ACCT 162 Module G Quiz

If a customer's account was recorded at $45,000, the audited value was $30,000, and the sampling interval was $30,000, the projected misstatement would be $10,000. $30,000. $15,000. $20,000.

$15,000.

A client's inventory is recorded at $300,000 and is comprised of 1,000 items. If auditors examined a sample of 200 items and found a total misstatement of $20,000 (overstatement), what is the estimated audited balance for inventory? $200,000 $20,000 $400,000 $100,000

$200,000

Pujols, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Wieserbud Brewing Inc., and estimated the account balance based on the ratio of audited value to recorded balances. He audited 120 items from a sample and found an audited value of $24,600. The sample had a recorded value of $30,000. If the entire inventory contained 2,400 items and the total recorded value of the inventory was $480,000, the estimated account balance using nonstatistical methods is $480,000. $393,600. $500,000. $474,500.

$393,600.

Which of the following is not considered in establishing the sample size in a monetary unit sampling application? Risk of incorrect acceptance Population size Expected misstatement All of these are considered.

All of these are considered.

Which of the following would not result in a lower level of the risk of incorrect acceptance? A reduction in the utilization of analytical procedures in the audit examination An increase in the susceptibility of the account balance to misstatement An increase in the acceptable level of audit risk from 5 to 10 percent The inability of the auditor to rely on the internal control as planned

An increase in the acceptable level of audit risk from 5 to 10 percent

In a classical variables sampling application, which of the following outcomes would typically not result from stratifying a population? A decrease in the population variability An increase in the standard deviation A decrease in the expected sample size A higher likelihood of selecting higher dollar items

An increase in the standard deviation

_____ methods use normal distribution theory and the central limit theorem to provide a range estimate of the account balance or class of transactions or the misstatement in the account balance or class of transactions. Nonstatistical sampling Monetary unit sampling (MUS) Attributes sampling Classical variables sampling

Classical variables sampling

Which of the following factors is most likely established based on the results of prior audit examinations? Risk of incorrect acceptance Population size Expected misstatement Tolerable misstatement

Expected misstatement

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following types of sampling risks? Assessing control risk too low Assessing control risk too high Incorrect rejection Incorrect acceptance

Incorrect acceptance

Which of the following is not true with respect to the risk of incorrect rejection? Incorrect rejection occurs when the auditor concludes that the account balance is not fairly stated. Incorrect rejection occurs when the true (but unknown) account balance is materially misstated. The risk of incorrect rejection has an inverse relationship with sample size. The risk of incorrect rejection exposes the auditor to an efficiency loss.

Incorrect rejection occurs when the true (but unknown) account balance is materially misstated.

Which of the following is not an acceptable course of action the audit team can choose when sample evidence suggests that the account balance is materially misstated? All of these are acceptable courses of action. Increase the sample size and examine additional items. Recommend adjustment of the client's account balance. Increase the tolerable misstatement and examine additional items.

Increase the tolerable misstatement and examine additional items.

Which of the following components of the upper limit on misstatements is based on the possibility that the sampling interval contains a greater degree of misstatement than the item examined by the auditor? Basic allowance for sampling risk Incremental allowance for sampling risk Risk of incorrect acceptance Projected misstatement

Incremental allowance for sampling risk

Samantha, CPA, decided to stratify the population in her statistical sampling plan. Which of the following is the most likely reason she used this approach? The population is relatively homogenous in terms of the dollar amount of components or transactions. It eliminates the need for calculating the projected misstatement in the account being examined. It eliminates the need for random selection. It reduces her expected sample size.

It reduces her expected sample size.

Which of the following represents a major difference in the use of monetary unit sampling (MUS) and classical variables sampling? MUS is a nonstatistical sampling method while classical variables sampling is a statistical sampling method. MUS is more effective in controlling the auditors' exposure to sampling risk than classical variables sampling. MUS defines the sampling unit as a dollar of an account balance while classical variables sampling defines the sampling unit as a component of an account balance. MUS considers both the expected misstatement and tolerable misstatement in the determination of sample size, while classical variables sampling only considers the expected misstatement.

MUS defines the sampling unit as a dollar of an account balance while classical variables sampling defines the sampling unit as a component of an account balance.

Which of the following selection methods selects individual dollars within an account balance or class of transactions for examination? Classical variables sampling Attribute sampling Nonstatistical variables sampling Monetary unit sampling

Monetary unit sampling

Which of the following is considered to be an advantage of monetary unit sampling compared to classical variables sampling? Left: selection of larger components Right: Ability to identify understatements Option A Option C Option D Option B

Option A

Holding other factors constant in a classical variables sampling application, an increase in which of these factors will cause sample size to increase? Risk of incorrect rejection: No; Risk of incorrect acceptance: Yes Risk of incorrect rejection: Yes; Risk of incorrect acceptance: Yes Risk of incorrect rejection: No; Risk of incorrect acceptance: No Risk of incorrect rejection: Yes; Risk of incorrect acceptance: No

Risk of incorrect rejection: No; Risk of incorrect acceptance: No

Which component of the expanded audit risk model is most closely associated with the risk of incorrect acceptance? Risk of material misstatement Nonsampling risk Analytical procedures risk Test of details risk

Test of details risk

As the auditors' assessments of control risk and analytical procedures risk decrease, which of the following statements is true? The sample size will not be affected. The sample size will increase. The allowable risk of incorrect acceptance will decrease. The allowable risk of incorrect acceptance will increase.

The allowable risk of incorrect acceptance will increase.

Which of the following is the least likely outcome when the upper limit on misstatements exceeds the tolerable misstatement? The auditor would conclude that the account balance is fairly stated. The auditor would be exposed to the risk of incorrect rejection. The auditor would be exposed to an efficiency loss. The auditor would consider expanding the sample to evaluate additional transactions or components of the account balance.

The auditor would conclude that the account balance is fairly stated.

Zimmerman is auditing a client's accounts balance recorded at $1 million using monetary unit sampling. After assessing the appropriate parameters, Zimmerman determined an appropriate sample size of 100 items. The following two misstatements were identified as a result of the substantive tests: Picture Assume that Zimmerman's parameters included a tolerable misstatement of $60,000 and a risk of incorrect acceptance of 5 percent. (Confidence factors for a 5 percent risk of incorrect acceptance are shown below): Picture Which of the following is not true with respect to the above? The projected misstatement is $7,000. If the upper limit on misstatements is $46,750, Zimmerman should accept the account balance as fairly stated. The basic allowance for sampling risk is $30,000. The actual misstatement detected by Zimmerman is $6,500.

The projected misstatement is $7,000.

Which of the following factors that affect sample size can be determined by considering the recorded account balance of the account or class of transactions as well as the relationship between the recorded account balance or class of transactions with important financial statement subtotals? Risk of incorrect acceptance Tolerable misstatement Expected misstatement Population size

Tolerable misstatement

Which of the following statements is not true regarding variables sampling? Both statistical and nonstatistical approaches to variables sampling can be used under GAAS. Variables sampling is appropriate when the distribution of the population is binary in nature. Two approaches to variables sampling are monetary unit sampling and classical variables sampling. The objective of variables sampling is to estimate either the true balance or the extent of misstatement in an account balance or class of transactions.

Variables sampling is appropriate when the distribution of the population is binary in nature.

The total amount of misstatement identified in a sample is referred to as the projected misstatement. incremental allowance for sampling risk. tolerable misstatement. actual misstatement.

actual misstatement.

The amount at which an item would be recorded assuming no mistakes in judgment or incorrect applications of generally accepted accounting principles were made is the audited value. expected misstatement. recorded value. tolerable misstatement.

audited value.

All other factors being equal, as the risk of incorrect acceptance and tolerable misstatement increase, the sample size will not be affected. not be determined from the information given. decrease. increase.

decrease.

Cruz, CPA, decided to use nonstatistical sampling to examine the accounts payable balances of Maverick Inc. Based on his professional judgment, Cruz judgmentally selected sample invoices from a file, but did so without any intentional bias. The selection method used by Cruz was systematic selection. haphazard selection. block selection. random selection.

haphazard selection.

When performing substantive procedures, auditors run the sampling risk(s) of assessing control risk too low only. incorrect acceptance and incorrect rejection. assessing control risk too high or too low. incorrect acceptance only.

incorrect acceptance and incorrect rejection.

As the expected misstatement is large relative to the tolerable misstatement, the audit team would most likely increase the sample size. decrease the sample size. consider the possibility of an increased level of tolerable misstatement. increase their degree of reliance on internal controls.

increase the sample size.

Incorrect rejection occurs when the auditor concludes that the account balance is _____ when in fact it is _____. fairly stated; misstated material; immaterial immaterial; material misstated; fairly stated

misstated; fairly stated

In classical variables sampling, a measure of the variability of the population is known as the standard deviation. tolerable misstatement. tainting percentage. sampling average.

standard deviation.

The process of subdividing a population into more homogeneous subgroups is known as classification. sampling. identification. stratification.

stratification.

In a classical variables sampling application, if the _____ exceeds the maximum difference between the recorded balance and any point within the precision interval, the auditor would decide to _____ the account balance as fairly stated. sample estimate; accept tolerable misstatement; accept tolerable misstatement; reject sample estimate; reject

tolerable misstatement; accept

When conducting variables sampling, auditors typically examine the separation of duties among client personnel for transactions related to the account balance or class of transactions. minutes from meetings of the client's board of directors. transactions of components of the account balance or class of transactions. the balances in an account balance or class of transactions from one or more prior years.

transactions of components of the account balance or class of transactions.

The sampling method used to examine a population when the auditor wants to estimate a continuous amount (or value) of the population is discovery sampling. balance sampling. attributes sampling. variables sampling.

variables sampling.

Which of the following statements is true regarding classical variables sampling? The determination of sample size requires auditors to consider a smaller number of factors than are considered under MUS. Classical variables sampling should be used when the auditor has greater concerns for overstatement (rather than understatement) errors. The sampling unit is defined as each individual dollar in the account under examination. A very small dollar account has the same probability of being selected for examination as a very large dollar account.

A very small dollar account has the same probability of being selected for examination as a very large dollar account.

Which of the following components of the upper limit on misstatements is determined by multiplying the sampling interval by the confidence factor for the acceptable risk of incorrect acceptance? Sampling interval Incremental allowance for sampling risk Basic allowance for sampling risk Projected misstatement

Basic allowance for sampling risk

Which of the following components of the upper limit on misstatements will exist in all monetary unit sampling applications, even in those where no misstatements are found? Incremental allowance for sampling risk Projected misstatement Computed allowance for sampling risk Basic allowance for sampling risk

Basic allowance for sampling risk

MES is auditing a client's accounts receivable balance recorded at $2 million using MUS sampling. The following parameters have been established for this account: • Tolerable misstatement = $200,000 • Expected misstatement = $100,000 • Risk of incorrect acceptance = 5% Which of the following statements would not be true with respect to the sample size in this situation? If MES can accept a risk of incorrect acceptance of 10% (holding all other factors constant), sample size will be decreased to 80 accounts. Because the size of the population is relatively large, this element does not affect sample size. The correct sample size is 116 customer accounts. Increasing tolerable misstatement from $200,000 to $600,000 (holding all other factors constant) will increase the sample size.

Because the size of the population is relatively large, this element does not affect sample size.

Romo, CPA, performed nonstatistical sampling to examine the inventory balances of Jones Company. The sample included 125 of the total 1,250 items with a recorded value of $550,000. Romo determined the expected misstatement to be $25,000 and the tolerable misstatement to be $40,000. The sample had a recorded value of $54,000 and an audited value of $52,000. What conclusion did Romo draw regarding the account balance? Conclude that the account balance is not fairly stated, since the estimated misstatement is less than the expected misstatement. Conclude that the account balance is fairly stated, since the estimated misstatement is greater than the expected misstatement. Conclude that the account balance is not fairly stated, since the estimated misstatement is greater than the tolerable misstatement. Conclude that the account balance is fairly stated, since the estimated misstatement is less than the tolerable misstatement.

Conclude that the account balance is fairly stated, since the estimated misstatement is less than the tolerable misstatement.

Which of the following is not true with respect to the effect of the population standard deviation in a classical variables sampling application? The standard deviation can be determined based on experience from prior audits or a small sample taken during the current audit. When the standard deviation is larger, the audit team is more likely to select a representative sample. The standard deviation has a direct relationship with sample size. The standard deviation represents the variability of the population being examined.

When the standard deviation is larger, the audit team is more likely to select a representative sample.

Ranger, CPA, used nonstatistical sampling to examine the accounts receivable balances of Cowboy Inc. He audited a sample of 150 items and found an audited value of $5,000 less than the recorded value of $25,000. The entire account balance contained 2,000 items and had a total recorded value of $350,000. Using nonstatistical methods and assuming that Ranger used the ratio of audited value to recorded value to estimate the account balance, the estimated total account balance is $330,000. $280,000. $345,000. $295,000.

$280,000.

Bama's accounts receivable were recorded at $600,000. Assume that the auditor determined a sample size of 20 customer accounts and prepared confirmations to be addressed to those customers. One misstatement was determined; an account recorded at $10,000 was confirmed to have a balance of $5,000. What is the appropriate sampling interval? $250 $30,000 $500 $60 _______________________ What is the projected misstatement? $5,000 $30,000 $10,000 $15,000 _______________________ Using an incremental confidence factor of 1.58 (corresponding to the risk of incorrect acceptance of 10 percent), what is the incremental allowance for sampling risk? $8,700 $23,700 $5,000 $7,900

$30,000 ________________ $15,000 ________________ $8,700

Jeter, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Big Apple Company and estimated the account balance based on the ratio of audited value to recorded balances. He audited 200 items from a sample and found an audited value of $36,000. The sample had a recorded value of $40,000. If the entire inventory contained 3,000 items and the total recorded value of the inventory was $500,000, the estimated account balance using nonstatistical estimation and projecting the error based on number of items examined is $540,000. $450,000. $474,500. $393,600.

$450,000.

Auditors are evaluating an account with a recorded balance of $500,000 using mean-per-unit estimation. This account is comprised of 1,000 individual components. The auditors sampled 100 items and determined a total audited value of $52,500. Using a risk of incorrect acceptance of 10 percent, the auditors determined a precision of $40,000. If the tolerable misstatement is $50,000, which of the following is not true? The probability that the auditors will incorrectly accept a materially misstated account balance is 10 percent. A 90 percent probability exists that the true population value falls between $460,000 and $540,000. The auditors would conclude that the account balance is fairly stated. The estimated recorded value of this account is $525,000.

A 90 percent probability exists that the true population value falls between $460,000 and $540,000.

Solo, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Hope Inc., and estimated the account balance by projecting the misstatement based on the number of items examined. In selecting her sample of 70 items, she used an expected misstatement of $40,000 and a tolerable misstatement of $65,000. The account balance consisted of 1,050 items totaling $1,200,000. The sample recorded value was $80,000, and the audited value was $76,000. What conclusion did Solo draw regarding the account balance? Accept because the expected misstatement is less than the tolerable misstatement Reject because the expected misstatement is greater than the tolerable misstatement Reject because the expected misstatement is greater than the expected misstatement Accept because the expected misstatement is less than the expected misstatement

Accept because the expected misstatement is less than the tolerable misstatement

Summitt, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Hero Inc. Which of the following methods of sample selection are available to her? Any method where the results can be probabilistically estimated Any method she believes will result in a representative sample Block and haphazard only Random and systematic only

Any method she believes will result in a representative sample

How does the auditor typically determine the appropriate level of the risk of incorrect rejection when using classical variables sampling? Based on the findings in prior audits or based on a small sample taken during the current year Based on prior assessments of audit risk, risk of material misstatement, and analytical procedures risk Based on the anticipated cost of conducting additional substantive procedures Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals

Based on the anticipated cost of conducting additional substantive procedures

How does the auditor establish the level of tolerable misstatement in a variables sampling application? Based on the anticipated cost of conducting additional substantive procedures Based on the findings in prior audits or based on a small sample taken during the current year Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals Based on prior assessments of audit risk, risk of material misstatement, and analytical procedures risk

Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals

Which of the following factors has a direct relationship with sample size in a variables sampling application? Tolerable misstatement: No; Expected misstatement: No Tolerable misstatement: Yes; Expected misstatement: Yes Tolerable misstatement: Yes; Expected misstatement: No Tolerable misstatement: No; Expected misstatement: Yes

Tolerable misstatement: No; Expected misstatement: Yes

Which of the following components of the upper limit on misstatements is affected by misstatements detected during the audit examination? Picture Option A Option D Option B Option C

C

Which of the following is not true with respect to the use of monetary unit sampling (MUS)? Compared to classical variables sampling, MUS allows the auditors to more effectively control their exposure to sampling risk. MUS selects individual dollars from an account balance for verification. MUS estimates the extent of misstatement in an account balance or class of transactions. MUS provides the auditor with a more conservative estimate of the misstatement than classical variables sampling.

Compared to classical variables sampling, MUS allows the auditors to more effectively control their exposure to sampling risk.

A number of factors influence the sample size for a variables sampling application. All other factors held constant, which of the following would lead to a larger sample size? Lower levels of tolerable misstatement Increased use of analytical procedures to obtain evidence about particular assertions Lower frequency and magnitude of misstatements A lower assessed level of risk of material misstatement

Lower levels of tolerable misstatement

SCA is auditing a client's accounts receivable balance recorded at $10 million using MUS sampling. The following parameters have been established for this account: • Tolerable misstatement = $500,000 • Expected misstatement = $100,000 • Risk of incorrect acceptance = 10% Which of the following statements would not be true with respect to the sample size in this situation? Increasing expected misstatement to $200,000 (holding all other factors constant) will increase the sample size to 115 customer accounts. If SCA wishes to reduce its exposure to the risk of incorrect acceptance to 5% (holding all other factors constant), sample size will be increased by 24 accounts. The correct sample size is 69 customer accounts. Decreasing tolerable misstatement from $500,000 to $200,000 (holding all other factors constant) will reduce the sample size by 331 accounts.

Decreasing tolerable misstatement from $500,000 to $200,000 (holding all other factors constant) will reduce the sample size by 331 accounts.

In which of the following circumstances would the auditor most likely use variables sampling? Evaluating the operating effectiveness of specific control procedures Evaluating the operating design of specific control procedures Determining whether the client's accounts receivable balance is correctly recorded Identifying the susceptibility of the account balance to misstatement

Determining whether the client's accounts receivable balance is correctly recorded

Which of the following is not a correct relationship between a factor and sample size in a monetary unit sampling application? Tolerable misstatement; Inverse Expected misstatement; Inverse Recorded balance of the account; Direct Risk of incorrect acceptance; Inverse

Expected misstatement; Inverse

In which of the following situations would the auditor be more likely to use monetary unit sampling as opposed to classical variables sampling? Larger expected misstatement: Yes; Concern with overstatements: Yes Larger expected misstatement: No; Concern with overstatements: No Larger expected misstatement: No; Concern with overstatements: Yes Larger expected misstatement: Yes; Concern with overstatements: No

Larger expected misstatement: No; Concern with overstatements: Yes

The upper limit on misstatements is an adjustment of the sample estimate of misstatement to reflect the desired level of sampling risk. an adjustment of the sample deviation rate to reflect the desired level of sampling risk. the maximum rate of deviation that could exist before auditors would reduce the reliance on an internal control. the maximum misstatement that could exist before auditors would conclude that the account balance is not fairly stated.

an adjustment of the sample estimate of misstatement to reflect the desired level of sampling risk.

The risk of incorrect acceptance relates to the preliminary estimate of materiality. efficiency of the audit. allowable risk of tolerable misstatement. effectiveness of the audit.

effectiveness of the audit.

Jones, CPA, used a classical variables sampling application to examine the inventory balance of XYZ Company. The recorded value of the inventory was $240,000, and Jones determined a tolerable misstatement of $12,000. Jones's sampling procedures resulted in a precision interval of $224,000 to $236,000. As a result, Jones should conclude that the inventory balance is fairly stated. tolerable misstatement should be increased. risk of incorrect acceptance is below the desired level. inventory balance is materially misstated.

inventory balance is materially misstated.

Under monetary unit sampling, the sampling interval is determined by dividing the _____ by the _____. population size; sample size tolerable misstatement; population size population size; tolerable misstatement sample size; population size

population size; sample size

In a classical variables sampling application, the sample size will be smaller when the population variability is lower. tolerable misstatement is lower. risk of incorrect rejection is lower. risk of incorrect acceptance is lower.

population variability is lower.

The amount by which a projected misstatement in an account balance or class of transactions differs from an actual misstatement as a result of the sample not being representative of the population would typically arise from sampling risk. a misunderstanding of accounting principles. risk of incorrect acceptance. management override of an internal control policy or procedure.

sampling risk.

An auditor may decide to increase the risk of incorrect rejection when many differences are expected. the cost and effort of selecting additional items is low. initial sample results do not support the planned level of control risk. increased reliability from the sample is desired.

the cost and effort of selecting additional items is low.

When the _____ exceeds the _____, the audit team is exposed to the risk of incorrect acceptance. upper limit on misstatements; expected misstatement upper limit on misstatements; tolerable misstatement tolerable misstatement; expected misstatement tolerable misstatement; upper limit on misstatements

tolerable misstatement; upper limit on misstatements

Green, CPA, performed a mean-per-unit sampling plan to examine the inventory balances of ABC Company. Green audited 120 items from a sample and found an audited value of $24,600. The sample had a recorded value of $30,000. If the entire inventory contained 2,400 items and the total recorded value of the inventory was $480,000, the estimated account balance using mean per unit estimation is $492,000. $393,600. $480,000. $474,500.

$492,000.

In a classical variables sampling application, the auditor determines there is a 95 percent probability that the true (but unknown) value of an entity's accounts receivable is between $45,000 and $55,000. If the estimated population value is $50,000, the precision is $10,000. 5 percent. $5,000. 95 percent.

$5,000.

A client's inventory is recorded at $600,000 and is comprised of 1,000 items. The auditors examined a sample of items with a recorded balance of $100,000 and determined an audited value of $90,000. What is the estimated audited value for inventory? $590,000 $540,000 $666,666 $90,000

$540,000

Brown, CPA, was using monetary unit sampling to audit an inventory of $3,000,000 that was comprised of 6,000 items. A sample size of 500 was determined and a tolerable misstatement of $20,000 was established. The sampling interval would be $20,000. $500. $5,000. $6,000.

$6,000.

Allister is auditing a client's accounts balance recorded at $500,000 using monetary unit sampling and determined a sample size of 100 items. The following two misstatements were identified as a result of the substantive tests: Left: Recorded amount: 4000 & 2000 Right: Audited amount : 1000 & 1500 Confidence factors for a 5 percent risk of incorrect acceptance are shown below: Left: Overstatement errors: 0 & 1 & 2 Right: Factor: 3.00 & 4.75 & 6.30 What is the incremental allowance for sampling risk? $3,500 $15,000 $8,500 $5,000

$8,500

The audit team is using monetary unit sampling to examine an entity's accounts receivable balance, which is recorded at $500,000. The team has determined the tolerable misstatement to be $25,000, the risk of incorrect acceptance to be 5 percent, and the expected misstatement to be 2 percent. Using the monetary unit sampling Sample Size Table, what is the appropriate sample size? 162 300 75 231

162

How does monetary unit sampling (MUS) ensure that larger dollar components are selected for examination? MUS sampling requires the auditor to stratify the sample into larger and smaller dollar components prior to beginning the sample selection process. MUS sampling defines the sampling unit as an individual dollar within an account balance or class of transactions. MUS sampling selects components having larger balances in the prior audit. MUS sampling requires the auditor to identify all items having a balance greater than performance materiality prior to beginning the sample selection process.

MUS sampling defines the sampling unit as an individual dollar within an account balance or class of transactions.

Which of the following is not an advantage associated with monetary unit sampling (MUS)? MUS sampling methods are more effective in identifying overstatement errors. MUS sampling methods typically result in relatively small sample sizes. MUS sampling methods typically include transactions or components reflecting relatively large dollar amounts. MUS sampling methods provide a conservative (higher) estimate of misstatement in the account balance or class of transactions.

MUS sampling methods provide a conservative (higher) estimate of misstatement in the account balance or class of transactions.

Which of the following statements is true regarding performance materiality in a monetary unit sampling application? Performance materiality addresses the risk that the aggregate of individually material misstatements may not cause the financial statements to be materially misstated. Performance materiality replaces the overall level of financial statement materiality. Performance materiality provides auditors with a conservative measure that considers the presence of undetected misstatements. Expected misstatement is the application of performance materiality to a particular sampling procedure.

Performance materiality provides auditors with a conservative measure that considers the presence of undetected misstatements.

Which of the following set of conditions would provide the auditor with the smallest sample size under monetary unit sampling (RIA = risk of incorrect acceptance, EM = expected misstatement, TM = tolerable misstatement, PS = population size)? RIA = 5%, EM = $2,000, TM = $10,000, PS = $100,000 RIA = 5%, EM = $7,500, TM = $15,000, PS = $150,000 RIA = 5%, EM = $5,000, TM = $10,000, PS = $200,000 RIA = 5%, EM = $7,500, TM = $15,000, PS = $300,000

RIA = 5%, EM = $2,000, TM = $10,000, PS = $100,000

Which of the following would be the most likely situation in which an auditor would use variables sampling? Comparing the recorded balance in accounts receivable to expected balances or prior-years' balances Evaluating sales invoices for evidence of authorization by client personnel Mathematically evaluating the client's provision for the allowance for doubtful accounts Selecting customer balances in accounts receivable for confirmation

Selecting customer balances in accounts receivable for confirmation

Which of the following is considered in determining the sample size in a classical variables sampling application but not in a monetary unit sampling application? Standard deviation: Yes; Risk of incorrect acceptance: Yes Standard deviation: Yes; Risk of incorrect acceptance: No Standard deviation: No; Risk of incorrect acceptance: Yes Standard deviation: No; Risk of incorrect acceptance: No

Standard deviation: Yes; Risk of incorrect acceptance: No

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements? Set the tolerable misstatement at a lower level than originally planned. Increase the sample size to reduce the effect of the unusually large disbursements. Stratify the cash disbursements population so that the unusually large disbursements are selected. Continue to draw new samples until all the unusually large disbursements appear in the sample.

Stratify the cash disbursements population so that the unusually large disbursements are selected.

What is one of the primary benefits of stratifying a population? Stratifying the population allows the auditor to reduce the necessary sample size. Stratifying the population reduces the auditor's exposure to nonsampling risk. Stratifying the population allows the auditor to have a higher likelihood of reaching a favorable conclusion with respect to the client's financial statements. Stratifying the population allows different types of audit procedures to be performed on larger and smaller transactions or components.

Stratifying the population allows the auditor to reduce the necessary sample size.

Which of the following is found by dividing the amount of misstatement noted in a logical unit by the recorded amount of that logical unit? Sample size Sampling interval Projected misstatement Tainting percentage

Tainting percentage

In a variables sampling application, which of the following would not ordinarily be documented by the audit team? Information on how the audit team verified the completeness of the identified population A description of the substantive procedures performed on each item selected The method and parameters used to determine sample size The audit team's rationale for the use of monetary unit sampling as opposed to other sampling techniques

The audit team's rationale for the use of monetary unit sampling as opposed to other sampling techniques

What is the auditor's normal course of action if a "logical unit" is selected twice in monetary unit sampling? The auditor should not include the logical unit as a selection, since the dollar amount of this unit is excessively large. The auditor should replicate the sample using an alternative random start. The auditor should count the logical unit as two selections and proceed as normal. The auditor should count the logical unit as a single selection and proceed as normal.

The auditor should count the logical unit as two selections and proceed as normal.

Auditors are evaluating an account with a recorded balance of $700,000 using classical variables sampling. Based on an allowable risk of incorrect acceptance of 10 percent, the auditors have determined the following: • Estimated account balance = $640,000 • Precision = $20,000 • Tolerable misstatement = $50,000 Which of the following best describes the auditors' decision and rationale for that decision? The auditors would conclude that the account balance is not fairly stated, since the sample estimate falls outside of the precision interval. The auditors would accept the account balance as fairly stated, since the difference between the upper bound of the precision interval and recorded balance is less than the tolerable misstatement. The auditors would conclude that the account balance is not fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement. The auditors would accept the account balance as fairly stated, since the sample estimate falls outside of the precision interval.

The auditors would accept the account balance as fairly stated, since the difference between the upper bound of the precision interval and recorded balance is less than the tolerable misstatement.

Auditors are evaluating an account with a recorded balance of $600,000 using classical variables sampling. Based on an allowable risk of incorrect acceptance of 5 percent, the auditors have determined the following: • Estimated account balance = $680,000 • Precision = $20,000 • Tolerable misstatement = $50,000 Which of the following best describes the auditors' decision and rationale for that decision? The auditors would conclude that the account balance is not fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement. The auditors would accept the account balance as fairly stated, since the sample estimate falls outside of the precision interval. The auditors would conclude that the account balance is not fairly stated, since the sample estimate falls outside of the precision interval. The auditors would accept the account balance as fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement.

The auditors would conclude that the account balance is not fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement.

Law, CPA, is using nonstatistical sampling in his examination of Jye Company's accounts receivable. The recorded balance of Jye's accounts receivable was $750,000. Law selected a sample of customer accounts for examination, which were recorded at $50,000. Based on the responses received from accounts receivable confirmations, Law determined an audited value of $45,000 for the accounts receivable. If tolerable misstatement is $60,000, which of the following statements is not true? The estimated account balance would be $825,000. The actual misstatement identified by Law is $5,000. Law is not able to provide a quantitative conclusion as to the exposure to the risk of incorrect acceptance. Law would conclude that the account balance is not fairly stated, since the estimated misstatement is greater than the tolerable misstatement.

The estimated account balance would be $825,000.??

Which of the following would not be estimated using variables sampling? All of these would be estimated using variables sampling. The extent to which an internal control procedure is not functioning as intended The amount of misstatement in a client's inventory The balance in the client's accounts receivable

The extent to which an internal control procedure is not functioning as intended

Which of the following is true with respect to the risk of incorrect acceptance? The risk of incorrect acceptance has an inverse relationship with sample size. The risk of incorrect acceptance exposes the auditor to an efficiency loss. The risk of incorrect acceptance may occur when the true (but unknown) account balance is fairly stated. The risk of incorrect acceptance is determined in the planning stages of the audit prior to the study of internal control.

The risk of incorrect acceptance has an inverse relationship with sample size.

Why is the auditor more concerned with controlling the exposure to the risk of incorrect acceptance than with the risk of incorrect rejection? Only the risk of incorrect acceptance results in an incorrect decision by the auditor. The risk of incorrect rejection is not related to the auditor's substantive procedures. The risk of incorrect acceptance may ultimately result in the auditor incorrectly issuing an unmodified opinion on the client's financial statements. The risk of incorrect rejection can be controlled by performing substantive procedures during the interim period.

The risk of incorrect acceptance may ultimately result in the auditor incorrectly issuing an unmodified opinion on the client's financial statements.

Which of the following does not represent a difference between the use of various approaches to classical variables sampling? The use of mean-per-unit estimation requires a reliable measure of recorded value while the use of difference and ratio estimation does not. The use of difference and ratio estimation normally provides smaller sample sizes than the use of mean-per-unit estimation. The use of difference and ratio estimation requires the auditor to expect a certain number of differences to exist in the population while the use of mean-per-unit estimation does not. The use of mean-per-unit estimation typically results in a larger standard deviation than the use of either difference estimation or ratio estimation.

The use of mean-per-unit estimation requires a reliable measure of recorded value while the use of difference and ratio estimation does not.

If an audit team performing a monetary unit sampling application selects a sample using a systematic random selection method, which of the following is true with respect to accounts with a balance greater than the sampling interval? They have a 100 percent probability of being selected. They have a greater than 50 percent probability of being selected. They have no probability of being selected. They have a less than 50 percent probability of being selected.

They have a 100 percent probability of being selected.

Which of the following is not true with respect to the risk of incorrect acceptance? This risk occurs when the sample results suggest that the account balance is fairly stated. This risk results in the auditor making an incorrect conclusion about the client's account balance or class of transactions. This risk is controlled by the auditor in determining sample size under monetary unit sampling (MUS). This risk provides the auditor with an efficiency loss.

This risk provides the auditor with an efficiency loss.

Which of the following expresses the relationship between changes in the factors and changes in sample size in variables sampling? Tolerable misstatement: Inverse; Expected misstatement: Direct; Risk of incorrect rejection: Inverse Tolerable misstatement: Direct; Expected misstatement: Inverse; Risk of incorrect rejection: Direct Tolerable misstatement: Inverse; Expected misstatement: Inverse; Risk of incorrect rejection: Direct Tolerable misstatement: Inverse; Expected misstatement: Inverse; Risk of incorrect rejection: Inverse

Tolerable misstatement: Inverse; Expected misstatement: Direct; Risk of incorrect rejection: Inverse

The auditor's sample would indicate that the client's account balance is fairly stated when the _____ is less than the _____. upper limit on misstatements; tolerable misstatement actual misstatement; tolerable misstatement tolerable misstatement; actual misstatement tolerable misstatement; upper limit on misstatements

upper limit on misstatements; tolerable misstatement