5.01 - AUDIT SAMPLING Flashcards
5.01 - AUDIT SAMPLING
As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely
occurred because
A) Control risk based on the auditor’s sample is greater than the true operating effectiveness of the client’s control activity.
B) The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it
will not.
C) The auditor believes that the control activity relates to the client’s assertions when, in fact, it does not.
D) Control risk based on the auditor’s sample is less than the true operating effectiveness of the client’s control activity
A) Control risk based on the auditor’s sample is greater than the true operating effectiveness of the client’s control activity.
An auditor assesses control risk too high when a sample is not representative and the proportion of exceptions in the
sample is greater than in the population.
As a result, control risk based on the auditor’s sample will be higher, not lower than the true operating effectiveness of the control activity.
If the auditor believes a control activity relates to an assertion when it does not, the auditor will assess control risk too low, not too high.
If the auditor believes that the control activity will reduce the extent of substantive testing, it indicates that the auditor believes the control can be relied upon, indicative of a low assessment of
control risk, not high.
5.01 - AUDIT SAMPLING
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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?
A) The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated.
B) The internal control not being as effective as the auditor believes.
C) The internal control being more effective than the auditor believes.
D) The auditor selecting inappropriate auditing procedures
D) The auditor selecting inappropriate auditing procedures
Nonsampling risk is the risk that an auditor will draw an incorrect conclusion from an audit procedure due to a flaw in the procedure or the auditor’s interpretation of the results, which would include selecting an inappropriate audit procedure.
Sampling risk is the risk that there is a flaw with the sample, causing the auditor to draw the wrong conclusion.
This is often associated with a nonrepresentative sample, which would cause the auditor to conclude that internal controls are more or less effective than they actually are or concluding that a misstated balance is fairly stated or that a fairly stated balance is misstated.
5.01 - AUDIT SAMPLING
An auditor discovers that an account balance believed to be materially misstated based on an audit sample was
not materially misstated based on the total population of the account balance. This is an example of which of the
following sampling types of risks?
A) Assessing control risk too high.
B) Incorrect acceptance.
C) Incorrect rejection.
D) Assessing control risk too low
C) Incorrect rejection.
Incorrect rejection means rejecting a population because of a projected error that is based on a sample exceeds the
tolerable misstatement despite the fact that the actual error in the population is below the tolerable misstatement.
Incorrect acceptance would occur when a projected error that is based on a sample is lower than the tolerable misstatement when the actual error in the population is higher.
Assessing control risk too low or too high results from a deviation rate detected in an attribute sample, not one applied to an account balance.
5.01 - AUDIT SAMPLING
Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?
A) The amount of bad debt write-offs
in the prior year.
B) The size of the intercompany receivable balance.
C) The auditor’s allowable risk of assessing control risk is too low.
D) Preliminary judgments about materiality levels.
D) Preliminary judgments about materiality levels.
The purpose of a test of subsequent cash receipts would be to determine if amounts reported in accounts receivable at year-end were fairly stated.
Preliminary judgments about materiality are relevant since that will determine whether or not a potential misstatement is material.
Bad debts written off in the prior year were already excluded from the year-end balance and are not relevant.
An intercompany receivable would not be the target of such a test.
The assessed level of control risk is relevant to planning the sample for a test of controls, not a test of amounts.
