Question 1

Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Accepted Answer

Choice "A" is correct. Inclusion of negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling. Choice "B" is incorrect. All items in the population should have an equal chance to be included in the sample. Therefore, the sampling process should not begin before the complete population is available, regardless of whether classical variables sampling or PPS sampling is used. Choice "C" is incorrect. When planning a particular sample for a substantive test of details, the auditor should consider preliminary estimates of materiality. Choice "D" is incorrect. If no errors are expected, PPS sampling generally requires a smaller sample than other methods.

Question 2

An auditor would least likely use computer software to:

Accepted Answer

Choice "D" is correct. The assessment of control risk is based on auditor judgment. A computer cannot replace professional auditor judgment in assessing control risk. Choice "A" is incorrect. Computer software would be used when constructing parallel simulations. Parallel simulation involves taking the client's data and reprocessing it using the auditor's equipment and software. Choice "B" is incorrect. The auditor would use generalized audit software or retrieval package software to access client data files. Choice "C" is incorrect. The auditor would most likely use some sort of software to prepare spreadsheets.

Question 3

The use of the ratio estimation sampling technique is most effective when:

Accepted Answer

Choice "A" is correct. Ratio estimation is most effective if there is a correlation between book values and audit amounts. Choice "B" is incorrect. A relatively small number of differences do not improve the effectiveness of ratio estimation sampling relative to other techniques. Choice "C" is incorrect. Whether populations are stated in terms of quantities or book values is irrelevant in determining the effectiveness of ratio estimation. Choice "D" is incorrect. Large overstatement and understatement errors do not give the ratio estimation sampling technique an advantage in effectiveness relative to other sampling techniques.

Question 4

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the:

Accepted Answer

Choice "A" is correct. The sample size in a variables sampling application is affected by the variability in the population (generally represented by the standard deviation), the acceptable level of risk (i.e., the risk of incorrect acceptance), the tolerable misstatement, and the expected misstatement. Choices "B", "C", and "D" are incorrect, per the above Explanation.

Question 5

A client that recently installed a new accounts payable system assigned employees a user identification code (UIC) and a separate password. Each UIC is a person's name, and the individual's password is the same as the UIC. Users are not required to change their passwords at initial log-in nor do passwords ever expire. Which of the following statements does not reflect a limitation of the client's computer access control?

Accepted Answer

Choice "D" is correct. The requirement that employees take regular vacations is a good internal control, but it is unrelated to computer-access controls. Choice "A" is incorrect. Using employee's names as their passwords is an ineffective computer-access control, because passwords are easily guessed. Choice "B" is incorrect. It would be acceptable to assign employee names as passwords, as long as the employees were required to change their passwords at initial log-in as well as periodically in the future. The fact that this requirement is not in place is a limitation of the client's computer-access controls. Choice "C" is incorrect. If password controls are used to segregate the duties of individual employees, using employee names as passwords allows an employee to circumvent this segregation by logging in with another employee's password.

Question 6

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:

Accepted Answer

Choice "A" is correct. The auditor decided to increase the level of the preliminary assessment of control risk because the 7% tolerable rate (maximum rate of deviations that an auditor would be willing to accept without altering his/her planned reliance on the control) was less than the 8% upper deviation rate. Choice "B" is incorrect. The expected deviation rate was 2.5%, not 7%. Choice "C" is incorrect. The upper deviation rate is always more than the percentage of errors in the sample since the sum of the percentage of the errors and the allowance for sampling risk equals the upper deviation rate. Choice "D" is incorrect. The expected deviation rate is not used in evaluating the sample. It is the upper deviation rate that is compared to the tolerable rate in evaluating a sample.

Question 7

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

Accepted Answer

Choice "D" is correct. By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable. Choice "A" is incorrect. Statistical sampling does not provide any advantage with respect to converting the test into a dual-purpose test. Choice "B" is incorrect. Statistical sampling still requires judgment to determine sample sizes. The tolerable rate of deviation, the likely rate of deviation, and the allowable risk of assessing control risk too low are all determined by the auditor's professional judgment. Choice "C" is incorrect. Statistical sampling does not afford greater assurance than a nonstatistical sample of the same size. It only provides the auditor with a better measure of the sufficiency of the evidence found, and helps to evaluate the results found.

Question 8

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?

Accepted Answer

Choice "D" is correct. Attributes sampling is the statistical sampling method used when testing controls. Choice "A" is incorrect. Variables sampling is used in substantive testing, not in tests of controls. Choice "B" is incorrect. Stratified sampling is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls. Choice "C" is incorrect. Ratio estimation is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls.

Question 9

Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files?

Accepted Answer

Choice "B" is correct. It is easier to access and alter microcomputer data files than manually prepared data files. Microcomputer access security is difficult to maintain because of the increased number of data entry points and the potential ability to defeat access controls. Choice "A" is incorrect. Once the programs are written, the focus will still be on the accuracy of the transactions. Choice "C" is incorrect. One of the benefits of an automated system over a manual system is the removal of random errors from the process. (Instead, systematic errors are more common.) Choice "D" is incorrect. There is no significant difference between comparing physical counts with accounting records kept either manually or on an automated system.

Question 10

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

Accepted Answer

Choice "C" is correct. An increase in tolerable misstatement results in a smaller sample size. An increase in the assessed level of control risk leads to an increase in sample size. Choices "A", "B", and "D" are incorrect, per the above Explanation.

Question 11

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?

Accepted Answer

Choice "A" is correct. There is an inverse relationship between the tolerable deviation rate and sample size: as the auditor is willing to accept a greater deviation rate, a smaller sample size can be used. Choice "B" is incorrect. There is a direct relationship between expected deviation rate and sample size: as the likely rate of deviation decreases, a smaller sample size can be used. Choice "C" is incorrect. There is an inverse relationship between the risk of assessing control risk too low and sample size: as the allowable level of risk increases, the sample size decreases. Choice "D" is incorrect. Population size has a relatively small effect on sample size, especially in large populations. The Effect of Information Technology on the Audit.

Question 12

For which of the following audit tests would a CPA most likely use attribute sampling?

Accepted Answer

Choice "A" is correct. Attribute sampling is used to estimate a rate of occurrence, and often involves a yes-no question. Attribute sampling could be used to determine the error rate in posting journal entries, perhaps by asking, "Is the entry posted to the proper account?" Choice "B" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as the amount in an expense account. Choice "C" is incorrect. Variables sampling is typically used to estimate a numerical quantity, such as a reasonable amount for depreciation expense. Choice "D" is incorrect. Attribute sampling is used to estimate a rate of occurrence, not to select the items to include in a sample.

Question 13

Which of the following factors is (are) considered in determining the sample size for a test of controls?

Accepted Answer

Choice "A" is correct. To determine the number of items to be selected for a particular sample for a test of controls, the auditor should consider the tolerable rate of deviation from the controls being tested, the likely rate of deviations (expected deviation rate), and the allowable risk of assessing control risk too low. Choices "B", "C", and "D" are incorrect, per the above Explanation.

Question 14

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider:

Accepted Answer

Choice "C" is correct. The sample size in an attribute sampling application is affected by the allowable risk of assessing control risk too low, the tolerable deviation rate, and the expected deviation rate. The average dollar value of the check requests has no effect on the sample size. Choices "A", "B", and "D" are incorrect, per the above Explanation.

Question 15

For which of the following audit tests would an auditor most likely use attribute sampling?

Accepted Answer

Choice "D" is correct. Attribute sampling examines the rate of occurrence in a sample: the attribute either exists or does not exist. Therefore, attribute sampling is more useful for tests of controls, such as the examination of time cards for proper approval. Choice "A" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate. Choice "B" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate. Choice "C" is incorrect. Attribute sampling is not appropriate for this substantive test of details. Classical variables sampling or Probability-Proportionate-to-Size (PPS) sampling, also known as dollar-unit sampling, is more appropriate.

Question 16

Which of the following statements is correct concerning statistical sampling in tests of controls?

Accepted Answer

Choice "B" is correct. Deviations from control activities do not necessarily result in misstatements. Therefore, deviations from pertinent control activities at a given rate would ordinarily be expected to result in misstatements at a lower rate. Choice "A" is incorrect. In tests of controls, population size has virtually no effect on sample size unless the population is small. Choice "C" is incorrect. There is a direct relationship between expected deviation rate and sample size. Choice "D" is incorrect. Detection risk and sample size are not factors in determining the tolerable deviation rate in a test of controls. The tolerable rate is simply the maximum rate that the auditor is willing to accept without altering his or her planned level of reliance.

Question 17

Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency?

Accepted Answer

Choice "C" is correct. When evaluating whether a control deficiency is a significant deficiency or a material weakness, the auditor should consider both the likelihood and magnitude of any potential misstatement. Choices "A", "B", and "D" are incorrect, based on the above.

Question 18

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

Accepted Answer

Choice "C" is correct. Variables sampling is normally used to estimate a numerical measurement of a population. Choice "A" is incorrect. Attribute sampling is used when testing controls as part of the auditor's evaluation of a company's internal control. Choice "B" is incorrect. Stop-or-go sampling is a type of attribute sampling used when testing controls. Choice "D" is incorrect. Random number sampling is a technique used to select a sample.

Question 19

When an auditor tests the internal controls of a computerized accounting system, which of the following is true of the test data approach?

Accepted Answer

Choice "d" is correct. The test data approach refers to a technique in which the client's application program is used to process a set of test data, the results of which are already known by the auditor. If the client's program is operating effectively, it should generate the same results determined by the auditor. Choice "a" is incorrect. An integrated test facility (not a test data approach) utilizes dummy accounts. For example, using an integrated test facility (ITF) approach, test data is initially commingled with live data, but coding to a dummy account allows later extraction from the system under actual operating conditions. Choice "b" is incorrect. Test data programs should be tailor-made by the auditor for each client's computer applications, to ensure that the data is in an appropriate form for that client's system, and that it includes the types of invalid conditions in which the auditor is interested. Choice "c" is incorrect. Test data contains the types of valid and invalid conditions in which the auditor is interested (it is not necessary to test all combinations of valid and invalid conditions).

Question 20

The sample size of a test of controls varies inversely with:

Accepted Answer

Choice "D" is correct. The sample size for a test of controls varies directly with the expected deviation rate and inversely with the tolerable rate. If the auditor expects more errors, he or she would increase sample size; conversely, if the tolerable rate of deviation increases, not as many items need to be selected. Choices "A", "B", and "C" are incorrect, per the above Explanation.

Exam 1: CPA Auditing and Attestation Exam