Module E+F HW

Question 1

1. Rome, CPA, is examining the internal control of Smack, Inc. Rome has established a risk of overreliance of 10%, an expected population
   deviation rate of 1%, and a tolerable rate of deviation of 5%.

Assume that a sample of 100 items was examined and 5 deviations were noted. What is the upper limit rate of deviation?
A. 5.0 percent.
B. 10.3 percent.
C. 10.0 percent.
D. 9.1 percent.

Answer 1

9.1 percent.

Question 2

2. The auditor’s sample size increases proportionally with increases in the size of the population.
   True
   False

Answer 2

False

Question 3

3. The expected population deviation rate is determined by the auditor based on either prior audit experience or a pilot sample from the current
   year.
   True
   False

Answer 3

True

Question 4

4. Which of the following is appropriately used for statistical sampling applications?

Unrestricted
Random
Selection Block
Selection

A. Yes Yes

B. Yes No

C. No Yes

D. No No

Answer 4

Unrestricted
Random
Selection Block
Selection

Yes No

Question 5

5. In audit sampling applications, sampling risk is
   A. The probability that accounting misstatements will arise in transactions and enter the accounting system.
   B. The probability that the audit team will fail to recognize erroneous accounting in the client’s documentation.
   C. The probability that an audit team’s conclusion based on a sample might be different from the conclusion based on an audit of the entire population.
   D. A characteristic of statistical sampling applications but not of nonstatistical applications.

Answer 5

The probability that an audit team’s conclusion based on a sample might be different from the conclusion based on an audit of the entire population.

Question 6

6. Attributes sampling is most closely associated with the auditor’s substantive procedures.
   True
   False

Answer 6

False

Question 7

7. When verifying the completeness assertion for sales transactions, the auditor would define the population as a shipping document for
   purposes of performing tests of controls.
   True
   False

Answer 7

True

Question 8

8. Rome, CPA, is examining the internal control of Smack, Inc. Rome has established a risk of overreliance of 10%, an expected population
   deviation rate of 1%, and a tolerable rate of deviation of 5%.

What is the appropriate sample size that would be examined by Rome?
A. 46
B. 93
C. 77
D. 38

Answer 8

77

Question 9

9. If the upper limit rate of deviation exceeds the tolerable rate of deviation, the auditor may decide to increase the assessment of control risk.
   True
   False

Answer 9

True

Question 10

10. The audit team will choose to reduce the reliance on controls if the_____ is greater than the_____
    A. Upper limit rate of deviation; tolerable rate of deviation.
    B. Tolerable rate of deviation; upper limit rate of deviation.
    C. Tolerable rate of deviation; expected rate of deviation.
    D. Expected rate of deviation; tolerable rate of deviation.

Answer 10

Upper limit rate of deviation; tolerable rate of deviation.

Question 11

11. The upper limit rate of deviation is equal to the sample rate of deviation minus the allowance for sampling risk.
    True
    False

Answer 11

False

Question 12

12. As the risk of overreliance decreases, the upper limit rate of deviation increases, holding all other factors constant.
    True
    False

Answer 12

True

Question 13

13. Rome, CPA, is examining the internal control of Smack, Inc. Rome has established a risk of overreliance of 10%, an expected population
    deviation rate of 1%, and a tolerable rate of deviation of 5%.

Assume that a sample of 100 items was examined and 5 deviations were noted. What is the allowance for sampling risk?
A. 5 percent.
B. 4.1 percent.
C. 5.3 percent.
D. 10.0 percent.

Answer 13

4.1 percent.

Question 14

14. Which of the following pairs of selection methods could appropriately be used in statistical sampling applications?
    A. Unrestricted random selection, systematic random selection.
    B. Unrestricted random selection, block selection.
    C. Block selection, haphazard selection.
    D. Systematic random selection, haphazard selection.

Answer 14

Unrestricted random selection, systematic random selection.

Question 15

15. In a sampling application to determine the average weight of students enrolled in a fitness class, if the sample estimate is 120 pounds, the precision is 10 pounds, and the reliability is 90 percent, which of the following statements is true?
    A. There is 10 percent likelihood that the average weight of a student in the class is more than 130 pounds.
    B. There is a 90 percent likelihood that the average weight of a student in the class is between 110 and 130 pounds.
    C. There is 10 percent likelihood that the average weight of a student in the class is less than 110 pounds.
    D. There is 90 percent likelihood that the average weight of a student in the class is less than 110 pounds or more than 130
    pounds.

Answer 15

There is a 90 percent likelihood that the average weight of a student in the class is between 110 and 130 pounds.

Question 16

16. Which of the following is not true with respect to the risk of overreliance?
    A. This risk has an inverse relationship with sample size.
    B. This risk may occur when the auditor’s sample indicates that the control is functioning as expected.
    C. All of the above are true with respect to the risk of overreliance.
    D. This risk may occur when the true (but unknown) population deviation rate is greater than the tolerable rate of deviation.

Answer 16

All of the above are true with respect to the risk of overreliance.

Question 17

17. The tolerable rate of deviation has an inverse relationship with control risk; that is, as the acceptable level of control risk decreases, the
    appropriate tolerable rate of deviation increases.
    True
    False

Answer 17

False

Question 18

18. Which of the following steps in the attributes sampling process would ordinarily be performed last?
A. Defining the population of interest.
B. Defining the deviation condition.
C. Evaluating sample results.
D. Selecting sample items.

Answer 18

Evaluating sample results.

Question 19

19. Which of the following factors is not assessed based on the acceptable level of control risk?
    A. Risk of overreliance.
    B. All of the above are assessed based on the acceptable level of control risk.
    C. Tolerable rate of deviation.
    D. Expected population deviation rate.

Answer 19

Expected population deviation rate.

Question 20

20. The sample rate of deviation is determined by dividing the number of deviations by the size of the population.
    True
    False

Answer 20

False

Question 21

21. To measure sample items in an attributes sampling application, the auditor performs the appropriate test of controls.
    True
    False

Answer 21

True

Question 22

22. Which of the following statements is not true if the precision interval for a sampling risk of 10 percent ranges from 60 to 70?
    A. The reliability is 90 percent.
    B. A 90 percent probability exists that the true population value is less than 60 or more than 70.
    C. A 10 percent probability exists that the true population value is less than 60 or more than 70.
    D. The precision is 5.

Answer 22

A 90 percent probability exists that the true population value is less than 60 or more than 70.

Question 23

23. If the tolerable rate of deviation is 6 percent, the acceptable risk of overreliance is 5 percent, and the upper limit rate of deviation is 4.8 percent, which of the following statements is not true?
    A. The auditor has limited the exposure to the risk of overreliance to 5 percent.
    B. The auditor would initially conclude that the internal control is not functioning as intended.
    C. The probability that the population deviation rate is greater than 4.8 percent is 5 percent.
    D. The probability that the population deviation rate is less than or equal to 4.8 percent is 95 percent.

Answer 23

The auditor would initially conclude that the internal control is not functioning as intended.

Question 24

24. After defining the deviation condition, the auditor would next identify the key controls to examine.
    True
    False

Answer 24

False

Question 25

25. If systematic selection is used with a starting point of 10, a population size of 100, and a necessary sample size of 20, the first three items selected for examination would be
A. 10, 15, 20.
B. 110, 210, 310.
C. 10, 110, 210.
D. 15, 20, 25.

Answer 25

10, 15, 20.

Question 26

26. Which of the following is not a method that auditors use to control their exposure to sampling risk during the examination?
    A. Evaluating sample results using a mathematical basis.
    B. Determining an appropriate sample size.
    C. Ensuring that all items have an equal opportunity to be selected.
    D. Performing the appropriate audit procedure.

Answer 26

Performing the appropriate audit procedure.

Question 27

27. An important control for sales on account is that all sales invoices are mathematically verified by the client. Which of the following would be
    the most appropriate population from which to select sample items?
    A. Sales invoices.
    B. Shipping documents.
    C. Entries in the general journal.
    D. Entries in the sales journal.

Answer 27

Sales invoices.

Question 28

28. Which of the following would not be a situation in which the auditor would apply attributes sampling?
    A. Ensuring that sales invoices are supported by a valid shipping document.
    B. Performing price tests for items listed on the client’s year-end inventory.
    C. Examining sales invoices for evidence that client personnel verified the mathematical accuracy of the invoices.
    D. The auditor would apply attributes sampling in all of the above situations.

Answer 28

Performing price tests for items listed on the client’s year-end inventory.

Question 29

29. The expected population deviation rate has an inverse relationship with sample size.
    True
    False

Answer 29

False

Question 30

30A. Mike Smith is studying the internal control of Pooh Company. Mike has identified client verification of sales invoices as an important control
and, based on the acceptable level of control risk and experience from prior audits, has made the following assessments:

Risk of overreliance 5%
Tolerable rate of deviation 6%
Expected population deviation rate 2%

a. What is the appropriate sample size?

Answer 30

127

Question 31

30B. Ignore your answer from (a) above. Assume that Mike Smith examined a sample of 80 items and found 2 deviations. Calculate the following measures: (Round your answers to 1 decimal place.) Risk of overreliance 5%

Sample rate of deviation
Upper limit rate of deviation
Allowance for sampling risk
C) What is Mike Smith’s initial conclusion regarding Pooh Company’s internal control?

Answer 31

Sample rate of deviation 2.5%
Upper limit rate of deviation 7.7%
Allowance for sampling risk 5.2%

C) Not functioning effectively

Question 32

31. The risk of overreliance exposes the auditor to an effectiveness loss.
    True
    False

Answer 32

True

Question 33

32. Which of the following factors does not impact the sample size in an attributes sampling application?
A. Tolerable rate of deviation.
B. Risk of overreliance.
C. Expected population deviation rate.
D. Sample rate of deviation.

Answer 33

Sample rate of deviation.

Question 34

33. Discovery sampling is ordinarily used when deviations from control activities occur at a relatively low rate and are extremely important in the audit examination.
    True
    False

Answer 34

True

Question 35

34. An advantage of statistical sampling over nonstatistical sampling methods is that statistical methods
    A. Afford more assurance than a nonstatistical sample of equal size.
    B. Provide an objective basis for quantitatively evaluating sampling risk.
    C. Eliminate the need to use judgment in determining appropriate sample sizes.
    D. Can more easily convert the sample into a dual-purpose test useful for substantive procedures.

Answer 35

Provide an objective basis for quantitatively evaluating sampling risk.

Question 36

35. When using sampling in the study of internal control, the audit team would compare the upper limit rate
of deviation to the
A. Tolerable rate of deviation.
B. Sample rate of deviation.
C. Statistical rate of deviation.
D. Expected rate of deviation.

Answer 36

Tolerable rate of deviation.

Question 37

36. Lower levels of control risk are typically associated with lower levels of the risk of overreliance.
    True
    False

Answer 37

True

Question 38

37. When the upper limit rate of deviation exceeds the tolerable rate of deviation, auditors may be exposed to the risk of underreliance.
    True
    False

Answer 38

True

Question 39

38. In addition to the quantitative measure of deviations, the auditor should also consider qualitative measures, such as the pervasiveness and source of the deviations.
    True
    False

Answer 39

True

Question 40

39. Which of the following statements is not true with respect to nonstatistical sampling?
    A. It considers a number of factors in determining the appropriate sample size.
    B. It cannot be used in an audit conducted in accordance with generally accepted auditing standards.
    C. It requires the use of judgment on the part of the individual performing the sampling application.
    D. When using it, an individual makes some estimate of the characteristic of interest.

Answer 40

It cannot be used in an audit conducted in accordance with generally accepted auditing standards.

Question 41

40. A limitation of systematic random selection is that this method
    A. Has a relatively low likelihood of yielding a representative sample.
    B. Results in a larger sample size than other selection methods.
    C. Can result in bypassing a number of items having similar characteristics.
    D. Cannot be used with statistical sampling plans.

Answer 41

Can result in bypassing a number of items having similar characteristics.