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Audit > Ch 8 > Flashcards

Ch 8 Flashcards

Audit Sampling: An Overview and Application to tests of controls

1
Q

Define Audit Sampling?

A
  • Evaluation of less than 100% of items in a population

Relevant Info

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2
Q

Nonstatistical Sampling?

A

Auditor use Judgement, Test of control, & Substantive procedures to:

  • Determining the sample size
  • Select the sample
  • Calculating the computed upper deviation rate
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3
Q

Statistical Sampling?

A

The auditor quantifies the sampling risk by collecting quantitive data to reach a conclusion about the population.

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4
Q

Statistical Sampling (Advantages)

A

(1) design an efficient sample
(2) measure the sufficiency of evidence obtained
(3) quantify sampling risk

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5
Q

Statistical Sampling (Disadvantages)

A

(1) training auditors in the proper use of sampling technique
(2) added complexity in designing and conducting the sampling application
(3) lack of consistent application across audit teams due to the complexity of the underlying concepts

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6
Q

The four factors that enter into the sample size decision and their relationship with sample
size are?

A

Factor Relationship to Sample Size
Desired confidence level —- Direct
Tolerable deviation rate (DR) —- Inverse
Expected population (DR) —- Direct
Population Size —- Decrease sample size when population size is small (<500 items)

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7
Q

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to

a. Eliminate the risk of nonsampling errors.
b. Reduce audit risk and materiality to a relatively low level.
c. Measure the sufficiency of the evidential matter obtained.
d. Minimize the failure to detect errors and fraud.

A

c. Measure the sufficiency of the evidential matter obtained

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8
Q

Samples to test internal controls are intended to provide a basis for an auditor to conclude whether

A

a. The controls are operating effectively.

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9
Q

When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why

A

A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded.

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10
Q

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls?

a. Desired Confidence Level: Decrease. Tolerable Deviation Rate: Decrease. Expected Population Deviation Rate: Increase
b. Desired Confidence Level: Increase. Tolerable Deviation Rate: Increase. Expected Population Deviation Rate: Decrease
c. Desired Confidence Level: Decrease. Tolerable Deviation Rate: Increase. Expected Population Deviation Rate: Decrease
d. Desired Confidence Level: Decrease. Tolerable Deviation Rate: Increase. Expected Population Deviation Rate: Increase

A

c. Desired Confidence Level: Decrease. Tolerable Deviation Rate: Increase. Expected Population Deviation Rate: Decrease

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11
Q

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 percent risk of assessing control risk too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1⁄2 percent of the sales invoices lacked approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The auditor then determined the computed upper deviation rate to be 8 percent.

In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the

A

Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent).

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12
Q

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 percent risk of assessing control risk too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1⁄2 percent of the sales invoices lacked approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The auditor then determined the computed upper deviation rate to be 8 percent.

Based on the information above, the planned allowance for sampling risk was

A

4 1⁄2 percent.

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13
Q

Which of the following statements is correct concerning statistical sampling in tests of controls?

a. Deviations from controls at a given rate usually result in misstatements at a
higher rate.
b. As the population size doubles, the sample size should also double.
c. The qualitative aspects of deviations are not considered by the auditor.
d. There is an inverse relationship between the sample size and the tolerable deviation rate.

A

d. There is an inverse relationship between the sample size and the tolerable deviation rate.

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14
Q

Assume an auditor is evaluating a statistical attribute sample of 50 items that resulted in three deviations. What should the auditor conclude if the tolerable deviation rate is 7 percent, the expected population deviation rate is 5 percent, and the allowance for sampling risk is 2 percent?

A

The planned assessed level of control risk should be modified because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.

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15
Q

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that

A

c. The deviation rate in the auditor’s sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate.

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16
Q

Audit Risk =

A

RMM
(IR x CR) X DR

RMM = Risk of Material Misstatement
IR = Inherent Risk (natural; Unique to Business)
CR = Control Risk (Internal control)
DR = Detection Risk (Auditor)
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17
Q

What is the relationship between Risk of Material Misstatement (RMM) & Detection Risk (DR)

A

Inverse
⬆RMM = ⬇DR&raquo_space; Do more work
⬇RMM = ⬆DR&raquo_space; Do less work

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18
Q

What are the 2 types of error?

A

Type I Error

Type II Error

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19
Q

What are the differences between type 1 & 2 Error?

A

Type I Error (Incorrect Rejection)
-We reject when it is True

Type II Error (Incorrect Acceptance)
-We accept when it is False

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20
Q

What are the 3 sample selection methods?

A

Random Selection
Systematic&raquo_space; Follow patterns
Haphazard&raquo_space; Auditor select w/o reason (Most common non-statistical)

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21
Q

Type of Statistical Sampling?

A 
Attribute Sampling (Internal Control)
- Use to see if we can rely on I/C
Monetary-Unit Sampling (Substantive Procedures)
- Use to determine misstatement of balance or class transaction
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22
Q

When confirming accounts payable, emphasis should be put on what kind of accounts?

A

Accounts with small or zero balances

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23
Q

Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation” is a specific example of which management assertion?

A

Occurrence

24
Q

“All purchase orders are supported by requisitions from proper persons” is a specific example of which management assertion?

A

Occurrence

25
Q

Typical activities of acquisition and expenditures cycle

A

purchase goods and services, receive goods and services, record the asset/expense and liability, pay the invoice

26
Q

relevant assertions for accounts payable

A

Completeness, cutoff, existence, valuation

27
Q

relevant assertions for expenses

A

completeness, cutoff, accuracy, classification

28
Q

Most important assertion

A

completeness

29
Q

Control procedures

A

Information processing controls, separation of duties, physical controls, performance reviews

30
Q

Auditing standards permit both statistical and nonstatistical methods of audit sampling

A

True

31
Q

A Type I error is the risk of incorrect acceptance.

A

False

32
Q

A Type II error is the risk of incorrect acceptance.

A

True

33
Q

Confidence level is the complement of sampling risk.

A

True

34
Q

Confidence level and sampling risk are related to sample size.

A

True

35
Q

The larger the sample, the lower the confidence level and the lower the sampling risk

A

False

36
Q

Audit sampling is commonly used to gather confirmation audit evidence.

A

True

37
Q

Audit sampling is commonly used to gather scanning audit evidence.

A

False

38
Q

Attribute sampling is used to estimate the proportion of a population that possesses a specified characteristic.

A

True

39
Q

With a nonstatistical sampling application, the auditor relies on professional judgment rather than the laws of probability to reach a conclusion about the audit test.

A

True

40
Q

Why must an auditor use sampling? What tradeoffs occur when an auditor uses sampling?

A

An audit of a large company without sampling would not be possible.

auditor can only provide a reasonable, not an absolute, assurance that the financial statements are fairly presented

41
Q

Which do not involve sampling

  1. Observing and evaluating segregation of duties.
  2. Testing of whether sales invoices are supported by authorized customer orders and shipping documents.
  3. Reviewing entity’s procedures for accounting for the numerical sequence of shipping documents.
  4. Examining sales orders for proper credit approval.
  5. Recomputing the information on copies of sales invoices.
  6. Comparing the average days outstanding in accounts receivable with industry averages
A
  1. Does not involve sampling.
  2. Involves sampling.
  3. Does not involve sampling.
  4. Involves sampling.
  5. Involves sampling.
  6. Does not involve sampling.
42
Q

Auditing standards permit both statistical and nonstatistical methods of audit sampling.
A. True
B. False

A

A. True

43
Q

If auditors conducting attributes sampling found that the entity deviated from a prescribed control in nine of the first 10 items examined, the auditor is most likely to
A. increase the computed upper deviation rate.
B. increase sample size.
C. stop the test and increase control risk.
D. decrease the tolerable deviation rate.

A

C. stop the test and increase control risk.

44
Q

Harvey Jones, CPA, uses statistical sampling to test control procedures. What is a benefit of using statistical sampling?
A. It eliminates the use of judgment required of Jones because the AICPA has established numerical criteria for this type of testing.
B. It provides a means of mathematically measuring the sampling risk that result from examining only a part of the data.
C. It is required by generally accepted auditing standards.
D. It increases Jones’ knowledge of the entity’s prescribed procedures and their limitations.

A

B. It provides a means of mathematically measuring the sampling risk that result from examining only a part of the data.

45
Q

For which of the following audit tests would an auditor most likely use attributes sampling?
A. Examining invoices in support of the valuation of fixed asset additions.
B. Making an independent estimate of the amount of LIFO inventory.
C. Inspecting employee time cards for proper approval by supervisors.
D. Selecting accounts receivable balances for confirmation.

A

C. Inspecting employee time cards for proper approval by supervisors.

46
Q

Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its unique ability to
A. define the precision required to provide audit satisfaction.
B. establish conclusive audit evidence with decreased audit effort.
C. mathematically measure uncertainty.
D. promote a more legally defensible procedural approach.

A

C. mathematically measure uncertainty.

47
Q

Which of the following statements is correct concerning statistical sampling in tests of controls?
A. Deviations from controls at a given rate usually result in misstatements at a higher rate.
B. The qualitative aspects of deviations are not considered by the auditor.
C. As the population size doubles, the sample size should also double.
D. There is an inverse relationship between the sample size and the tolerable deviation rate.

A

D. There is an inverse relationship between the sample size and the tolerable deviation rate.

48
Q

Which of the following statements is correct concerning statistical sampling in tests of controls?
A. Deviations from controls at a given rate usually result in misstatements at a higher rate.
B. The qualitative aspects of deviations are not considered by the auditor.
C. As the population size doubles, the sample size should also double.
D. There is an inverse relationship between the sample size and the tolerable deviation rate.

A

D. There is an inverse relationship between the sample size and the tolerable deviation rate.

49
Q

Which of the following statements is correct concerning statistical sampling in tests of controls?
A. There is an inverse relationship between the expected population deviation rate and the sample size.
B. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.
C. In determining tolerable deviation rate, an auditor considers detection risk and the sample size.
D. As the population size increases, the sample size should increase proportionately

A

B. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.

50
Q

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? (dec or inc)
1. Desired Confidence Level 2. Tolerable Deviation Rate 3. Expected Population Deviation Rate

A
  1. Desired Confidence Level
  2. Tolerable Deviation Rate
  3. Expected Population Deviation Rate
51
Q

In determining the sample size for a test of controls, an auditor should consider the expected deviation rate, desired confidence level, and the
a. risk of incorrect acceptance.

b. tolerable deviation rate.
c. population size.
d. nature and cause of deviations.

A

b. tolerable deviation rate.

52
Q

Samples to test internal controls are intended to provide a basis for an auditor to conclude whether

a. the financial statements are materially misstated.
b. the risk of incorrect acceptance is too high.
c. the controls are operating effectively.
d. materiality for planning purposes is at a sufficiently low level.

A

c. the controls are operating effectively.

53
Q

The term precision relates to
A. the difference between confidence level and estimated error.
B. the difference between expected and sample deviation rate.
C. the difference between confidence level and tolerable error.
D. the difference between expected and tolerable deviation rate.

A

D. the difference between expected and tolerable deviation rate.

54
Q 
Which of the following risks is related to effectiveness of testing?
A. The risk of incorrect rejection.
B. Inherent risk.
C. The risk of incorrect acceptance.
D. None of these.
A

C. The risk of incorrect acceptance.

55
Q

The risk of incorrect acceptance relates to the
A. tolerable misstatement.
B. preliminary estimates of materiality levels.
C. efficiency of the audit.
D. effectiveness of the audit.

A

D. effectiveness of the audit.

Audit (3 decks)

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