Question 1

When the computed upper exception rate is greater than the tolerable exception rate, it is necessary for the auditor to take specific action.Which of the following courses of action would be most difficult to justify?
A)Reduce the tolerable exception rate so as to accept the sample results.
B)Expand the sample size and perform more tests.
C)Revise the assessed control risk.
D)Write a letter to management which outlines the control deficiencies.

Accepted Answer

Reducing the tolerable exception rate is not an appropriate course of action and is difficult to justify as it means lowering the overall level of assurance obtained from the audit. The tolerable exception rate is typically set based on professional judgment, risk assessment, and materiality considerations, and should not be compromised in response to adverse findings. Instead, the auditor should consider other options such as increasing the sample size, revising the assessed control risk, or communicating the control deficiencies to management.

Question 2

Place the following steps in their proper order: 1.Analyze exceptions
2)Select the sample
3)Define attributes and exception conditions
4)State the objectives of the audit test
5)Specify the tolerable exception rate
A)1, 3, 2, 4, 5.
B)4, 3, 1, 2, 5.
C)4, 3, 5, 2, 1.
D)1, 2, 3, 4, 5.

Accepted Answer

The first step is to state the objectives of the audit test (4). This will help determine the scope of the audit and guide the selection of the sample. The next step is to define the attributes and exception conditions (3). This involves determining what constitutes an exception and how it will be measured. Once the attributes and exception conditions have been defined, the auditor can then select the sample (2) that will be tested. This sample should be representative of the entire population and chosen randomly. The auditor then specifies the tolerable exception rate (5), which is the maximum acceptable rate of exceptions. Finally, the auditor can analyze exceptions (1) and determine if any further action is required.

Question 3

Which of the following represents the best description of the tolerable exception?
A)The highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively
B)The highest exception rate the auditor expects to find in the population
C)The number of exceptions found in the sample divided by the sample size
D)The highest estimated exception rate in a population at a given EPER

Accepted Answer

The tolerable exception is the highest exception rate the auditor will allow in the control being tested and still conclude it is operating effectively. This threshold is set by the auditor based on professional judgment and may vary depending on the risk assessment of the control and the materiality of the related account balance or financial statement assertion. Option B refers to the expected rate of exceptions, which may be used to determine the sample size for auditing procedures. Option C represents the sample exception rate, while Option D refers to the estimated exception rate in the population based on the auditor's understanding of the control environment and testing results.

Question 4

When analyzing exceptions, the auditor should keep in mind that:
A)all exceptions must be reported to management.
B)they should determine the breakdown in the internal controls that allowed the exceptions to occur.
C)the nature of an exception and its causes have no effect on the qualitative evaluation of the system.
D)exceptions do not need to be analyzed if it is too costly.

Accepted Answer

The auditor should determine the breakdown in the internal controls that allowed the exceptions to occur in order to provide recommendations for improvement to management. All exceptions may not necessarily need to be reported to management, and the nature and causes of exceptions affect the overall evaluation of the system. Cost should not be the only factor in deciding whether to analyze exceptions.

Question 5

Auditors often use the ________ to determine the estimated population exception rate.
A)current year's audit results
B)tolerable exception rate
C)preceeding year's audit results
D)estimated computed by management

Accepted Answer

The answer of Auditors often use the ________ to determine...

Question 6

The relationship of tolerable exception rate (TER)to sample size is:
A)direct (larger TER = larger sample).
B)inverse (larger TER = smaller sample).
C)variable (sometimes larger, sometimes smaller).
D)not determinable.

Accepted Answer

As the tolerable exception rate increases, the sample size decreases. This is because a larger TER means that a higher level of error is acceptable, so less data needs to be collected to make a conclusive decision.

Question 7

If the auditor concludes that the CUER is 5% at a 8% sampling risk, this means that the exception rate in the population is no greater than 5% with an 8% risk of the exception rate exceeding 5%.

Accepted Answer

A CUER (Computed Upper Exception Rate) of 5% at 8% sampling risk means that the auditor has 8% chance of incorrectly concluding that the exception rate in the population is greater than 5%. Therefore, the true exception rate in the population is no greater than 5% with a 92% level of confidence (100%-8%).

Question 8

Which of the following is the exception rate that the auditor expects to find before testing?
A)Sample exception rate
B)Estimated population exception rate
C)Computed exception rate
D)Tolerable exception rate

Accepted Answer

The estimated population exception rate is the rate that the auditor expects to find in the population before testing.

Question 9

The exception rate the auditor will permit in the population and still be willing to reduce the assessed level of control risk is called the:
A)tolerable exception rate.
B)estimated population exception rate.
C)acceptable risk of overreliance.
D)sample exception rate.

Accepted Answer

The tolerable exception rate is the maximum rate of exceptions that an auditor is willing to accept in the population and still reduce the assessed level of control risk. This rate is determined based on the auditors' judgment and assessment of the risk of material misstatement in the financial statements. The other options, estimated population exception rate, acceptable risk of overreliance, and sample exception rate, are not specifically related to the auditor's willingness to reduce the assessed level of control risk.

Question 10

The acceptable risk of overreliance:
A)is the risk that the auditor will erroneously conclude that the controls are less effective than they actually are.
B)is less of a concern to the auditors than the risk of underreliance.
C)represents the auditor's measure of sampling risk.
D)is determined by a statistical formula, and not by professional judgment.

Accepted Answer

The acceptable risk of overreliance represents the auditor's measure of sampling risk, which is the risk that the auditor's conclusion based on a sample may be different from the conclusion they would reach if they examined every item in the population. This is a key concept in audit sampling and risk assessment.

Question 11

In testing controls, an overreliance on internal controls that reduces substantive tests and increases the likelihood of not detecting a material misstatement occurs because:
A)true deviation in the population was less than the sample.
B)true deviation in the population was greater than the sample.
C)auditor judgment was flawed.
D)it is inherent in the audit risk model.

Accepted Answer

An overreliance on internal controls occurs when the auditor does not perform sufficient substantive tests, relying instead on the effectiveness of internal controls to prevent material misstatements. This increases the risk of not detecting a material misstatement if the true deviation in the population is greater than the sample. Therefore, the correct answer is B. The other choices do not provide a valid explanation for why an overreliance on internal controls might increase the risk of not detecting a material misstatement during testing.

Question 12

The upper limit of the interval estimate is also known as the confidence interval.

Accepted Answer

The upper limit of the interval estimate is a part of the confidence interval, which also includes a lower limit; together, they define the range of values within which a population parameter is estimated to lie with a certain level of confidence.

Question 13

The exception rate that the auditor will permit in the population and still be willing to use the preliminary control risk assessment is called the:
A)acceptable exception rate.
B)estimated population exception rate.
C)sample exception rate.
D)tolerable exception rate.

Accepted Answer

The tolerable exception rate is the maximum rate of deviation from the control that the auditor can tolerate and still be willing to use the preliminary control risk assessment. The other options (acceptable exception rate, estimated population exception rate, and sample exception rate) do not accurately describe the concept of a tolerable exception rate.

Question 14

Which of the following would have the least impact in determining sample size?
A)Acceptable risk of overreliance
B)Risk of assessing control risk too low
C)Tolerable exception rate
D)Population size

Accepted Answer

Population size has the least impact on determining the sample size as it only influences the precision of the estimate but not the calculation of the sample size itself. The other factors listed (acceptable risk of overreliance, risk of assessing control risk too low, tolerable exception rate) are key considerations in determining sample size.

Question 15

Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated?
A)Sample exception rate
B)Estimated population exception rate
C)Computed upper exception rate
D)Exception

Accepted Answer

The answer of Which of the following is not a...

Question 16

Which of the following must be set prior to testing a sample?
A)Sample exception rate
B)Achieved upper precision limit
C)Computed exception rate
D)Tolerable exception rate

Accepted Answer

The tolerable exception rate must be set prior to testing a sample. This is because it represents the maximum rate of exceptions that can be tolerated without concluding that there is a material misstatement in the population. The other options (A, B, C) are based on the actual testing and calculation of results, and not on pre-testing preparations.

Question 17

What types of exceptions are auditors most concerned with when evaluating populations of accounting data?

Accepted Answer

The answer of What types of exceptions are auditors most...

Question 18

The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the:
A)finite correction factor.
B)tolerable exception rate.
C)acceptable risk of overreliance.
D)estimated population exception rate.

Accepted Answer

The acceptable risk of overreliance is the risk that the auditor is willing to take in accepting a control as effective when the true population exception rate is greater than the tolerable rate. This is the level of risk that is deemed acceptable by the auditor in terms of relying on the control. The other options are not directly related to this concept.

Question 19

If an auditor judgmentally selects a sample of one hundred items from a population and finds two exceptions, the auditor:
A)can conclude that the sample exception rate is 2%.
B)can conclude that the population exception rate is 2%.
C)can calculate the highest exception rate expected in the population.
D)cannot make any conclusions about either the sample or the population.

Accepted Answer

The answer of If an auditor judgmentally selects a sample...

Question 20

If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be:
A)increased in number.
B)reduced in number.
C)not performed.
D)unchanged from prior planned settings.

Accepted Answer

If the auditor decides to assess control risk at a moderate level, it means that the auditor has determined that the controls in place are now more effective. This would result in the auditor reducing the extent of substantive testing which is typically more expensive and increasing the extent of tests of controls. Therefore, the tests of controls for the current year would be increased in number.

Quiz 15: Audit Sampling for Tests of Controls and Substantive Tests of Transactions

When the computed upper exception rate is greater than the tolerable exception rate, it is necessary for the auditor to take specific action.Which of the following courses of action would be most difficult to justify?

Place the following steps in their proper order: 1.Analyze exceptions 2) Select the sample 3) Define attributes and exception conditions 4) State the objectives of the audit test 5) Specify the tolerable exception rate

Which of the following represents the best description of the tolerable exception?

When analyzing exceptions, the auditor should keep in mind that:

Auditors often use the ________ to determine the estimated population exception rate.

The relationship of tolerable exception rate (TER) to sample size is:

If the auditor concludes that the CUER is 5% at a 8% sampling risk, this means that the exception rate in the population is no greater than 5% with an 8% risk of the exception rate exceeding 5%.

Which of the following is the exception rate that the auditor expects to find before testing?

The exception rate the auditor will permit in the population and still be willing to reduce the assessed level of control risk is called the:

The acceptable risk of overreliance:

In testing controls, an overreliance on internal controls that reduces substantive tests and increases the likelihood of not detecting a material misstatement occurs because:

The upper limit of the interval estimate is also known as the confidence interval.

The exception rate that the auditor will permit in the population and still be willing to use the preliminary control risk assessment is called the:

Which of the following would have the least impact in determining sample size?

Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated?

Which of the following must be set prior to testing a sample?

What types of exceptions are auditors most concerned with when evaluating populations of accounting data?

The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the:

If an auditor judgmentally selects a sample of one hundred items from a population and finds two exceptions, the auditor:

If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be: