14.1 Flashcards
As a result of tests of controls, an auditor underrelies on controls. This incorrect assessment most likely occurred because
Operating effectiveness based on the auditor’s sample is less than the true operating effectiveness of the controls.
The risk of underreliance is that the auditor erroneously concludes that controls are less effective than they actually are. This type of error affects audit efficiency because it generally requires additional work to correct the first conclusion (AU-C 530).
Fact Pattern:
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 overreliance (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined, and seven of them were lacking approval. The auditor then determined the achieved upper deviation limit to be 8%.
The allowance for sampling risk was
4.5%
The allowance for sampling risk equals the achieved upper deviation limit (8%) minus the sample deviation rate (7 ÷ 200 = 3.5%), or 4.5%.
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if
The population has highly variable recorded amounts.
The primary objective of stratification is to reduce the effect of high variability by dividing the population into subpopulations. Reducing the effect of the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and the confidence level constant.
In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the prior year’s rate because of the results of the prior year’s tests of controls and the overall control environment. The auditor most likely would then increase the planned
Sample size.
To determine the sample size for a test of controls, the auditor considers (1) the tolerable rate of deviations, (2) the expected actual rate of deviations, and (3) the allowable risk of overreliance. An increase in the expected rate has the effect of increasing the degree of assurance to be provided by the sample and therefore increasing the planned sample size.
An auditor suspects that the invoices from a small number of vendors contain serious misstatements and therefore limits the sample to those vendors only. A major disadvantage of selecting such a directed sample of items to examine is the
Inability to quantify the sampling error related to the total population of vendor invoices.
Judgment sampling uses the auditor’s subjective judgment to determine the sample size (number of items examined) and sample selection (which items to examine). This subjectivity is not always a weakness. The auditor, based on other audit work, may be able to test the most material and risky transactions and to emphasize the types of transactions subject to high control risk. Probability (random) sampling provides an objective method of determining sample size and selecting the items to be examined. Unlike judgment sampling, it also provides a means of quantitatively assessing precision and reliability.
In a monetary-unit sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample is
$2,000.
MUS is a commonly used method of statistical sampling for tests of details of balances because it provides a simple statistical result expressed in dollars. Given that only one misstatement was detected, the projected misstatement for this sample is the product of the tainting percentage and the sampling interval. The tainting percentage is calculated as the difference between the recorded amount and the audited amount, divided by the recorded amount. In this sample, the tainting percentage is 20% [($5,000 – $4,000) ÷ $5,000]. Multiplying this number by the sampling interval results in a projected misstatement based on the sample of $2,000 ($10,000 × 20%).
Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If a computer application control that performs a limit check for each check request is to be subjected to the auditor’s test-data approach, the sample should include
One transaction.
A limit check compares an input with a limit (e.g., the number of the month cannot exceed 12). If the limit is exceeded, an error message is printed. Because this is a mechanical check (done by the computer), only one transaction need be in the sample. The transaction should exceed the limit to verify that the limit check is operating correctly.
Fact Pattern:
An auditor has been assigned to take a monetary-unit sample of a population of vouchers in the purchasing department. The population has a total recorded amount of $300,000. The auditor believes that a maximum misstatement of $900 is acceptable and would like to have 95% confidence in the results. (The confidence factor at 95% and zero misstatements = 3.00.) Additional information is provided in the opposite column.
In examining the sample, one overstatement was detected causing an extension of $270 to the tolerable misstatement. Assuming a sample size of 1,000 and assuming that the maximum dollar amount of overstatement, if no misstatements were found, was established to be $900 before the sampling analysis, what conclusion can the auditor now make from the sampling evidence?
(S)he is 95% confident that the dollar amount of overstatement in the population of vouchers is less than $1,170.
Had the auditor detected no misstatements in the sample, (s)he could have been 95% confident that the dollar amount of overstatement in the balance was less than $900. Given discovery of an overstatement causing an extension to the tolerable misstatement of $270, the auditor can conclude with 95% confidence that the overstatement is less than $1,170 ($900 + $270).
For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting purchase orders for proper approval by supervisors.
Attribute sampling tests binary questions, such as yes/no. It is best used to test the effectiveness of internal controls because it can estimate the rate of control deviations. When inspecting purchase orders for proper approval by supervisors, the auditor tests a binary question. A deviation occurs when a purchase order does not have the proper approval.
An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed by the client’s internal control. One of the purchase orders in the chosen sample of 20 cannot be found, and the auditor is unable to use alternative procedures to test whether that purchase order was properly approved. The auditor should
Treat the missing purchase order as a deviation for the purpose of evaluating the sample.
If the auditor is not able to apply the planned audit procedures or appropriate alternative procedures to selected items, (s)he should consider the reasons for this limitation. Furthermore, the auditor ordinarily should consider those selected items to be deviations from the procedures for the purpose of evaluating the sample.
In estimating the total value of supplies on repair trucks, Baker Company draws random samples from two equal-sized strata of trucks. The mean value of the inventory stored on the larger trucks (stratum 1) was computed at $1,500, with a standard deviation of $250. On the smaller trucks (stratum 2), the mean value of inventory was computed as $500, with a standard deviation of $45. If Baker had drawn an unstratified sample from the entire population of trucks, the expected mean value of inventory per truck would be $1,000, and the expected standard deviation would be
Greater than $250.
The standard deviation is a measure of variability within a population. That the population was stratified indicates that each stratum has a smaller standard deviation than the population as a whole. If the two diverse populations are combined, the resulting standard deviation is likely to be larger than that of either of the separate strata. Because the standard deviations of the two strata were $250 and $45, the expected standard deviation is likely to be greater than $250.
Which of the following statements is true concerning statistical sampling in tests of controls?
Deviations from specific control activities increase the likelihood of misstatements but do not always cause misstatements.
Deviations from a specific control increase the risk of misstatements in the accounting records but do not always result in misstatements. Thus, deviations from a specific control at a given rate ordinarily result in misstatements at the financial statement level at a lower rate.
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?
Incorrect acceptance.
An auditor is concerned with two aspects of sampling risk in performing substantive tests of details: the risk of incorrect acceptance and the risk of incorrect rejection. The risk of incorrect acceptance is the risk that an auditor erroneously concludes that a material misstatement does not exist when, in fact, it does.
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
The average dollar value of the check request:
The allowable risk of overriliance:
No
Yes
Tests of controls, such as tests whether check requests have been properly authorized, are binary in nature. The auditor determines whether the control has been applied. Dollar amounts are irrelevant in this form of testing. However, in sampling, the auditor must consider the acceptable risk of overreliance to determine sample size. The auditor also must estimate a population deviation rate.
An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that
There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.
By taking every twentieth item, the auditor chose a sample containing 5% (1 ÷ 20) of the items in the population. If the sample contains $3,700 of overstatements and $200 of understatements, the projected overstatements and understatements are $74,000 and $4,000, respectively, a projected misstatement of $78,000. Furthermore, sampling risk should be considered. The allowance for sampling risk calculated for a specified level of confidence is an interval around the sample result that is expected to contain the true amount of misstatement. The upper limit of this interval equals $78,000 plus the calculated allowance. Accordingly, given that projected misstatement exceeds tolerable misstatement, the auditor most likely will conclude that the risk that actual misstatement exceeds tolerable misstatement is unacceptably high.
