Question 1

Monetary-unit sampling is the most commonly used statistical method of sampling for tests of details of balances.

Accepted Answer

Monetary-unit sampling is indeed the most commonly used statistical method of sampling for tests of details of balances.

Question 2

Acceptable risk of assessing control risk too low (ARO)and allowable risk of incorrect acceptance (ARIA)are inversely related; that is, a decrease in ARO is accompanied by an increase in ARIA.

Accepted Answer

This statement is true. The acceptable risk of assessing control risk too low (ARO) and the allowable risk of incorrect acceptance (ARIA) are inversely related, meaning that as one decreases, the other increases. This is due to the fact that if a lower ARO is chosen, there is less room for error, and therefore the allowable risk of incorrect acceptance must be higher to compensate.

Question 3

Tolerable misstatement is inversely related to sample size; that is, as tolerable misstatement increases, sample size decreases.

Accepted Answer

This statement is true. When the tolerable misstatement increases, the level of assurance required to detect misstatement decreases, which means a smaller sample size can be used. On the other hand, if the tolerable misstatement is set very low, a larger sample size may be needed to obtain sufficient assurance.

Question 4

When the computed upper deviation rate is greater than the tolerable deviation rate in attributes sampling, one possible appropriate course of action is to increase sample size.

Accepted Answer

Increasing the sample size can help in reducing the margin of error and improving the accuracy of the estimation, which may lead to a better match between the upper deviation rate and the tolerable deviation rate. By having a larger sample size, we can capture more information about the population and increase the likelihood of detecting any potential issues with the quality of the product or process under investigation. However, this is not the only course of action, and other options such as improving the sampling method or adjusting the tolerable deviation rate may also be considered depending on the circumstances.

Question 5

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

Accepted Answer

Acceptable Audit Risk (AAR) and Acceptable Risk of Incorrect Acceptance (ARIA) are not directly related in the manner described; AAR pertains to the auditor's willingness to accept that the financial statements may be materially misstated after the audit is completed, while ARIA relates specifically to the risk the auditor is willing to take of accepting a control or an account balance as correct when it's actually materially misstated. Changes in one do not inversely affect the other in a direct manner; they are components of audit risk that are managed independently based on the auditor's risk assessment.

Question 6

The factor that has the least effect on sample size is the difference between the tolerable deviation rate and estimated population deviation rate.

Accepted Answer

The difference between the tolerable deviation rate and estimated population deviation rate is one of the key factors that determines the necessary sample size. The larger the difference, the larger the sample size required. Therefore, this factor has a significant effect on sample size, and statement A is false.

Question 7

When a small preliminary sample is used to estimate the population deviation rate, the preliminary sample cannot be included in the ultimate sample.

Accepted Answer

The preliminary sample can be included in the ultimate sample for testing purposes, as it is part of the data collected and can contribute to the overall understanding of the population characteristics.

Question 8

Acceptable risk of incorrect acceptance is of greater concern to the auditor than acceptable risk of incorrect rejection.

Accepted Answer

This is because incorrect acceptance could lead to the auditor giving an incorrect conclusion on the financial statements, whereas incorrect rejection only means a need for further testing or investigation.

Question 9

When monetary-unit sampling is used to audit accounts receivable, a customer's account with a small year-end balance has the same chance of being included in the sample as a customer's account with a large year-end balance.

Accepted Answer

Monetary-unit sampling focuses on the dollar values, giving larger balances a higher probability of selection, as the method aims to give each dollar in the population an equal chance of being selected, not each account regardless of size.

Question 10

Acceptable risk of assessing control risk too low is the risk that the auditor is willing to take of accepting a control as effective when the true population deviation rate is greater than the estimated population deviation rate.

Accepted Answer

The answer of Acceptable risk of assessing control risk too...

Question 11

Tolerable deviation rate (TDR)is inversely related to sample size; that is, as TDR increases, sample size decreases.

Accepted Answer

This statement is true as a smaller sample size would be sufficient to estimate a larger TDR, while a larger sample size would be needed to estimate a smaller TDR.

Question 12

In monetary-unit sampling, the likelihood of high dollar items from the population being included in the sample is greater than the likelihood for small dollar items.

Accepted Answer

This is because monetary-unit sampling (MUS) involves selecting items for sampling with a probability proportionate to their individual dollar value. Therefore, items with a high dollar value have a greater chance of being selected for the sample compared to items with a small dollar value.

Question 13

The most common method of associating misstatement assumptions with layers of the computed upper deviation rate in monetary-unit sampling is to associate the largest dollar misstatement percents with the largest layers.

Accepted Answer

This statement is true. The largest dollar misstatements are typically found in the largest layers of monetary-unit sampling, so it makes sense to associate the most conservative misstatement assumptions with those layers. This helps to ensure that the auditor is sufficiently conservative in assessing the risk of material misstatement in those areas with the highest potential impact on the financial statements.

Question 14

Although systematic sample selection is easy to use, its primary disadvantage is that it is not a probabilistic sampling method.

Accepted Answer

Systematic sample selection is a probabilistic sampling method as it involves randomly selecting the first individual and then selecting every nth individual in the population.

Question 15

Stratification allows the auditor to emphasise particular population items.

Accepted Answer

Stratification involves dividing a population into subgroups based on some relevant characteristic, such as geographical location or transaction amount. By doing so, the auditor can focus on specific areas or items that are deemed high risk or more significant, thus emphasising particular population items.

Question 16

For tests of details of balances, a lower frequency of misstatements can result in smaller sample sizes.

Accepted Answer

When there is a lower frequency of misstatements, it means that the population is more homogeneous and therefore, the sample size required to achieve a specific level of precision and confidence in the results is likely to be lower. This is because there is less variation to account for in the population, making it easier to detect and correct errors.

Question 17

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

Accepted Answer

As the estimated misstatement in the population increases, auditors typically increase the sample size to obtain a more precise estimate of the misstatement, not decrease it.

Question 18

Assessed control risk and acceptable risk of assessing control risk too low (ARO)are directly related; that is, as assessed control risk increased, ARO also increases.

Accepted Answer

This statement is true. As assessed control risk increases, it means that the auditor has determined there is a higher risk of material misstatement in the financial statements. If the auditor were to assess control risk too low, this would increase the likelihood of not detecting a material misstatement and increase the acceptable risk of assessing control risk too low. Therefore, the two risks are directly related.

Question 19

An increase in sample size has the effect of decreasing the sampling error if the actual sample deviation rate remains constant.

Accepted Answer

When sample size increases, the sample becomes more representative of the population and the sampling error decreases. However, if the actual deviation rate changes with the increase in sample size, the sampling error may still be high.

Question 20

Monetary-unit sampling selects individual dollars as the sampling unit, but in practice auditors do not audit individual dollars.

Accepted Answer

Monetary-unit sampling (MUS) uses dollars as the sampling unit and quantifies the amount of sampling risk in monetary terms. However, in practice, auditors generally do not audit individual dollars but use statistical sampling techniques to select and audit representative samples of monetary units. These samples help auditors to draw conclusions about the entire population of transactions or balances.

Quiz 14: Audit sampling