A3 Becker IC, sampling, & risk

Question 1

In a probability-proportional-to-size 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 would be:

A.	$10,000

B.	$5,000

C.	$2,000

D.	$1,000

Answer 1

Choice “C” is correct. The sample error of $1,000 ($5,000 − $4,000) is projected to the entire interval through use of a “tainting factor” of 20 percent ($1,000 / $5,000). If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be 20 percent of $10,000, or $2,000.

Choices “B” and “A” are incorrect, per the above explanation.

Choice “D” is incorrect, as the sample error of $1,000 needs to be projected to the entire interval.

Question 2

Auditors try to identify predictable relationships when applying analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

A.	Interest expense.

B.	Accounts payable.

C.	Allowance for doubtful accounts.

D.	Accounts receivable.

Choice “A” is correct. Income statement accounts tend to be more predictable than balance sheet accounts, and therefore interest expense would likely yield a higher level of evidence than the allowance for doubtful accounts, accounts receivable, or accounts payable.

Choice “B” is incorrect. Accounts payable is affected by payments made at the discretion of the client, which may not be particularly predictable.

Choice “C” is incorrect. The allowance for doubtful accounts is affected by write-offs of specific receivables, which is not particularly predictable.
Choice “D” is incorrect. Accounts receivable is affected by payments received from customers, which is not particularly predictable.