chapter 8

Question 1

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

Answer 1

measure the sufficiency of the evidential matter obtained.

Question 2

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

Answer 2

the controls are operating effectively.

Question 3

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:

Answer 3

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

Question 4

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 2½ 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:

Answer 4

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

Question 5

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 2½ 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:

Answer 5

4½ percent.

Question 6

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

Answer 6

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

Question 7

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?

Answer 7

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.

Question 8

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:

Answer 8

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.

Question 9

Sampling Risk

When performing a test of controls, auditors must be concerned with two aspects of sampling risk: assessing control risk too high and assessing control risk too low.

Assessing control risk too high is the risk that the sample results will cause the auditors to assess control risk higher than warranted based on the actual operating effectiveness of the control. Assessing control risk too low is the more important risk that the sample results will cause the auditors to assess risk at a lower level than warranted.

Answer 9

affects audit efficiency
- assessing control risk too high
- performing too much testing than neccesarry

affects audit effectiveness
-assessing control risk too low
- not performing enough testing

Question 10

1. Audit __________ is affected when too much substantive testing is done.
2. Audit effectiveness is impacted when the auditor doesn’t do enough __________.
3. An audit needs to have the correct balance of efficiency and __________.
4. Assessing the control risk too low results in an inappropriate __________ of the extent of substantive procedures.
5. Auditors must carefully control the risk of assessing risk too high or __________ when performing test of controls.

Answer 10

efficiency

testing

effectiveness

reduction

low

Question 11

a. Attribute sampling

b. Desired confidence level

c. Allowance for sampling risk

d. Sampling risk

e. Sampling population

f. Nonstatistical sampling

g. Tolerable deviation rate

Answer 11

Used to estimate the proportion of a population that possesses a certain characteristic

The probability that the true but unknown measure of the characteristic of interest is within specified limits

The difference between the expected and the tolerable deviation rate

The possibility that the sample drawn is not representative of the population and leads to an incorrect conclusion

All or a subset of the items that constitute the class of transactions

Relies on the auditor’s judgment to determine sample size, select the sample, or evaluate the results

The maximum deviation rate from a prescribed control that an auditor is willing to accept

Question 12

1. An auditor is examining loan receivables at a local bank. The population of loans contains two strata. One stratum is composed of 25 loans that are each greater than $1 million. The second stratum contains 450 loans that are less than $1 million. The auditor has decided to test all loans greater than $1 million and 15 loans less than $1 million.
2. Assume the same facts as number 1 except that the auditor decides to apply analytical procedures to the second stratum of loans.
3. An auditor has haphazardly selected 30 sales invoices to be examined for proper pricing of the goods purchased by the customer.
4. The prepaid insurance account is made up of four policies that total $45,000. The auditor has decided that this account is immaterial and decides that no policies will be examined.

Answer 12

statistical sampling

No sampling is used in this example

Non-statistical sampling

No sampling is used in this example

Question 13

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the

Answer 13

Effectiveness of the audit

Question 14

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing.
This assessment occurred because the true deviation rate in the population was

Answer 14

More than the deviation rate in the auditor’s sample

Question 15

Given random selection, the same sample size, and the same precision requirement for the testing of two
unequal populations, the risk of assessing control risk too low on the smaller population is

Answer 15

Lower than assessing control risk too low for the larger population

Question 16

An auditor may use a systematic sampling technique with a start at any randomly selected item when performing
a test of controls with respect to control over cash receipts. The biggest disadvantage of this type
of sampling is that the items in the population

Answer 16

May occur in a systematic pattern, thus destroying the sample randomness

Question 17

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they
provide a scientific basis for planning the

Answer 17

Sample size

Question 18

Which of the following statements is generally correct about the sample size in statistical sampling when
testing internal controls?

Answer 18

The population size has little or no effect on the sample size.

Question 19

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% risk of assessing control risk too low (99% confidence) that
not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that
about 2½% 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 achieved upper precision limit to be 8%.

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

Answer 19

Tolerable rate (7%) was less than the achieved upper precision limit (8%)

Question 20

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned
reliance on a prescribed control when the

Answer 20

Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

Question 21

Which of the following statements is correct about the sample size in statistical sampling when testing
internal controls?

Answer 21

The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.