SU 15: Sampling

Question 1

Prior experience indicates numerous pricing and extensions errors of perpetual inventory balances what sampling method would be approriate

Answer 1

Difference estimation. If population misstatement involves (1) determining the difference between the audit carrying amounts for items in the sample (2) adding the difference (3) recalculating the mean difference (4) multiplying the mean # of items in the poplulation. An allowance for sampling risk is calculated. Ratio estimation is similar except it estimates the population misstatement by multiplying the carrying amount of the population by the ratio of the total audit value of the sample items to the total carrying amount. If has been demonstrated that ratio and difference estimations both reliable and efficient when small misstatements predominate and they are not skewed.

Question 2

Which of the following combinations results in a decrease in sample size for attribute sample. Allowable risk of assessing control risk too low/Tolerable rate/Expected Pop Dev Rate

Answer 2

Increase/Increase/Decrease
to determine the sample size for a test of controls, the auditor considers (1) tolerable rate of deviation form the control being tested (2) the expected actual rate of deviations (3) the allowable risk of assessing control risk too low. An increase in allowable risk of assessing control risk too low, an increase in the tolerable rate and decrease in expected rate each has the effect of reducing required sample size.

Question 3

1.) The larger the item in the population, the more likely it will be included in the sample

Answer 3

a. B, monetary-unit sampling only. In monetary unit sampling, the probability of selection is related to size of the item

Question 4

2.) Replaces the need for the use of judgement by an auditor

Answer 4

a. D, neither MPU or monetary-unit sampling. As noted in AU 350, “Evaluating the appropriateness of evidence is solely a matter of auditing judgement and is not determined by the design and evaluation of an audit sample”

Question 5

3.) Use the average amount of sampled items to estimate the amount of population

Answer 5

a. A, Classical variables or MPU sampling only. MPU sampling determines the average amount of sampled items (total audited amount of the sample/number of items in the sample) and then multiplies this average by the number of items in the population to estimate the population amount.

Question 6

4.) Use results from a portion of the population to draw an inference about the total population

Answer 6

a. C, both MPU and MUS. AU 350 states “Audit sampling is 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”

Question 7

5.) Allow the auditor to measure and control the risk of accepting a materially misstated balance

Answer 7

a. C, both MPU and MUS. By using statistical theory, the auditor can quantify sampling risk to assist in limiting it to a level they feel is appropriate

Question 8

6.) Require the auditor to estimate the population standard deviation to determine the appropriate sample size

Answer 8

a. A, Classical variables or MPU sampling only. MPU sampling requires the auditor estimate the population’s standard deviation to determine the sample size and evaluate the results. MUS, however, does not require the use of the population standard deviation

Question 9

7.) Is equally useful for selection samples and drawing inferences about asset and liability balances

Answer 9

a. A, Classical variables or MPU sampling only. MUS sampling is appropriate only for accounts subject to risk of overstatement (eg assets). Because the focus of liability accounts is ordinarily on the risk of understatement, MUS does not meet the objectives for liabilities

Question 10

8.) Eliminates the need for the auditor to consider materiality

Answer 10

a. D, neither. The auditor must quantify the amount considered material for either sampling method. The amount considered material is one of the factors used in calculating the appropriate sample size

Question 11

9.) Automatically stratifies the population during sample selection

Answer 11

a. B, monetary-unit sampling only. Because MUS increase the probability of selecting large items, it effectively stratifies the population.

Question 12

10.) Require documentation of results in the working papers

Answer 12

a. C, both MPU and MUS. All important evidence and conclusions should be documented in the working papers, regardless of what tools or techniques the auditor uses.

Question 13

Sampling Risk is defined as

Answer 13

That a properly drawn sample may not be representative of the population

Question 14

Risk of Assessing control risk too low is

Answer 14

The risk the assessed level of control risk based on the sample is less than the true operating effectiveness of internal control. This risk relates to audit effectiveness and is termed a Type II or Beta risk

Question 15

Risk of Assessing control risk too high is

Answer 15

The assessed level of control risk based on the sample is greater than the true operating effectiveness of the control. relates to efficiency resulting in greater audit effort. Type I or Alpha risk.

Question 16

Sampling Risk

Answer 16

Upper-deviation rate less sample deviation rate

Question 17

Attribute sampling

Answer 17

generally used for tests of controls
• Estimate frequency of errors in population based on frequency in sample
• Determine whether or not estimated error rate indicates control is working effectively

Question 18

Classical variables sampling

Answer 18

generally used for substantive testing
• Estimate value of population based on value of items in sample
• Determine whether or not estimated value is close enough management’s assertion
as to valuation

Question 19

Probability proportional to size sampling

Answer 19

also used for substantive testing
• Form of variables sampling
• Items that are larger in size or value higher probability of being selected for sample

Question 20

Attribute Sampling: If upper precision limit ≤ tolerable rate

Answer 20

assessed level of control risk unchanged

Question 21

Attribute Sampling: If upper precision limit > tolerable rate

Answer 21

assessed level of control risk increased

Question 22

Attribute Sampling: Upper precision limit =

Answer 22

Sample deviation rate + Allowance for sampling risk

Question 23

Attribute Sampling: Calculate the sample deviation rate

Answer 23

of errors in sample ÷ # of items in samp

Question 24

Variables Sampling: tolerable misstatement

Answer 24

the maximum difference, taking materiality into
account, between the actual balance and the reported balance that will not prevent the
auditor from issuing an unmodified report

Question 25

Variables Sampling: allowable risk of incorrect acceptance or sampling risk

Answer 25

the maximum

allowable risk that the auditor will accept an amount that is materially incorrect

Question 26

Variables Sampling: expected amount of misstatement or expected deviation

Answer 26

the amount by
which the auditor expects the actual balance to differ from the reported amount based on
the assessed level of control risk

Question 27

Variables Sampling: upper deviation limit

Answer 27

the estimated difference between the actual amount

and the reported amount based on the sample

Question 28

Variables Sampling: If precision ≤ tolerable misstatement

Answer 28

opinion may require modification

Question 29

Variables Sampling: If precision > tolerable misstatement

Answer 29

opinion will not require modification

Question 30

Sample size depends upon

Answer 30

1. The population size.
2. The acceptable risk.
3. The variability in the population.
4. The tolerable misstatement.

Question 31

Sample size is inversely related to

Answer 31

the acceptable sampling risk and is affected by many factors, including the tolerable deviation rate, the expected population deviation rate, and population size.

Question 32

the focus of interest in a test of controls.

Answer 32

The accountant wants to reach conclusions about all the items (typically documents) in the population.

Question 33

Attribute sampling tests binary

Answer 33

yes/no, or error/nonerror questions.
Attribute sampling is used to test the effectiveness of controls because it can estimate a rate of occurrence of control deviations in a population.

Question 34

Sampling for substantive testing attempts to provide evidence about

Answer 34

whether an account balance is materially misstated. After taking a sample and drawing a conclusion about the population, the auditor either accepts or rejects the reported number.

Question 35

n =

Answer 35

Sample size.

Question 36

The sample size formula for mean-per-unit variables sampling is as follows:

Answer 36

n = (C x S x N/A)

Question 37

C =

Answer 37

Confidence coefficient or number of standard deviations related to the required confidence level (1 - the risk of incorrect rejection).

Question 38

S =

Answer 38

Standard deviation of the population (an estimate based on a pilot sample or from the prior year’s sample).

Question 39

N =

Answer 39

Number of items in the population.

Question 40

A =

Answer 40

Allowance for sampling risk. This allowance is a total. In some representations, the allowance (precision) is stated in the denominator on a per-item basis, and A and N would not be included in the formula.

Question 41

tolerable deviation rate

Answer 41

the maximum error rate the auditor will allow without

increasing the assessed level of control risk

Question 42

Which of the following factors is(are) considered in determining the sample size for a test of controls?

1. ) Expected Population Deviation Rate
2. ) Tolerable Population Deviation Rate

Answer 42

Attribute sampling is typically used to test controls. The factors necessary to determine sample size include (1) the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, (2) the tolerable population deviation rate, and (3) the expected population deviation rate. The population is usually assumed to be infinite, and tables are used to identify the appropriate sample size.

Question 43

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

Answer 43

Deviations from specific control activities increase the likelihood of misstatements but do not always cause misstatements.
Deviations from a specific control increase the risk of misstatements in the accounting records but do not always result in misstatements. Thus, deviations from a specific control at a given rate ordinarily result in misstatements at the financial statement level at a lower rate.

Question 44

A client is holding securities as collateral for an outstanding account receivable. During the course of the audit engagement, the CPA should

Answer 44

Examine the securities and determine their fair value.
When an entity holds an asset of another entity as security for an outstanding debt, the auditor should examine the collateral and estimate its fair value to determine the reasonableness of the arrangement. The auditor may refer to published data such as current market quotations to determine the value of securities.

Question 45

Attribute Sampling Relationship to Sample Size: Increase of Assessing Control Risk too Low

Answer 45

Decrease sample size

Question 46

Attribute Sampling Relationship to Sample Size: Increase in Tolerable rate

Answer 46

Decrease sample size

Question 47

Attribute Sampling Relationship to Sample Size: Increase in Expected Population Deviation rate

Answer 47

Increase sample size

Question 48

Attribute Sampling Relationship to Sample Size: Increase Population

Answer 48

Increase sample size (slightly)

Question 49

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

Answer 49

Precision.
The precision or confidence interval (allowance for sampling risk) is an interval around the sample statistic that is expected to include the true value of the population at the specified confidence level. When using classical variables sampling, the allowance for sampling risk is calculated based on the normal distribution.

Question 50

Precision

Answer 50

is a measure of how closely the sample represents the population.

Question 51

Nonsampling Risk

Answer 51

Nonsampling risk is the risk of an erroneous conclusion caused by a factor not related to sampling risk. For example, the auditor may (1) apply inappropriate procedures, (2) misinterpret audit evidence, or (3) not recognize misstatements or control deviations.