Audit - Ch 9

If the UML is ___________ the tolerable misstatement, the evidence supports the conclusion that the account balance is not materially misstated.

less than or equal to

Probability-proportional-to-size sampling approach is ______.

particularly appropriate when the auditor is concerned with overstatements

The auditor must define the __________ so that the selected sample is appropriate for the assertions being tested.

population

The auditor selects a sample for MUS by using a systematic selection approach called ______ selection.

probability-proportional-to-size

An account has a correct balance of $6,500 and a recorded balance of $0. When MUS sampling, the chance of the account being selected for audit is ______.

zero

How to find allowance for sampling risk in nonstatistical sampling:

SR = TM - EM

risk of incorrect rejection

(alpha risk) results indicate that the balance has been materially misstated when it is not. - impacts efficiency

Risk of incorrect acceptance

(beta risk) results indicate that the balance has NOT been materially misstated when it has. - impacts effectiveness

Advantages of using Monetary Unit Sampling

- MUS is easier - MUS has smaller sample size - natural stratification - MUS looks for overstatements

Advantages of MUS include ______.

- automatically stratified sample - no requirement to make assumptions about the distribution of misstatements - smaller sample size than classical variable sampling when few misstatements expected

Disadvantages of MUS include ______.

- overstatement of the allowance of sampling risk - zero balances are not automatically selected - increased possibility of rejecting an acceptable book value

If the auditor has evidence that there is an unacceptably high risk that accounts receivable is materially misstated, the auditor can ______.

- request management adjust the account - perform other substantive procedures - increase sample size - issue a qualified or adverse opinion

Important determinants of sample size for testing account balances are ______.

- tolerable misstatement - desired confidence level - estimated misstatement

True or false: When there are zero projected misstatements, no allowance for sampling risk must be computed.

False Even with zero projected misstatements, an allowance must be computed.

Apply Monetary Unit Sampling

1. Determine an objective - what assertion is being tested 2. Define the population, the sampling unit, and a misstatement 3. Determine the sample size a. Acceptable risk of incorrect acceptance (confidence level) - tied to DR (as DR inc, SS dec) b. Tolerable misstatement - from planning (as materiality inc, SS dec) c. Expected misstatement - based on past (as inc, SS inc) d. Population size (as PS inc, SS inc) 4. Select the sample - consider the assertion, random starting point, random # generator 5. Perform the audit procedure - send a customer a confirmation, physically examine an addition to PP&E, test counts for specific inventory items 6. Calculate the Projected Misstatement or the Upper Limit on Misstatement 7. Draw final conclusions

The assumption of basic precision is that any undetected misstatements in the population are misstated by _______%

100

If the book value of the logical unit is less than the sampling interval, and it is 100% misstated, then the projected misstatement is equal to ______.

100% of the sampling interval

An account has a balance of $1.5 million. Individually significant items total $325,000. Tolerable misstatement is $40,000 and expected misstatement is $10,000. Given this information, and a confidence factor is 1.2, the nonstatistical sample size should be ____________

47 ((1.5mill-325,000)/(40,000-10,000))*1.2

Assume an account has a book value of $45,219 and an audit value of $39,587. If the sampling interval is $36,428, the projected misstatement associated with this account is $________

5,632 -100% because the book value is greater than the interval

Assume an account has a book value of $45,219 and an audit value of $39,587. If the sampling interval is $36,428, the projected misstatement associated with this account is $________

5,632 BV-AV = PM

If the population to be sampled is the $50,000 accounts payable balance that represents amounts due to 14 vendors, there are _________ sampling units in the MUS population.

50,000

The tainting factor for an account with a book value of $42,750 and an audit value of $38,900 is __________%

9 (42750-38900)/42750 (BV-AV)/BV = tainting factor

True or false: As with attribute sampling, population size does not influence sampling computations when testing monetary account balances.

False

True or false: When the book value of a logical unit is less than the sampling interval and it is 100% misstated, the projected error for this unit is assumed to be the book value of the unit.

False The projected error is the sampling interval.

True or false: Monetary-unit sampling is based on attribute-sampling theory modified to express a rate of occurrence.

False: Monetary-unit sampling is based on attribute-sampling theory modified to express a monetary conclusion.

True or false: Nonstatistical sampling is generally considered "bad" sampling and thus rarely used in practice.

False: This is false. Auditing standards require that nonstatistical approaches yield sample sizes and evaluations that are similar to statistical methods.

Nonstatistical sampling Formula

Sample Size = (pop size/(Tolerable misstatement - Expected misstatement))* confidence factor CF found on pg 315 table 9-5

What happens to sample size if more expected misstatements increase?

Sample Size increases

tolerable misstatement

The amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated. Tied to materiality

Sampling Risk

The possibility that the sample drawn is not representative of the population and that, as a result, the auditor reaches an incorrect conclusion about the reliability of the control, the account balance, or class of transactions based on the sample.

If Projected misstatement in a nonstatictical sampling is significantly greater than the Expected misstatement:

There is a high risk that the true misstatement exceeds the tolerable misstatement. **Propose an adjustment OR Do more work

True or false: When the amount of tolerable misstatement increases, the sample size decreases.

True: There is an inverse relationship between tolerable misstatement and sample size.

There is ______ relationship between confidence level and sample size.

a direct

There is ______ relationship between sample size and expected misstatement.

a direct

Which of the following statements are correct? a. It is easier to determine sample size using MUS when the auditor expects little or no misstatements, b. Unlike classical variables sampling, MUS requires the user to make assumptions about the distribution of misstatements. c. MUS automatically results in a stratified sample when applied using a probability-proportional-to-size sample selection procedure.

a. It is easier to determine sample size using MUS when the auditor expects little or no misstatements, c. MUS automatically results in a stratified sample when applied using a probability-proportional-to-size sample selection procedure.

Which of the following statements are correct? a. MUS automatically results in a stratified sample when applied using a probability-proportional-to-size sample selection procedure. b. It is easier to determine sample size using MUS when the auditor expects little or no misstatements, c. Unlike classical variables sampling, MUS requires the user to make assumptions about the distribution of misstatements.

a. MUS automatically results in a stratified sample when applied using a probability-proportional-to-size sample selection procedure. b. It is easier to determine sample size using MUS when the auditor expects little or no misstatements

Common methods for projecting the amount of misstatement found in a nonstatistical sample include ______. a. difference projection b. error calculation c. constant projection d. ratio projection

a. difference projection d. ratio projection

There is ______ relationship between the risk of incorrect acceptance and sample size.

an inverse

In auditing, the physical representation of the population is known as the ______________

frame

Statistical Sampling

apply the laws of probability to aid an auditor in designing an efficient sample, in measuring the sufficiency of evidence obtained, and evaluating the sample results.

Select all that apply Haphazard __. a. is permitted for both statistical and nonstatisical sampling b. allows the auditor to select items judgmentally c. selects items that will be representative of the population d. implies that items are selected in a careless manner

b. allows the auditor to select items judgmentally c. selects items that will be representative of the population

The allowance for sampling risk when zero misstatements are observed is referred to as the ____________ ___________.

basic precision

The assumption of __________ __________ is that any undetected misstatements in the population are misstated by 100%.

basic precision

When using probability-proportional-to-size sample selection, logical units with a book value larger than the sampling interval are ______ to be selected.

certain

MUS can be used to test the assertion that no material misstatements exist in a(n) account balance _____.

class of transactions or disclosure component of the financial statements

Nonstatistical audit sampling is ______ used in practice.

commonly

When computing a nonstatistical sample size, individually significant items are ______.

deducted from the account balance

For practical purposes, the acceptable risk of incorrect acceptance is the same as ___________ risk.

detection

When projecting the amount of a misstatement in a nonstatistical sample, __________ ___________ is used when the misstatement is expected to be relatively constant for all items in the population regardless of dollar size.

difference projection

The dollar amount of misstatement that the auditor believes exists in the population is defined as the __________ misstatement

expected

The larger the __________ misstatement, the larger the sample size must be.

expected

Audit sampling is most often used in substantive testing to test the hypothesis that a financial statement account is ______.

fairly stated

The risk that the sample supports the conclusion that the recorded account balance is fairly stated when in fact it is not is the risk of ____________ _____________

incorrect acceptance

With MUS, a(n) ______ represents the sampling unit.

individual dollar

Random or systematic sample selection __.

is required for statistical sampling and may be used for nonstatistical sampling

The lower the amount of tolerable misstatement, the ______ the sample size must be.

larger

Tolerable misstatement will almost always be _______ overall materiality.

less than

If the UML is ______ the tolerable misstatement, the evidence supports the conclusion that the account balance is not materially misstated.

less than or equal to

Account balances sampled by auditors typically have ______ error rates.

low

If an auditor has evidence that there is an unacceptably high risk that accounts receivable is materially misstated ______.

management can be asked to adjust the account balance

For MUS, the difference between monetary amounts in the entity's records and amounts supported by audit evidence is defined as a(n)

misstatement

The auditor determines which items should be tested individually and which items should be subject to sampling in many __________ sampling applications.

nonstatistical

MUS is ______ effective at detecting understatements.

not very

An MUS application is designed primarily to test for ______ errors.

overstatement

nonstatistical sampling

rely exclusively on judgement to determine sample size and to evaluate sample results

When using MUS, the selection of zero or negative balances ______.

requires special design consideration

Probability-proportional-to-size sample selection uses a(n) __________ _____________ to select sample items.

sampling interval

If the auditor is concerned about goods shipped but not billed, the appropriate population to sample is ______.

shipping documents

Auditing standards indicate that the sample size for statistical sampling should be _________ that of nonstatistical sampling.

similar to

For MUS, a misstatement is defined as the difference between monetary amounts in the entity's records and amounts ______.

supported by audit evidence

If the logical unit is equal to or greater than the sampling interval, the projected misstatement is equal to ______.

the actual misstatement detected in the logical unit

Expected Misstatement

the amount of misstatement that the auditor believes exists in the population based on past

If the frame and the intended sampling population differ ______.

the auditor might draw an incorrect conclusion

If the logical unit's book value is less than the sampling interval, and it is misstated by less than 100%, the projected misstatement is equal to ______.

the tainting factor multiplied by the sampling interval

If the UML is less than or equal to the __________ misstatement, the evidence supports the conclusion that the account balance is not materially misstated.

tolerable

If the UML is less than or equal to the ______________ misstatement, the evidence supports the conclusion that the account balance is not materially misstated.

tolerable

When using nonstatistical sampling, the auditor may individually test any item that may contain potential misstatements that individually exceed _________ misstatement

tolerable

A common formula for sample size is: Sampling population book value/(__________ misstatement - __________ misstatement) x ___________ factor

tolerable expected confidence

The maximum amount by which the account can be misstated and still be acceptable to the auditor as being fairly presented is called

tolerable misstatement

The total of the projected misstatement and the allowance for sampling risk is referred to as the ________ ____________ limit

upper misstatement