14.6 Flashcards
In estimation sampling for variables, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation?
The acceptable level of risk.
Variables sampling is used in tests of details because it may be used to (1) estimate the amount of a variable, such as an account balance, and (2) quantify the risk that the estimate may not approximate the true value. For substantive tests of details, the sample size depends on the auditor’s desired assurance (1.0 – the risk of incorrect acceptance) that tolerable misstatement is not less than actual misstatement in the population. The desired assurance may be based on, among other things, the following: (1) the assessed risk of material misstatement, (2) the assurance provided by other substantive procedures related to the same assertion, (3) tolerable misstatement, and (4) expected misstatement for the population. Accordingly, as the acceptable risk of incorrect acceptance decreases, the desired assurance increases, and the auditor decreases the tolerable misstatement.
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).
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.
In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. The auditor discovered $4,000 in overstatement in the sample. The company’s materiality is $65,000. The tolerable misstatement for purchases is $50,000. What should the auditor do next?
Project the detected error to the entire population.
The auditor should project the results of sampling to the population.
When an auditor uses monetary-unit sampling to examine the total value of invoices, each invoice
Has a probability proportional to its monetary value of being selected.
Monetary-unit sampling results in the selection of every nth monetary unit. Thus, a $1,000 item is 1,000 times more likely to be selected than a $1 item. The probability of selection of a sampled item is directly proportional to the size of the item.
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 examining inventory most likely would use variables sampling rather than attributes sampling to
Estimate whether the dollar amount of inventory is reasonable.
Variables sampling is used by auditors to estimate quantities or dollar amounts in substantive testing. Attribute sampling applies to tests of controls and is used to estimate a deviation rate (occurrence rate) for a population. Thus, an auditor who wants to estimate whether the dollar amount of inventory is reasonable uses variables sampling.
The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk?
The auditor selecting inappropriate auditing procedures.
Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion when the same procedure is applied to the entire population. Two types of erroneous conclusions may be drawn: (1) controls are more effective than they actually are (overreliance), or a material misstatement does not exist when in fact it does exist (incorrect acceptance), or (2) controls are less effective than they actually are (underreliance), or a material misstatement exists when in fact it does not exist (incorrect rejection). Nonsampling risk is the risk of an erroneous conclusion caused by a factor not related to sampling risk. For example, the auditor may apply inappropriate procedures or misinterpret audit evidence and not recognize misstatements or control deviations.
In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of overreliance, and the
Tolerable population deviation rate.
A test of controls is an application of attribute sampling. The initial size for an attribute sample is based on (1) the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, (2) the tolerable population deviation rate, (3) the expected population deviation rate, and (4) the population size. However, a change in the size of the population has a very small effect on the required sample size when the population is large. Consequently, population size is often not considered unless it is small.
Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls?
The population size has little or no effect on the sample size.
In an attribute sampling application, e.g., for testing internal controls, the total number of sampling units in the population should be known. However, the sample size is relatively insensitive to size changes in large populations.
An auditor is performing tests of details of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate?
ratio or difference estimation.
Difference estimation of population misstatement involves (1) determining the differences between the audit and carrying amounts for items in the sample, (2) adding the differences, (3) calculating the mean difference, and (4) multiplying the mean by the number of items in the population. An allowance for sampling risk also is calculated. Ratio estimation is similar except that it estimates the population misstatement by multiplying the carrying amount of the population by the ratio of the total audit value of the sample items to their total carrying amount. It has been demonstrated that ratio or difference estimation is both reliable and efficient when small misstatements predominate and they are not skewed.
When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible misstatement in either direction. This statistical concept is known as
precision.
The precision or confidence interval (allowance for sampling risk) is an interval around the sample statistic that is expected to include the true value of the population at the specified confidence level. When using classical variables sampling, the allowance for sampling risk is calculated based on the normal distribution.
An auditor is testing a multinational corporation’s fixed asset purchases for overstatement and notices that, out of the hundreds of purchases, a significant number of large purchases were made during the year. The auditor decides to use monetary-unit sampling (MUS) to test fixed asset purchases. Which of the following would not be an advantage of using MUS in this situation?
MUS eliminates the need for auditor judgement.
Statistical sampling, such as MUS, allows the auditor to obtain an objective sample from an existing population. However, this method of sampling does not eliminate the need for the auditor’s judgment in evaluating the sample.
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
Measure the sufficiency of the evidence obtained.
Statistical sampling helps the auditor to design an efficient sample, to measure the sufficiency of the evidence obtained, and to evaluate the sample results. Auditors are required to obtain sufficient appropriate evidence. Sufficiency is the measure of the quantity of evidence. It relates to the design and size of the sample.
The auditor failed to recognize a deviation included in a sample intended to test controls related to a transaction process. This failure best reflects
Nonsampling risk.
Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm’s audit practice in accordance with the quality control standards (AU-C 530).
