Chapter 5

Question 1

When is ratio estimation most efficient for a sampling technique?

Answer 1

If there is a correlation between book values and audit amounts (calculated audit amounts are approximately proportional to the clients book amounts)

Question 2

What is the statistical concept of precision all about?

Answer 2

It is used to describe the auditor’s evaluation of sampling results by calculating the possible error in both direction (sometimes called allowance)

Question 3

When would an auditor decide to decrease the acceptable level of risk?

Answer 3

When the cost and effort of selecting additional sample items is low

Question 4

In order for a practitioner to examine and report on management’s assertion about the effectiveness of the entity’s internal control, what must happen first?

Answer 4

management must present its written assertion about the effectiveness of internal control

Question 5

Any report issued on significant deficiencies notes during an audit should:

Answer 5

1. Indicate that the purpose of the audit was to report on the financial statements and NOT to provide assurance on internal control
2. Include the definition of significant deficiencies
3. include a restriction on the use of the report

Question 6

What opinion should be issued on internal controls for a scope limitation or for a material weakness?

Answer 6

Scope limitation: disclaimer of opinion or withdraw from the engagement
Material Weakness: adverse opinion

Question 7

When should communication regarding independence be made to the audit committee?

Answer 7

Communications regarding independence must be made IN WRITING PRIOR TO accepting the engagement

Question 8

If using a dual purpose test for variable and attribute sampling, which sample size should the auditor use for the sample size?

Answer 8

The auditor should use the larger of the two samples

Question 9

For PPS sampling, how do you calculate the sampling interval?

Answer 9

Tolerable misstatement/reliability factor

Question 10

For PPS sampling, how do you calculate the sample size?

Answer 10

Recorded amount of the population/Sampling interval