Deck 7: Sampling and Overview of the Risk Response Phase of the Audit

Question 1

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.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

The permanent file includes detailed descriptions of evidence gathered for a particular year's audit.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

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

An advantage of statistical sampling is that it allows an auditor to measure sampling risk.

Question 14

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 15

The decision of what constitutes sufficient appropriate audit evidence is a matter for professional judgement

Question 16

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

Question 17

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

Question 18

The permanent file includes client information and documentation that apply to more than one audit.

Question 19

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

Question 20

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

Question 21

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 22

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 23

When conducting an audit, statistical sampling involves

A) random selection and probability to evaluate results
B) calculated selections and probability to evaluate results
C) less staff and training, and is less costly than other sampling
D) allows the auditor to select a sample they believe appropriate

Question 24

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 25

Before selecting a sample, an auditor will use their professional judgement 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

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 27

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

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 28

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 29

Non statistical sampling is easier to use than statistical sampling as it

A) requires less staff training
B) is lower in cost
C) allows the auditor to select a sample they believe is appropriate
D) all of the above

Question 30

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 31

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 32

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 33

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 34

Which of the following statements regarding statistical sampling is ?

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 35

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 36

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 37

Which of the following statements is in?

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 their professional judgement to determine the tolerable error and required level of confidence
D) an auditor will use their professional judgement when considering what would be considered an error within the population tested

Question 38

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 39

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 40

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 41

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

Question 42

During the execution stage of the audit, an auditor will document:

A) details of audit tests undertaken
B) their understanding of their client
C) related parties identified
D) analytical procedures used to aid in risk identification

Question 43

Why do auditors inspect records and documents?

A) To check the dates of transactions
B) For evidence that management have authorised significant purchases
C) To check that a transaction occurred
D) All of the above

Question 44

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 45

Which of the following would not be included in an auditor's permanent file?

A) The client's organisational chart
B) Copies of long-term contracts
C) Copies of debtors' confirmation letters
D) Prior years' audit reports

Question 46

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

Question 47

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

Question 48

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 accounts
C) no fraud has occurred during the year
D) they have remained independent of their clients

Question 49

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 50

If an auditor decides that a client has internal controls that can reduce the likelihood of a material misstatement for an identified risk, the auditor will:

A) test those controls
B) qualify the audit report
C) adopt a predominantly substantive approach
D) not test those controls

Question 51

An auditor uses their professional judgement 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 52

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

Question 53

Control risk is the risk that:

A) an auditor expresses an inappropriate audit opinion when a financial report 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 54

An audit working paper generally includes:

A) the client's name
B) cross-referencing between working papers
C) a file reference
D) all of the above

Question 55

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

Question 56

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 57

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 ASIC
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 58

Describe the major types of sampling techniques available to auditors.

Question 59

Substantive audit procedures include:

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