Ch 9 & 10 - Quiz Flashcards
Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?
A.) Set the tolerable rate of deviation at a lower level than originally planned.
B.) Stratify the cash disbursements population so that the unusually large disbursements are selected.
C.) Continue to draw new samples until all the unusually large disbursements appear in the sample.
D.) Increase the sample size to reduce the effect of the unusually large disbursements.
B.) Stratify the cash disbursements population so that the unusually large disbursements are selected.
Stratifying the population will allow the auditor to ensure inclusion of the disbursements. The sampling procedure (selecting less than all items) will then be applied only to the smaller disbursements.
An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was 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 low.
B.) Incorrect acceptance.
C.) Incorrect rejection.
D.) Assessing control risk too high.
B.) Incorrect acceptance.
This answer is correct because the risk of incorrect acceptance is the risk of accepting a population as being materially correct when in fact it is materially misstated.
Which of the following best illustrates the concept of sampling risk?
A.) An auditor may select audit procedures that are not appropriate to achieve the specific objective.
B.) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
C.) The documents related to the chosen sample may not be available for inspection.
D.) An auditor may fail to recognize errors in the documents examined for the chosen sample.
B.) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
This answer is correct because sampling risk arises from the possibility that an auditor’s conclusions based upon a sample would differ from the conclusions drawn when examining the entire population (i.e., the risk that the sample examined is not representative of the population).
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 internal control being more effective than the auditor believes.
B.) The internal control not being as effective as the auditor believes.
C.) The auditor concluding the account balance is not materially misstated, but is, in fact, materially misstated.
D.) The auditor selecting inappropriate auditing procedures.
D.) The auditor selecting inappropriate auditing procedures.
This answer is correct because nonsampling risk includes the aspects of audit risk not due to the mathematics supporting the sampling process itself; nonsampling risk includes “human” errors such as selecting an inappropriate auditing procedure rather than “statistical” errors.
An auditor may decide to increase the risk of incorrect rejection when
A.) Many differences (audit value minus recorded value) are expected.
B.) The cost and effort of selecting additional sample items are low.
C.) Increased reliability from the sample is desired.
D.) Initial sample results do not support the planned level of control risk.
B.) The cost and effort of selecting additional sample items are low.
The risk of incorrect rejection relates to the efficiency of the audit. If the auditor incorrectly believes that a material misstatement exists, the auditor will perform extra auditing procedures to try to find the material misstatement. After performing the extra work, the auditor will then reach the correct conclusion that the balance is fairly stated.
When the auditor decides to increase the risk of incorrect rejection, the auditor is increasing the risk of audit inefficiency, i.e., of doing too much work. This decision might seem appropriate if the cost and effort of selecting additional sample items are low.
Which of the following statements about audit sampling risks is correct for a nonissuer?
A.) Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.
B.) Sampling risk is derived from the uncertainty in applying audit procedures to specific risks.
C.) Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.
D.) Nonsampling risk can arise because an auditor failed to recognize misstatements.
D.) Nonsampling risk can arise because an auditor failed to recognize misstatements.
Nonsampling risk refers to any error unrelated to sampling risk that the auditor might commit when performing an audit sampling task, such as failing to recognize a misstatement or otherwise misinterpreting the audit evidence.
An advantage that using statistical sampling has over nonstatistical sampling is that statistical sampling helps an auditor to
A.) Minimize the failure to detect errors and irregularities.
B.) Reduce the level of audit risk and materiality to a relatively low amount.
C.) Eliminate the risk of nonsampling errors.
D.) Measure the sufficiency of the evidential matter obtained.
D.) Measure the sufficiency of the evidential matter obtained.
Statistical sampling allows an auditor to:
1) design an efficient sample;
2) measure the sufficiency of the evidential matter obtained; and
3) evaluate the sample results.
An underlying feature of random-based selection of items is that each
A.) Item must be systematically selected using replacement.
B.) Item in the accounting population should have an opportunity to be selected.
C.) Stratum of the accounting population be given equal representation in the sample.
D.) Item in the accounting population be randomly ordered.
B.) Item in the accounting population should have an opportunity to be selected.
Every item in the accounting population should have an opportunity to be selected.
When performing a test of a control with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population
A.) May occur in a systematic pattern, thus destroying the sample randomness.
B.) May systematically occur more than once in the sample.
C.) Must be recorded in a systematic pattern before the sample can be drawn.
D.) Must be systematically replaced in the population after sampling.
A.) May occur in a systematic pattern, thus destroying the sample randomness.
Systematic items occurrence in a population may destroy a sample’s randomness.
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?
Increase in tolerable misstatement Increase in assessed level of control risk
A.) Decrease sample size
Decrease sample size
B.) Decrease sample size Increase sample size
C.) Increase sample size Increase sample size
D.) Increase sample size Decrease sample size
B.) Decrease sample size Increase sample size
Increasing tolerable misstatement decreases sample size, while increasing the assessed level of control risk increases sample size.
In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000.
If this were the only error discovered by the auditor, the projected error of this sample would be
A.) $5,000.
B.) $1,000.
C.) $4,000.
D.) $2,000.
D.) $2,000.
In a probability-proportional-to-size application, the projected error of the sample is the amount of the difference between the book value and the audit value when the amount of the account examined is greater than the sampling interval.
As the selected account receivable was $10,000 and the sampling interval was $5,000, the projected error was $2,000 (the actual difference between the recorded amount and the audit value).
Which of the following is the primary objective of probability proportional to sample size?
A.) To identify items where controls were not properly applied.
B.) To identify zero and negative balances.
C.) To increase the proportion of smaller-value items in the sample.
D.) To identify overstatement errors.
D.) To identify overstatement errors.
PPS sampling is most effective in detecting overstatements, since the likelihood of an item’s selection increases with the recorded magnitude of the item.
In an audit of a nonissuer’s financial statements, projected misstatement is
A.) An auditor’s best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit.
B.) An auditor’s best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.
C.) The only amount that the auditor considers in evaluating materiality and fairness of the financial statements.
D.) The likely amount of misstatement in the subsequent period’s financial statements if a control is not properly implemented.
B.) An auditor’s best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.
Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
A.) The auditor rarely needs the assistance of a computer program to design an efficient sample.
B.) Inclusion of zero and negative balances generally does not require special design considerations.
C.) An estimate of the standard deviation of the population’s recorded amounts is not required.
D.) Any amount that is individually significant is automatically identified and selected.
B.) Inclusion of zero and negative balances generally does not require special design considerations.
The requirement is to identify an advantage in using classical variables sampling rather than probability-proportional-to-size sampling.
Answer (c) is correct because the inclusion of zero and negative balances generally does not require special design considerations when using classical sampling, while it does when using probability-proportional-to-size sampling (AICPA Audit Sampling Guide).
Answer (a) is incorrect because classical variables sampling does require an estimate of the standard deviation of the population’s recorded amounts.
Answer (b) is incorrect because the computational process involved with classical variables sampling may make use of a computer program desirable.
Answer (d) is incorrect because probability-proportional-to-size sampling, not classical sampling, automatically stratifies individually significant items.
How would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement?
A.) By performing analytical procedures, but not substantive procedures, at period end.
B.) By obtaining a management representation letter.
C.) By assigning more experienced staff or those with specialized skills to high-risk areas.
D.) By performing tests of controls at interim-and period-end dates.
C.) By assigning more experienced staff or those with specialized skills to high-risk areas.
This answer is correct because a heightened assessed risk of material misstatement may result in the assignment of more experienced staff and/or those with specialized skills to high-risk areas; examples of other responses include (1) providing more supervision and emphasizing the need for professional skepticism, (2) incorporating additional elements of unpredictability into audit procedures and (3) increasing the overall scope of audit procedures.
