Chapter 5 Set 1 EVILLL

Question 1

What is attribute sampling?

Answer 1

Test of Controls, it deals with characteristics. Think of yes or no answers (rate of occurrence)
exp. Did the check get the proper authorization?

Question 2

What is variable sampling?

Answer 2

Test of Details, substantive testing dollar amount (numerical quantity)
exp. what is the balance of?

Question 3

What are the two risks under Variable Sampling (tests of details, substantive testing)?

Answer 3

Risk of Incorrect Acceptance (BBBAD Beta Risk, Ineffective)

Risk of Incorrect Rejection (Alpha Risk, Inefficient)

Question 4

What are the two risks under Attribute Sampling (tests of controls)?

Answer 4

Risk of Assessing Control Risk too Low (BBBAD Beta, Ineffective)
Risk of Assessing Control Risk too High (Alpha, Inefficient)

Question 5

Sampling Risk

Answer 5

Inherent in audit sampling, this is the risk that the sample is not representative of the POOPulation :) and that the auditor’s conclusion will be different from the conclusion had the auditor examined 100% of the population

Question 6

Statistical Sampling

Answer 6

Auditors specify the sampling risk they are willing to accept first, then calculate the sample size that will provide that degree of reliability. Determined using MATHHHH but judgement still required
Note: results evaluated QUANTITatively
Provides sufficient audit evidence

Question 7

Non Statistical Sampling

Answer 7

Sample size NOT determined using math, but JUDGEMENT. Auditors use judgement to evaluate the sample results.
Provides sufficient audit evidence

Question 8

Statistical Sampling Advantages

Answer 8

• measure sufficiency of audit evidence
• provide objective basis for quantitatively evaluating sample results
• efficient sample
• quantify sampling risk so limit risk can be at acceptable level

Question 9

Nonsampling Risk

Answer 9

Includes all aspects of audit risk that are not due to sampling, this risk is always present and cannot be measured, but the auditor can attempt to reduce this to a low level through super good planning and superrvision

Question 10

How to calculate upper deviation rate for ATTRIBUTE SAMPLING?

Answer 10

Sample Deviation Rate + Allowance for Sampling Risk = Upper Deviation Rate

Question 11

When can an auditor rely on the control ATTRIBUTE SAMPLING?

Answer 11

When the Upper Deviation Rate is less than tolerable dev rate

Question 12

If Upper Deviation Rate is > Tolerable Deviation Rate, can the auditor rely on the control ATTRIBUTE SAMPLING?

Answer 12

NO

Question 13

What is Stratification?

Answer 13

When samples are separated into homogeneous groups, each group is treated as its own population, results in reduced sample size, this is used when population has highly VARIABLE amounts

Question 14

When will sample size INCREASE?

Answer 14

• expected misstatement increases
• standard deviation (population variability) increases
• assessed level of risk increases

Question 15

When will Sample size DECREASE?

Answer 15

• tolerable misstatement increases

- acceptable level of risk increases

Question 16

Mean - Per - Unit Estimation for VARIABLE sampling?

Answer 16

Average Sample Value X Number of Items in Population = Point Estimate

uses average value of items in sample to estimate the true population value

Question 17

Ratio Estimation for VARIABLE sampling?

Answer 17

Selected Items True Value / Selected Items Book Value X Population Book Value = Point Estimate

uses the ratio of audited (correct) values of items to their book value to estimate true population value, Ratio estimation is most effective if there is a correlation between book values and audit amount

Question 18

Difference Estimation for VARIABLE sampling?

Answer 18

Step 1: Calculate Projected Error = ((BV of Sample - Audit Val of Sample) / # of items audited)*population items
Step 2: Calculate Point Estimate = Total BV of Population - Projected Error

uses the average difference between audited (correct) values of items and their book values to estimate true population value

Question 19

What is Tolerable misstatement?

Answer 19

Maximum dollar error that may exist in an account w/out causing financial statements to be materially misstated

Question 20

Sampling Interval is determined how PPS (probability proportional to size)?

Answer 20

Sampling Interval = Tolerable misstatement / Reliability factor (from table)

Question 21

Sample size is determined PPS?

Answer 21

Sample Size = Recorded amount of the population / sampling interval (from above)

Question 22

The sample size in an attribute sampling application is affected by?

Answer 22

• allowable risk of assessing control risk too low
• tolerable deviation rate
• expected deviation rate

Question 23

The sample size in a variables sampling application is affected by?

Answer 23

• variability in the population (generally represented by the standard deviation)
• acceptable level of risk (i.e., the risk of incorrect acceptance)
• tolerable misstatement
• expected misstatement

Question 24

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:

Answer 24

Precision

Question 25

Which of the following statements about audit sampling risks is correct for a nonissuer?

Answer 25

Nonsampling risk includes all aspects of audit risk that are not due to sampling. It is always present and cannot be measured; the auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality control of all firm practices. Nonsampling risk can arise because an auditor failed to recognize misstatements in documents examined.