AUD 3.8 & 3.9 - Sampling

Question 1

The risk that the sample is not representative of the population and the auditors conclusion will be different from the conclusion had the auditor examined 100 percent of the population:

Answer 1

Sampling risk

Question 2

Variability = uncertainty which also = what?

Answer 2

A larger sample size

Question 3

Audit sampling methods can be either:

Answer 3

Statistical or nonstatistical

Question 4

Auditors specify the sampling risk they are willing to accept and then calculate the sample size that provides that degree of reliability. Results are evaluated quantitatively.

Answer 4

Statistical sampling

Question 5

The sample size is not determined mathematically. Auditors use their judgement in determining the sample size and sample results are evaluated using auditors judgment

Answer 5

Nonstatistical sampling

Question 6

Advantages of statistical sampling:

Answer 6

Measure the sufficiency of the audit evidence
Objective basis or quantitatively evaluating sample results
Design an efficient sample
Quantify sampling risk to limit risk to an acceptable level

Question 7

This should be used in statistical sampling to give all items in the population an equal change to be included in the sample being audited:

Answer 7

Random sample selection

Question 8

Three types of sampling used:

Answer 8

Attribute sampling
Variables sampling and PPS sampling

Question 9

This sampling is used for testing internal controls:

Answer 9

Attribute sampling

Question 10

This sampling is used in substantive testing of account balances

Answer 10

Variables sampling or PPS sampling

Question 11

This sampling usually deals with yes or no question rather than dollar values:

Answer 11

Attribute sampling

Question 12

What are two sampling risks in substantive testing?

Answer 12

Risk of incorrect acceptance
Risk of incorrect rejection

Question 13

Two sampling risks in test of controls:

Answer 13

Risk of assessing control risk too low
Risk of assessing control risk too high

Question 14

The risk that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated

Answer 14

Risk of incorrect acceptance

Question 15

Risk that the sample supports the conclusion that the recorded account balance is magically misstated when in fact it is not materially misstated:

Answer 15

Risk of incorrect rejection

Question 16

Risk that the assessed level of control risk based on the ample is less than the true risk based on the actual operating effectiveness of the control

Answer 16

Risk of assessing control risk too low

Question 17

Risk that the assessed level of control risk based on the sample is greater than the true risk based on the actual operating effectiveness of the control

Answer 17

Risk of assessing control risk too high

Question 18

Which two sampling risks deal with a lack of efficiency in the audit?

Answer 18

Risk of incorrect rejection
Risk of assessing control risk too high

Question 19

Which two sampling risks deal with a lack of effectiveness in the audit?

Answer 19

Risk of incorrect acceptance
Risk of assessing control risk too low

Question 20

The risk of being ineffective + the confidence level of the auditor should equal what?

Answer 20

100%

Question 21

For variable sampling (substantive tests of details), I the recorded value of the population is OK and the sample indicates the population is OK, the decision was:

Answer 21

Correct

Question 22

For variable sampling (substantive tests of details), I the recorded value of the population is OK and the sample indicates the population is NOT OK, the decision was:

Answer 22

Incorrect
Risk of incorrect rejection
Not efficient

Question 23

For variable sampling (substantive tests of details), I the recorded value of the population is NOT OK and the sample indicates the population is NOT OK, the decision was:

Answer 23

Correct

Question 24

For variable sampling (substantive tests of details), I the recorded value of the population is NOT OK and the sample indicates the population is OK, the decision was:

Answer 24

Incorrect
Risk of incorrect acceptance
Not effective

Question 25

For attribute sampling (tests of controls), the true operation of the control is OK and the sample indicates the control’s operation is OK, the decision was:

Answer 25

Correct

Question 26

For attribute sampling (tests of controls), the true operation of the control is OK and the sample indicates the control’s operation is NOT OK, the decision was:

Answer 26

Incorrect Risk of assessing control risk too high Not efficient

Question 27

For attribute sampling (tests of controls), the true operation of the control is NOT OK and the sample indicates the control’s operation is OK, the decision was:

Answer 27

Incorrect Risk of assessing control risk too low Not effective

Question 28

For attribute sampling (tests of controls), the true operation of the control is NOT OK and the sample indicates the control’s operation is NOT OK, the decision was:

Answer 28

Correct

Question 29

All aspects of audit risk that are not due to sampling. This risk is always present. Examples of this risk are selecting audit procedures that are not appropriate to achieve specific objectives and failure by the auditor to recognize misstatements in documents examined:

Answer 29

Nonsampling risk

Question 30

A sampling method used to estimate the rate (percentage) of occurrence (exception) of a specific characteristic (attribute)

Answer 30

Attribute sampling

Question 31

The maximum rate of deviation from a prescribed procedure that auditor will tolerate without modifying planned reliance on internal controls

Answer 31

Tolerable deviation rate

Question 32

The auditors best estimate of the deviation rate in the population from which it was selected

Answer 32

Deviation ratae

Question 33

When planning a particular audit sample for tests of controls, the auditor applies professional judgement in considering:

Answer 33

The tolerable deviation rate Allowable risk of assessing control risk too low

Question 34

Assume that the tolerable rate for a population is 5% and the sample consists of 60 items, if no deviations are found in the sample of 60, the auditor may conclude:

Answer 34

There is an acceptably low sampling risk that the true deviation rate in the population exceeds the tolerable rate of 5% because the sample deviation rate is much less than the tolerable rate

Question 35

Assume that the tolerable rate for a population is 5% and the sample consists of 60 items, if the sample includes 2 or more deviations (2/60 = 3.33%) in the sample of 60, the auditor may conclude:

Answer 35

That there is an unacceptable high sampling risk that the rate of deviations in the population exceeds the tolerable rate of 5% because the sample deviation rate is close to the tolerable rate

Question 36

In assuming the auditor wants to determine the percentage of sales order that are missing credit approval as the attribute sampling application for test of controls, the auditor must perform the following steps:

Answer 36

Define the objective of the test Define the population Define the sampling unit Define the attributes of interest Determine the sample size Select the sample Evaluate the results Form a conclusion about the internal control tested

Question 37

The auditor must specify the following factors when determining the sample size in attribute sampling:

Answer 37

Risk of assessing control risk too lo Tolerable deviation rate Expected deviation rate Population size

Question 38

The risk of assessing control risk too low and sample size has what relationship?

Answer 38

Inverse If the auditor wants to assume less risk, use a larger sample size If the auditor wants to assume more risk, use a smaller sample size

Question 39

The tolerable deviation rate and sample size has what relationship?

Answer 39

Inverse If the auditor accepts less deviation rate, increase the sample size If the auditor accepts more deviation rate, decrease the sample size

Question 40

Expected deviation rate and sample size has what relationship?

Answer 40

Direct If the auditor expects less deviations, use a smaller sample size If the auditor expects more deviations, use a larger sample size

Question 41

What are two types of sampling techniques used in attribute sampling when selecting a sample size?

Answer 41

Random sampling Systematic selection (selecting every nth item)

Question 42

What type of sampling technique when selecting samples is not acceptable when using attribute sampling?

Answer 42

Block (cluster) sampling

Question 43

What is a disadvantage to systematic sampling?

Answer 43

Results may be skewed if errors occur in a systematic pattern / bills are paid in the same order each month

Question 44

The upper deviation rate formula is:

Answer 44

Sample deviation rate + allowance for sampling risk

Question 45

Assume the auditor finds one sales order that is missing the proper credit approval in a sample of 100 sales order, calculate the sample deviation rate:

Answer 45

1/100 = 1%

Question 46

Assume the auditor finds one sales order that is missing the proper credit approval in a sample of 100 sales order and the upper deviation rate was 4.7, what is the allowance for sampling risk?

Answer 46

1/100 = 1% (deviation rate) 4.7% (upper deviation rate) - 1% = 3.7% is the allowance for sampling risk

Question 47

Assume the auditor finds one sales order that is missing the proper credit approval in a sample of 100 sales order and accepts a 5% risk of assessing control risk too low, and the upper deviation rate was 4.7, and the allowance for sampling risk is 3.7%, what is the auditors conclusion?

Answer 47

The auditor is 95% sure the deviation rate does not exceed 4.7%

Question 48

If the upper deviation rate is less than or equal to the auditors tolerable deviation rate, the auditor can..

Answer 48

The auditor may rely on the control

Question 49

If the upper deviation rate exceeds the auditors tolerable deviation rate, the auditor can..

Answer 49

Can not rely on the control and either select and test other internal controls or modify the NET of the substantive tests to reflect a reduced reliance on controls

Question 50

A special type of attribute sampling appropriate when the auditor believes that the population deviation rate is zero or near zero. It is used when the auditor is looking for a very critical characteristic (Fraud):

Answer 50

Discovery sampling

Question 51

Designed to avoid oversampling for attributed by allowing the auditor to stop an audit test before complete in all steps. Used when few errors are expected

Answer 51

Stop and go sampling (sequential sampling)

Question 52

Assume the upper deviation rate has been determined to be 4.7% and the tolerable rate is 3%, would the auditor rely on the control? What is the tolerable rate is 6%?

Answer 52

If 3% - No because 3% < 4.7% If 6% - Yes because 6% > 4.7%

Question 53

A statistical sampling method used to estimate the numerical measurement of a population such as a dollar value. Used primarily for substantive testing.

Answer 53

Variable sampling

Question 54

He maximum monetary misstatement in the related account balance or class of transactions that the auditor is willing to accept

Answer 54

Tolerable misstatement

Question 55

When planning a sample for a substantive test of details the auditor should consider:

Answer 55

Preliminary estimates of materiality levels Tolerable misstatement Allowable risk of incorrect acceptance

Question 56

A technique used when a population has highly variable recorded amounts so that they may be separated into relatively homogeneous groups:

Answer 56

Stratification

Question 57

If the total projected misstatement is less than the tolerable misstatement for the account balance or class of transactions, the auditor should…

Answer 57

Consider the risk that such a result might be obtained even through the true monetary misstatement for the population exceeds tolerable misstatement

Question 58

Three commonly used classical variables sampling plans:

Answer 58

Mean-per-unit estimation Ratio estimation Difference estimation

Question 59

A sampling plan that uses the average value of the items in the sample to estimate the true population value

Answer 59

Mean-per-unit estimation (Does not require the book value of the population to estimate the true population value)

Question 60

A sampling plan that uses the ratio of the audited values of items to their book values to project the true population value:

Answer 60

Ratio estimation

Question 61

To use this sampling plan, for it to be highly effective, the audited and book amounts must be proportionate

Answer 61

Ratio estimation

Question 62

A sampling plan that uses the average difference between the audited values of items and their book values to project the actual population value. Used when items are not proportionate.

Answer 62

Difference estimation

Question 63

This sampling plan is very sensitive to the variability of the population. Auditors normally stratify the population into relatively similar groups o reduce the sample size.

Answer 63

Mean-per-unit estimation

Question 64

These sampling plans usually require smaller sample sizes however they are only effective when the auditor expects large numbers of over/under statements

Answer 64

Ratio and difference estimation

Question 65

The auditor uses the following parameters in conjunction with tables or formulas to determine the sample size for variables sampling:

Answer 65

Tolerable misstatement Expected misstatement Audit risk Risk of incorrect acceptance & risk of incorrect rejection

Question 66

Tolerable misstatements and sample size have what relationship?

Answer 66

Inverse The higher the tolerable misstatement, the lower the sample size

Question 67

Expected misstatement and sample size have what relationship?

Answer 67

Direct As expected misstatements increase, the sample size increases

Question 68

Standard deviation and sample size have what relationship? (Variable sampling)

Answer 68

Direct As the std. deviation increases, sample size increases

Question 69

Assessed level of risk and sample size have what relationship? (Variable sampling)

Answer 69

Direct As risk increases, the sample size increases

Question 70

Acceptable level of risk and sample size have what relationship?

Answer 70

Inverse As acceptable level of risk increases, the sample size decreases

Question 71

Assume a population of 5,000 accounts with a total value of $4,500,000. Auditor selects a sample of 200 accounts with a book value of $184,200. The audited value of these accounts is $175,000 with an average value of $875 per account. Determine the point estimate using mean-per-unit estimation:

Answer 71

$875 X 5,000 accounts = $4,375,000 point estimate

Question 72

Assume a population of 5,000 accounts with a total value of $4,500,000. Auditor selects a sample of 200 accounts with a book value of $184,200. The audited value of these accounts is $175,000 with an average value of $875 per account. Determine the point estimate using ratio estimation:

Answer 72

($175,000 (book) / $184,200 (audited)) X $4,500,000 = $4,275,000 point estimate

Question 73

Assume a population of 5,000 accounts with a total value of $4,500,000. Auditor selects a sample of 200 accounts with a book value of $184,200. The audited value of these accounts is $175,000 with an average value of $875 per account. Determine the point estimate using difference estimation:

Answer 73

((184,200 - 175,000) / 200) X 5,000 = 230,000 projected error 4,500,000 - 230,000 = 4,270,000 point estimate

Question 74

If the book value falls within the acceptable range (the point estimate +/- the allowance for sampling risk), the auditor would

Answer 74

Accept the clients book value as fairly stated

Question 75

A technique in which the sampling unit is defined as an individual dollar in a population. Once a dollar is selected, the entire account containing that dollar is audited

Answer 75

PPS sampling

Question 76

Advantages of PPS sampling

Answer 76

Automatically emphasizes larger items by stratifying the sample If no errors are expected, generally requires a smaller sample

Question 77

Disadvantages of PPS sampling

Answer 77

Zero balances, negative balances, an understated balances generally require special design consideration

Question 78

How is the sampling interval for PPS sampling determined?

Answer 78

Tolerable misstatement / reliability factor

Question 79

How is the sample size determined for PPS sampling?

Answer 79

Recorded amount of population / sampling interval Sampling interval = tolerable misstatement / reliability factor