cost, and it allows an auditor to make a sample choice that they believe is appropriate."
d) Georgia Walters has started her sample selection of sales transactions for a gemstone conglomerate. She believes that she can improve audit efficiency by stratifying the sample.

Question 74

For high-risk accounts, the timing of most audit procedures will be

A) whenever the client says it is most convenient for them to be conducted.
B) at, or after, year-end.
C) before year end.
D) during the interim audit testing stage.

Question 75

A range of sampling techniques are available to auditors. Evaluate the advantages and disadvantages of the major techniques.

Question 76

Substantive procedures or tests can be described as

A) procedures to detect errors in the accounts.
B) audit procedures to detect material misstatements at the assertion level.
C) procedures to assess audit risk.
D) audit procedures to evaluate the operating effectiveness of internal controls.