Chapter 8 [Specialized Audit Tools: Attributes Sampling, Monetary Unit Sampling, and Data-Analytics Tools]

Question 1

A characteristic of the population of interest to the auditor.

Answer 1

Attribute

Question 2

A statistical sampling method used to estimate the rate of control procedure failures based on selecting one sample and performing the appropriate audit procedure.

Answer 2

Attributes sampling

Question 3

The application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.

Answer 3

Audit sampling

Question 4

Basic precision

Answer 4

The amount of uncertainty associated with testing only a part of the population (sampling risk); calculated as the sampling interval multiplied by a confidence factor.

Question 5

Extremely large and complex data sets that users can analyze to reveal patterns and associations; often so large that users cannot efficiently analyze it using tools such as Excel because the data overloads the system.

Answer 5

Big data

Question 6

A sampling technique that involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week.

Answer 6

Block sampling

Question 7

A digital accounting ledger of transactions that can be programmed to record financial transactions among multiple parties. ____________ enables smart contracts that include coded instructions for the blockchain ledger about when a contract will occur, the parties involved in the contract, and the payment terms.

Answer 7

Blockchain

Question 8

Electronic computer programs software companies are developing and marketing that enable organizations to use data analytics and big data by providing online analytical processing, information transformation (e.g., dashboards that display key performance indicators), and data management and security.

Answer 8

Business intelligence (BI) platforms

Question 9

A process that includes investigating new patterns in data that might change the way that the organization organizes and uses its data.

Answer 9

Classification analyses

Question 10

A broad construct referring to both qualitative and quantitative analysis tools that enable a decision maker to extract data, categorize it, identify patterns within it, and use it to enhance efficiency and effectiveness in decision making.

Answer 10

Data analytics

Question 11

Qualitative and quantitative techniques and processes that auditors use to enhance their productivity and effectiveness; auditors extract, categorize, identify, and analyze patterns or trends in the data. They vary according to organizational requirements.

Answer 11

Data-analytics tools

Question 12

Information that companies use to generate revenue; can include, for example, output files from customers’ use of an app, information from systems in which customers interact with the company’s website, and databases that the company uses to store information about its business.

Answer 12

Data assets

Question 13

Activities that users complete to retrieve data (e.g., bar coding).

Answer 13

Data capture

Question 14

An inventory of data available to an organization that may include data on suppliers, employees, production, sales, and fixed assets, among others; assists data stewards in managing their respective data assets.

Answer 14

Data catalog

Question 15

An organization that manages hardware, software, air conditioning, backup systems, and communication and security equipment for multiple organizations; allow organizations to store data “off-site” to prevent misuse, manipulation, or destruction.

Answer 15

Data center

Question 16

Activities that users complete to correct or remove erroneous data (e.g., contradictory data, input keying mistakes, duplicate data, missing information, and inappropriate changes to the data).

Answer 16

Data cleaning

Question 17

Activities that involve creating, organizing, and maintaining data sets so that the appropriate users are aware of the data and can access them.

Answer 17

Data curation

Question 18

Helps users understand the structure and content of a database, including the name of the data, its description, relationships among various related data, and access rights.

Answer 18

Data dictionary

Question 19

An electronic exploitation that involves the perpetrator embedding seemingly valid data that enables malicious computer codes to exploit weaknesses in the computer system.

Answer 19

Data-driven attack

Question 20

Gaining an understanding of data by using techniques such as path analysis, classification, and visualization.

Answer 20

Data exploration

Question 21

The exercise of authority and control (e.g., planning and monitoring) over the manner in which an organization manages its data assets.

Answer 21

Data governance

Question 22

A conceptual modeling that outlines an organization’s decisions about data that it will collect and control and metrics around data accuracy, quality, timeliness, and usage.

Answer 22

Data governance framework

Question 23

The process of sorting through large data sets to identify patterns, measure and predict trends, and establish relationships to solve problems through data analytics. When conducting data mining, users create and analyze data.

Answer 23

Data mining

Question 24

A process by which data scientists define and analyze data requirements that they need to support the business processes through data-producing information systems within organizations.

Answer 24

Data modeling

Question 25

An interdisciplinary field about scientific methods, processes, and information systems that aims to help users gain insights from complex and often unstructured data.

Answer 25

Data science

Question 26

An individual who oversees data usage and security policies and acts as a liaison between the IT department and the remainder of the organization; curate data assets.

Answer 26

Data steward

Question 27

Integrating data and models to solve problems or make decisions in an organization.

Answer 27

Deploying models

Question 28

An anticipation of the deviation rate in the entire population. Also referred to as the expected failure rate.

Answer 28

Expected failure rate

Question 29

The level of misstatement that the auditor expects to detect, and it is based on projected misstatements in prior-year audits, results of other substantive tests, professional judgment, and knowledge of changes in personnel and the accounting system.

Answer 29

Expected misstatement

Question 30

An anticipation of the deviation rate in the entire population. Also referred to as the expected failure rate.

Answer 30

Expected population deviation rate

Question 31

(also referred to as known misstatements ) Misstatements that have been specifically identified and about which there is no doubt.

Answer 31

Factual misstatements

Question 32

A nonstatistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias, or special reason for including or omitting certain items from the sample.

Answer 32

Haphazard sampling

Question 33

An increase in the total estimated misstatement caused by the statistical properties of misstatements detected in the lower stratum.

Answer 33

Incremental allowance for sampling risk

Question 34

An individual unit in an overall performance measurement system; they differ based on the area in the organization that deploys them.

Answer 34

Key performance indicator (KPI)

Question 35

(also referred to as factual misstatements ) Misstatements that have been specifically identified and about which there is no doubt.

Answer 35

Known misstatements

Question 36

See Projected misstatement.

Answer 36

Likely misstatement

Question 37

The balance or transaction that includes the selected dollar in a monetary unit sample.

Answer 37

Logical unit

Question 38

Items that are not in the top stratum.

Answer 38

Lower stratum

Question 39

An error, either intentional or unintentional, that exists in a transaction or financial statement account balance. For substantive sampling purposes, a misstatement involves differences between recorded values and audited values.

Answer 39

Misstatement

Question 40

(also referred to as probability proportional to size sampling ) A sampling method based on attributes estimation sampling but involving dollar misstatements rather than failure rates.

Answer 40

Monetary unit sampling (MUS)

Question 41

The best estimate of the actual amount of dollar misstatements in the population based on projecting the sample results to the population. The projected misstatement is calculated as the sampling interval multiplied by the tainting percentage.

Answer 41

Most likely misstatement

Question 42

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

Answer 42

Nonsampling risk

Question 43

The application of auditor judgment and experience in a sample application to assist the auditor in determining an appropriate sample size and in evaluating the sample results.

Answer 43

Nonstatistical sampling

Question 44

A process that involves looking for instances in which one construct or measure predicts one that follows another.

Answer 44

Path analysis

Question 45

A group of transactions or the items that make up an account balance for which the auditor wants to estimate some characteristic, such as the effectiveness of a control procedure or estimating the extent of misstatement in an account.

Answer 45

Population

Question 46

A sampling selection method in which each item in the population has a probability of being included in the sample proportionate to the dollar value of the item. Monetary unit sampling uses this method to select a sample and is considered a subset of PPS sampling.

Answer 46

Probability proportional to size (PPS) sampling

Question 47

The best estimate of the actual amount of dollar misstatements in the population based on projecting the sample results to the population. The projected misstatement is calculated as the sampling interval multiplied by the tainting percentage.

Answer 47

Projected misstatement

Question 48

(also referred to as the risk of assessing control risk too high ) The risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective.

Answer 48

Risk of assessing control risk too high

Question 49

(also referred to as the risk of assessing control risk too low ) The risk that the auditor will conclude that the state of internal controls is effective when internal controls are actually not effective.

Answer 49

Risk of assessing control risk too low

Question 50

(also referred to as the risk of assessing control risk too low ) The risk that the auditor will conclude that the state of internal controls is effective when internal controls are actually not effective.

Answer 50

Risk of incorrect acceptance of internal control reliability

Question 51

The risk that the auditor will conclude that the account balance does not contain a material misstatement when the account balance actually does contain a material misstatement.

Answer 51

Risk of incorrect acceptance of book value

Question 52

The risk that the auditor will conclude that the account balance contains a material misstatement when the account balance actually does not contain a material misstatement.

Answer 52

Risk of incorrect rejection of book value

Question 53

(also referred to as the risk of assessing control risk too high ) The risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective.

Answer 53

Risk of incorrect rejection of internal control reliability

Question 54

Calculated by dividing the population size by the desired sample size.

Answer 54

Sampling interval

Question 55

The risk that the auditor’s conclusion based on a sample might be different from the conclusion the auditor would reach if the test were applied in the same way to the entire population.

Answer 55

Sampling risk

Question 56

The individual items to be tested.

Answer 56

Sampling units

Question 57

Results in knowingly or unknowingly creating unrepresentative samples.

Answer 57

Selection bias

Question 58

Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order.

Answer 58

Simple random sampling

Question 59

The application of probability theory and statistical inference, along with auditor judgment and experience, in a sample application to assist the auditor in determining an appropriate sample size and in evaluating the sample results.

Answer 59

Statistical sampling

Question 60

Dividing the population into two or more subgroups.

Answer 60

Stratification

Question 61

This sampling technique involves systematic sampling in which the first item is selected randomly from the interval.

Answer 61

Systematic random sampling

Question 62

This sampling technique involves dividing the number of physical units in the population by the sample size to determine a uniform interval; a random starting point is selected in the first interval and one item is selected throughout the population at each of the uniform intervals after the starting point.

Answer 62

Systematic sampling

Question 63

The percentage of misstatement present in a logical unit, such as the sample item’s book value. The tainting percentage equals the amount of misstatement in the item divided by the item’s recorded amount.

Answer 63

Tainting percentage

Question 64

A rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population. Also referred to as the tolerable failure rate.

Answer 64

Tolerable failure rate

Question 65

A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. In practical terms, a tolerable misstatement is the maximum amount of misstatement the auditor can accept in the population without requiring an audit adjustment or a qualified audit opinion.

Answer 65

Tolerable misstatement

Question 66

A rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population. Also referred to as the tolerable failure rate.

Answer 66

Tolerable rate of deviation

Question 67

Population items whose book values exceed the sampling interval and are therefore all included in the sample. The top stratum consists of all account balances exceeding a specific dollar amount.

Answer 67

Top stratum

Question 68

A process that includes the process of understanding the significance of and patterns in data by placing it in a visual context.

Answer 68

Visualization

Question 69

Sampling can be used for both tests of control and substantive tests of account balances and assertions

T or F?

Answer 69

TRUE

Question 70

Auditors can use sampling for testing either the effectiveness of controls (attributes sampling) or direct tests of account balances and assertions (monetary unit sampling)

T or F?

Answer 70

TRUE

Question 71

For which of the following auditing procedures would sampling be most appropriate?

a. Examining documents
b. Inquiring of management
c. Observing controls being completed
d. Conducting analytical procedures

Answer 71

a

Question 72

Which of the following activities would be most likely accomplished using sampling?

a. Sorting a file to identify the largest items
b. Scanning for unusual transactions
c. Selecting items and tracking them back to source documents
d. Footing the file

Answer 72

c

Question 73

Sampling risk is the risk that the auditor’s conclusion based on a sample might be different from the conclusion that would be reached if the audit procedure was applied in the same way to the entire population.

T or F?

Answer 73

TRUE

Question 74

The risk of incorrect acceptance of internal control reliability is a risk that the auditor will conclude that an internal control is not effective when the internal control is effective

T or F?

Answer 74

FALSE

Question 75

Which of the following questions would an auditor ask when sampling to perform tests of control?

a. Which population and sampling unit should be tested, and what characteristics should be examined?
b. How many items should be selected for audit testing?
c. Which items should be included in the sample?
d. What inferences can be made about the overall population from the sample?
e. All of the above

Answer 75

e

Question 76

Refer to Exhibit 8.2 and determine which of the following terms match this definition:

The risk that the auditor will conclude that internal controls are effective when internal controls are actually not effective.

a. The risk of incorrect acceptance of internal control reliability
b. The risk of incorrect acceptance of book value
c. The risk of incorrect rejection of internal control reliability
d. The risk of incorrect rejection of book value
e. None of the above

Answer 76

a

Question 77

A benefit of nonstatistical sampling as compared to statistical sampling is that the sample size can be significantly smaller, thereby making the audit more efficient

T or F?

Answer 77

FALSE

Question 78

A benefit of statistical sampling as compared to nonstatistical sampling is that less auditor judgement is required because the auditor can leverage the power of probability theory

T or F?

Answer 78

FALSE

Question 79

Refer to Exhibit 8.4 and determine which of the following statements is true.

a. In nonstatistical sampling, sample size is determined by auditor judgment
b. In statistical sampling, the sample must be randomly selected to give each unit in the population an equal chance to be included in the sample
c. In nonstatistical sampling, evaluation is based on auditor judgment and projections are based on sample results
d. All of the above are true

Answer 79

e

Question 80

Which of the following statements is false?

a. When properly used, either nonstatistical or statistical sampling can be effective in providing sufficient appropriate audit evidence
b. Statistical sampling allows the auditor to measure the risk of making an incorrect inference about the population from which the sample is taken, whereas nonstatistical sampling does not allow for such measurement
c. Nonstatistical sampling may help avoid second guessing by regulators or jurors should those parties question the quality of sampling with audit judgment
d. Combining statistical sampling with audit judgment generally produces a higher quality audit conclusion than using audit judgment alone
e. All of the above are false

Answer 80

c

Question 81

Attributes sampling is a statistical sampling method used to estimate the rate of control procedure failures based on selecting a sample and performing the appropriate audit procedure

T or F?

Answer 81

TRUE

Question 82

In attributes sampling, the attribute of interest is an individual dollar amount in the population

T or F?

Answer 82

FALSE

Question 83

Use Exhibit 8.5 to determine which of the following statements is false

a. As tolerable deviation rate rises, the sample size decreases
b. As the expected deviation rate rises, the sample size decreases
c. If the auditor accepts a 5% risk of overreliance, a 7% tolerable deviation rate, and expects a deviation rate of 2.5%, the sample size will equal 109
d. If the auditor accepts a 10% risk of overreliance, a 7% tolerable deviation rate, and expects a deviation rate of 2.5%, the sample size will be a number less than 109
e. All of the above are false

Answer 83

b

Question 84

In attributes sampling, which of the following will not affect the sample size?

a. The risk of incorrect rejection of book value.
b. Sampling risk.
c. The tolerable rate of deviation.
d. The expected population deviation rate.

Answer 84

a

Question 85

Block sampling involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week.

T or F?

Answer 85

TRUE

Question 86

Haphazard sampling is a statistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias, or special reason for including or omitting certain items from
the sample.

T or F?

Answer 86

FALSE

Question 87

Refer to Exhibit 8.6. Assume a 5% risk of overreliance, a tolerable deviation rate of 8%, a sample size of 100, and that the number of deviations is five. What is the upper limit of the possible deviation rate, and what does it mean?

a. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 10.3%.
b. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 5%.
c. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 10.3%.
d. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 5%.

Answer 87

a

Question 88

Consider the case whereby the risk of overreliance is 5%, the sample size is 20, and the auditor detects no deviations in the operation of the control. What can the auditor conclude?

a. This is good news; no deviations were found, so we conclude that the control is working effectively.
b. The upper limit of deviations is 14%, so we conclude that the control is not working effectively.
c. If we doubled the sample size, the upper limit of deviations would decrease by about half.
d. One of the above a-c.
e. Two of the above a-c.

Answer 88

e

Question 89

When the auditor detects control deviations, it is best to evaluate them quantitatively rather than qualitatively.

T or F?

Answer 89

FALSE

Question 90

When using nonstatistical sampling, the auditor cannot quantitatively assess the risk of making an incorrect inference based on the sample results.

T or F?

Answer 90

TRUE

Question 91

Which of the following relationships is inaccurate?

a. High tolerable deviation rate=smaller sample; Low tolerable deviation rate=larger sample
b. Low expected population deviation rate=small sample; High expected population deviation rate=larger sample
c. Low sampling risk=small sample; High sampling risk=larger sample
d. Population size has little effect on sample size

Answer 91

c

Question 92

The auditor should not pursue which of the following options when a control is ineffective?

a. Identify a compensating control.
b. Take a larger sample.
c. Assess control risk as lower than originally planned and change the audit approach accordingly.
d. Analyze the nature of the control deviations and identify implications.

Answer 92

c

Question 93

Top-stratum items are population items whose book values exceed the sampling interval and are therefore excluded from the sample

T or F?

Answer 93

FALSE

Question 94

The division of a population into two or more subgroups is referred to as stratification.

Answer 94

TRUE

Question 95

Which of the following definitions is true?

a. Factual misstatement—A misstatement that has been specifically identified and about which there is no doubt.
b. Projected misstatement—The auditor’s best estimate of the misstatement in a given population based on projecting the sample results to the population.
c. Tolerable misstatement—A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population.
d. Expected misstatement—The level of misstatement that the auditor expects to detect.
e. All of the above are true.

Answer 95

e

Question 96

Which of the following statements is false?

a. Top-stratum items are population items whose book values exceed the sampling interval and are therefore all included in the sample.
b. Because the auditor knows the amount of errors in the top stratum (all items were evaluated), no estimate of errors is required for the top stratum.
c. Stratification of the population into several subpopulations generally reduces audit efficiency.
d. Sampling evaluation reflects the sum of top-stratum misstatements and the projected misstatement derived from lower-stratum items.
e. None of the above are false.

Answer 96

c

Question 97

One strength of MUS is that it automatically selects a sample in proportion to an item’s dollar amount, thus providing automatic stratification of the sample.

T or F?

Answer 97

TRUE

Question 98

The population for MUS is defined as the number of dollars in the population being tested. Each dollar in the population has an equal chance of being chosen, but each dollar chosen is associated with a tangible item such as a customer’s balance or an inventory item, so
items with more dollars have a greater likelihood of being selected.

T or F?

Answer 98

TRUE

Question 99

Refer to Exhibit 8.7. Assume that the risk of incorrect acceptance is 10%, tolerable misstatement is 5% of population dollars, and expected misstatement is 30% of tolerable misstatement (in other words, 1.5% of the
population dollars). What is the minimum sample size that the auditor should use?

a. 28
b. 87
c. 120
d. 162

Answer 99

b

Question 100

Which of the following represents the calculation of the sampling interval?

a. Tolerable error / Risk of incorrect acceptance.
b. Sample size / Population size.
c. Tolerable error * Risk of incorrect acceptance.
d. Population size / Sample size.

Answer 100

d

Question 101

The projected misstatement for items in the upper stratum is calculated as the sampling interval multiplied by the tainting percentage.

T or F?

Answer 101

FALSE

Question 102

Projected errors for items in the top stratum equal basic precision multiplied by a confidence factor.

T or F?

Answer 102

FALSE

Question 103

Which of the following statements is false with respect to basic precision?

a. Basic precision represents the increase in the total estimated misstatement caused by the statistical properties of misstatements detected in the lower stratum.
b. Basic precision is the amount of uncertainty associated with testing only a part of the population (sampling risk).
c. Basic precision is the amount of error you are confident of not exceeding if no errors are detected in the sample.
d. Basic precision is calculated as the sampling interval multiplied by a confidence factor.

Answer 103

a

Question 104

In a MUS sample, the total estimated misstatement calculation includes which of the following amounts?

a. The factual misstatement in the top-stratum.
b. Basic precision.
c. The projected misstatement in the lower stratum.
d. An incremental allowance for sampling risk in the lower stratum.
e. All of the above.

Answer 104

e

Question 105

Benford’s Law helps predict frequency patterns of deviations of controls.

T or F?

Answer 105

FALSE

Question 106

Data analytics is a broad construct referring to both qualitative and quantitative analysis tools that enable a decision maker to extract data, categorize it, identify patterns within it, and use it to enhance efficiency and effectiveness in decision making.

T or F?

Answer 106

TRUE

Question 107

The acronym KPI relates to which of the following phrases?

a. Key Profitability Indicator
b. Key Performance Indicator
c. Known Performance Increment
d. Known Profitability Increment

Answer 107

b

Question 108

To test the existence assertion for sales, which of the following data analytics tools might you use?

a. Compare sales invoices with shipping documents.
b. Compare sales invoices with sales contracts.
c. Analyze data around year-end to ensure that sales are recorded in the correct period.
d. Two of the above (a-c).
e. All of the above (a-c).

Answer 108

b