CH 8
The risk of incorrect rejection is also commonly known as the risk of ______. assessing control risk too low overreliance assessing control risk too high underreliance
assessing control risk too high underreliance
Selection methods for nonstatistical sampling include ______. haphazard sampling materiality sampling random-sample large-dollar sampling systematic-sample (with random start)
haphazard sampling random-sample systematic-sample (with random start)
The larger the sample size, the ______ the confidence level and the ______ the sampling risk. higher; lower lower; lower lower; higher higher; higher
higher; lower
The auditor should evaluate the qualitative aspects of the deviations, including the ____ the deviations. nature of substantive procedures for causes of consequences of
nature of causes of consequences of
A disadvantage of _____ sampling is the auditor's judgment may diverge significantly from sampling theory.
nonstatistical
The major advantages of statistical sampling are that it helps the auditor _____. quantify sampling risk deal with the lack of consistent application across audit teams train staff measure the sufficiency of evidence obtained design an efficient sample
quantify sampling risk measure the sufficiency of evidence obtained design an efficient sample
The number of deviations found in the sample divided by the number of items in the sample is the _____ rate. expected deviation attribute sampling sample deviation true population deviation
sample deviation
If the auditor is interested in examining the effectiveness of a control designed to ensure that all shipments to customers are billed, the correct population to test is the population of _____. shipping records customers sales invoice vendors
shipping records
For most tests of controls, if the auditor is unable to examine a document to test whether the control was adequately performed, the auditor should _____. not record the sample item as a deviation for purposes of evaluating the sample results use an alternative procedure ignore the item when evaluating sample results replace the item with another transaction
use an alternative procedure
The smaller the difference between tolerable error and expected error, the _____ the sample size needed. larger smaller
larger
If 3 deviations are found in a sample of 60, the sample deviation rate is _____.
5
If the computed upper deviation rate is less than or equal to the tolerable deviation rate, the auditor can conclude that the control tested _____ be relied upon cannot can
can
With a nonstatistical sample, the auditor_____ calculate the sample deviation rate _____ quantify the computed upper deviation rate and the sampling risk associated with the test. cannot; but can cannot; and cannot can; and can can; but cannot
can; but cannot
In testing an internal control, the risk that the sample supports a conclusion that the control is not operating effectively when, in truth, the control is operating effectively is the risk of ______. incorrect rejection overreliance incorrect acceptance assessing control risk too high
incorrect rejection assessing control risk too high
Which of the following statements are correct? If a sample size is not statically derived, it cannot be statistically evaluated. A nonstatistical approach can involve random selection and a judgmental evaluation. Haphazardly selected samples should not be formally evaluated statistically.
A nonstatistical approach can involve random selection and a judgmental evaluation. Haphazardly selected samples should not be formally evaluated statistically.
True or false: The best way to address sampling risk is to test 100% of the population.
False
True or false: To be effective, most controls need to operate 100% of the time.
False
Which of the following make an approach nonstatistical? Sample results are evaluated judgmentally. Judgment is used to determine the sample size. A random sample selection technique is used. A haphazard sample selection technique is used.
Sample results are evaluated judgmentally. Judgment is used to determine the sample size. A haphazard sample selection technique is used.
Which of the following is NOT a reason that technology will never totally eliminate the need for sampling? Some evidence must be obtained from third parties. Many testing procedures require physical inspection. Some populations are small enough to not require sampling. Data analysis requires that the data be tested for validity. Many control processes require human involvement.
Some populations are small enough to not require sampling.
True or false: It is wise to be somewhat conservative when estimating the expected population deviation rate.
True
True or false: Sample results can only be projected to the population from which the sample was selected.
True
True or false: Technology will never totally eliminate the need for auditors to rely on sampling to some degree.
True
Understanding the nature and cause of a deviation helps the auditor better assess control risk and evaluate whether the deviations represent _____. control deficiencies substantive deviations revenue recognition issues improper assertions
control deficiencies
Nonstatistical sample sizes are determined by _____. formulas or tables applying professional judgment audit firm policy
applying professional judgment audit firm policy
Typically public accounting firm guidelines for nonstatistical sample sizes are _____ designed to rely heavily on field auditor judgments designed to improve consistency consistent with sampling theory
designed to improve consistency consistent with sampling theory
The disadvantages of statistical sampling include additional costs of _____. designing and conducting the sampling application measuring the sufficiency of risk obtained through sampling procedures lacking consistent application across audit teams due to the complexity of the underlying concepts training auditors in the proper use of sampling techniques designing an inefficient sample
designing and conducting the sampling application lacking consistent application across audit teams due to the complexity of the underlying concepts training auditors in the proper use of sampling techniques
If control risk is mistakenly set at a low level _____. acceptance risk will be set too high it will be easy to detect a material misstatement detection risk will be set too low detection risk will be set too high
detection risk will be set too high
The objectives of attribute sampling when used for tests of controls are to _____. determine the degree of reliance that can be placed on controls for a financial statement audit evaluate the compliance with policies about internal control by accounting staff determine the level of substantive testing for a financial statement audit evaluate the operating effectiveness of the internal control for purposes of the internal control audit
determine the degree of reliance that can be placed on controls for a financial statement audit evaluate the operating effectiveness of the internal control for purposes of the internal control audit
For a financial statement audit, if the auditor concludes the evidence supports the planned level of control risk, no modifications of planned _____ procedures are necessary.
substantive
True or false: Audit sampling is always appropriate, regardless of the level of risk.
False
Match the Type of Evidence with whether Audit Sampling is commonly used: Yes or No Observation Reperformance Confirmation Analytical Procedures Scanning Recalculation Inspection of records or documents Inquiry Inspection of tangible assets
Make sure it's in order Yes: Inspection of tangible assets Inspection of records or documents Reperformance Recalculation Confirmation No: Analytical Procedures Scanning Inquiry Observation
A statistical sampling method used to estimate the proportion of a characteristic in a population is called _____.
attribute
Because the auditor does not know the true deviation rate, he or she calculates a _____. computed upper deviation rate true population deviation rate projected population rate computed lower deviation rate
computed upper deviation rate
The converse of sampling risk is _____ _____.
confidence level
When analyzing deviations the auditor should _____. consider how the deviations may impact other phases of the audit determine if the deviation represents an unintentional error or fraud ignore deviations that involve misunderstanding of instructions always consider the deviations to be material weaknesses
consider how the deviations may impact other phases of the audit determine if the deviation represents an unintentional error or fraud
If an auditor is not able to apply a planned audit procedure to a sample item the auditor should _____. ignore the sample item and replace it with another randomly selected sample unit consider the effects of not being able to apply the planned procedure remove the sample item and not consider it a deviation for purposes of evaluating sample results
consider the effects of not being able to apply the planned procedure
The risk of incorrect rejection (Type I) relates to the _____ of the audit. The risk of incorrect acceptance (Type II) relates to the _____ of the audit.
efficiency, effectiveness
Typically public accounting firm guidelines for nonstatistical sample sizes are designed to rely on _____ to make judgments. field auditor the audit senior and partner in charge experts at firm headquarters
experts at firm headquarters
For a financial statement audit, if the planned level of control risk is not supported by samples results and tests of control, the auditor may choose to inform management of the deficiencies and withdraw from the audit engagement increase the assessed level of control risk and modify substantive procedures test other control procedures that could support the level of risk
increase the assessed level of control risk and modify substantive procedures test other control procedures that could support the level of risk
If detection risk is set too high, the risk that the auditor will fail to detect an actual material misstatement _____. increases will not be affected decreases
increases
The sample size is ______ related to the tolerable deviation rate. not positively inversely
inversely
The size of the population ______ an important factor in determining sample size for attribute sampling. may or may not be is is not
is not
All else being equal, the larger the expected population deviation rate, the ______ the sample size. larger smaller
larger
Auditors can reduce sampling risk by taking ______ samples. larger smaller management selected
larger
If the computed upper deviation rate is _____the tolerable deviation rate, the auditor can conclude that the control tested can be relied upon. less than greater than or equal to greater than less than or equal to
less than or equal to
The effect of expected _____ deviation rate on sample size highlights the importance of a good estimate of the _____ deviation rate.
population, expected
If the auditor believes that the expected _____ deviation rate exceeds the _____deviation rate, statistical testing should not be performed.
population, tolerable
At the planning stage of an audit sampling application, _____ is the difference between the expected and tolerable deviation rate or misstatement.
precision
Statistical sampling uses the laws of _____ to compute sample size and evaluate the sample results.
probability
If the auditor defines a deviation for a purchase as a vendor's bill not supported by a receiving report, and the auditor selects a telephone bill, the auditor should _____. replace the item with another purchase transaction follow up on the lack of receiving report report the lack of receiving report as a deviation not report the lack of receiving report as a deviation
replace the item with another purchase transaction not report the lack of receiving report as a deviation
Sampling risk is the risk that the ______. results of a sample contain more observations than are necessary auditor has not properly assessed the control environment sample is too small for the population results of a sample are not representative of the population
results of a sample are not representative of the population
The computed upper deviation rate is the sum of the _____. sample deviation rate and an appropriate allowance for sampling risk number of deviations found in the sample and appropriate allowance for population risk number of deviations found in the sample and appropriate allowance for sampling risk sample deviation rate and an appropriate allowance for population risk
sample deviation rate and an appropriate allowance for sampling risk
Auditor's will tolerate deviation and still consider a control to be effective because there is a risk that the _____ deviation rate differs from the _____ deviation rate.
sample, population
Auditors can set either a confidence level or _____ _____.
sampling risk
Confidence level, is the complement of _____. tolerable error sampling risk expected error desired level of assurance
sampling risk
The uncertainty associated with sampling is known as _____ _____.
sampling risk
When using audit sampling, the auditor _____ select only items that are unusual or large or items that are the first or last items in the frame. may or may not should should not
should not
Haphazard selection may be useful for nonstatistical sampling, but it should not be used for statistical sampling because systematic samples are much more effective for detecting fraud professional standards require a random sample the auditor cannot measure the probability of an item being selected
the auditor cannot measure the probability of an item being selected
Sample sizes will become too large to be practical or are simply not computable because there is insufficient allowance for sampling risk when _____ are too close together. tolerable error and sample size sample size and estimated deviation rate tolerable and estimated deviation rates desired confidence and margin for error
tolerable and estimated deviation rates
The maximum deviation rate from a prescribed control that the auditor is willing to accept and still consider the control effective is called the _____ rate. tolerable deviation material deviation tolerable control materiality
tolerable deviation
Once the desired confidence level is set, the appropriate sample size is determined by how much ______. tolerable error exceeds expected error expected error exceeds tolerable error
tolerable error exceeds expected error
If an auditor is performing a nonstatistical sampling application, sampling risk _____ be measured directed. can only sometimes cannot can
cannot
Professional standards indicate that sample sizes for nonstatistical applications should be _____ sample sizes for statistical applications comparable to greater than less than.
comparable to
For tests of controls, a(n) _____ is a departure from adequate performance of the internal control
deviation
Testing automated IT controls _____ involve audit sampling may or may not does does not
does not
A voided document _____ if properly voided. represents a deviation even does not represent deviation
does not represent deviation
The physical representation of the population is referred to as the _____.
frame
Sampling units are selected without any conscious bias when a(n) _____ selection approach is used.
haphazard
Auditing standards recognize and permit both _____ and _____ methods of audit sampling.
statistical, nonstatistical
If a large number of deviations are detected early in the tests of controls, the auditor should consider _____. selecting an additional sample to find enough sample observations that do not have deviations stopping the test as soon as it is clear that the results of the test will not support the planned assessed level of control risk continuing the test until all items planned to be sampled have been tested
stopping the test as soon as it is clear that the results of the test will not support the planned assessed level of control risk
One reason why auditors must accept some detection and audit risk is ______. representative sampling representation risk sampling risk sampling choice
sampling risk
The individual members of the sampling population are called the _____ _____.
sampling unit
If a large number of deviations are detected early in the tests of controls in the context of a financial statement audit, auditor options include _____. setting the control risk at the maximum for audit assertions affected informing the entity and considering the exceptions a control deficiency relying on other internal controls enhancing related substantive tests
setting the control risk at the maximum for audit assertions affected relying on other internal controls enhancing related substantive tests
Classical variables sampling in auditing utilizes the techniques typically taught in an undergraduate _____ class.
statistics
When the auditor has decided to rely on controls, the confidence level is set at 90 or 95 percent, meaning that the auditor is willing to accept a 10 or 5 percent risk of accepting _____. the control as ineffective when in fact it is the control as effective when in fact it is not material misstatements of the account balance
the control as effective when in fact it is not
The three major types of statistical sampling techniques are _____ sampling, _____ -unit sampling, and _____ _____ sampling
attribute, monetary, classical variables
Selecting and evaluating less than 100% of the items in an audit population is such a way that the auditor expects a representative group to provide a reasonable basis for conclusions about the population is ______. audit sampling sampling risk confidence sampling
audit sampling
The selection and evaluation of less than 100% of the items in a population that is expected to be representative of the population to provide a reasonable basis for a conclusion is the definition of _____ _____.
audit sampling
If identified controls are operating effectively, control risk may be set _____. at the minimum at the maximum below the maximum
below the maximum
Major types of statistical sampling techniques include _____ sampling. classical variables attribute risk-based underwriter monetary-unit
classical variables attribute monetary-unit
In substantive testing, the risk that the sample supports a material misstatement does not exist when a material misstatement actually does exist is the risk of _____ _____.
incorrect acceptance
The primary purpose of sampling is to draw _____ about the whole population based on the results of testing only a subset of the population.
inferences
If the auditor selects a voided document in a sample ____. the item should not be replaced with a new sample item it does not represent a deviation the item should be replaced with a new sample item it represents a deviation
it does not represent a deviation the item should be replaced with a new sample item
All else being equal, the less risk that the auditor is willing to accept, the _____ the sample size must be. smaller larger less material more robust
larger
All else equal, an increase in expected defect rate will require a _____, because there is now less room for sampling risk to be accommodated and the sampling conclusion needs to be more precise. smaller sample size larger materiality level smaller materiality level larger sample size
larger sample size
The size of the population is not an important factor in determining sample size for _____ sampling.
attribute
If an auditor expected that a control would have a 1 percent deviation (failure) rate and he or she were willing to tolerate a deviation rate of 5 percent, the allowance for sampling risk would be _____ percent.
4
If you examine a sample of 100 transactions and find 8 with errors, this suggests a transaction error rate of _____ %.
8
Estimating the dollar value of a class of transactions or account balances or determining whether an account is materially misstated are common uses of _____ _____ sampling.
Classical Variables
Which of the following is NOT a reason that technology will never totally eliminate the need for sampling? Many control processes require human involvement. Many testing procedures require physical inspection. Some evidence must be obtained from third parties. Some populations are small enough to not require sampling. Data analysis requires that the data be tested for validity.
Some populations are small enough to not require sampling.
Which of the following statements are correct? Steps and techniques for both statistical and nonstatistical sampling are more similar than different. Auditing standards recognize and permit both statistical and nonstatistical methods of audit sampling. Auditing standards indicate that sample sizes for nonstatistical sampling should be larger than sample sizes for statistical sampling. Research suggests that only statistical methods of sampling are common in practice.
Steps and techniques for both statistical and nonstatistical sampling are more similar than different. Auditing standards recognize and permit both statistical and nonstatistical methods of audit sampling.
The auditor must rely on his or her professional judgment to reach a conclusion about the audit test when using _____ sampling application(s). a statistical both statistical and non statistical neither statistical nor nonstatistical a nonstatistical
a nonstatistical
Using a systemic selection approach to select a sample means _____. items may be selected for a sample multiple times once an item it selected, it cannot be selected a second time a starting number is selected first and then every nth item is selected
a starting number is selected first and then every nth item is selected
If the auditor believes that the expected population deviation rate exceeds the tolerable deviation rate _____. sampling should be increased to reduced the population rate below the tolerable rate additional substantive procedures should be performed statistical testing should not be performed the control should not be relied on
additional substantive procedures should be performed statistical testing should not be performed the control should not be relied on
Auditing standards require that the sample items be selected so that the sample can be expected to represent the population. Thus, ____ opportunity to be selected. higher value items must have a lower all items must have an equal higher value items must have a higher
all items must have an equal
In order for a sample to be representative of the population _____. all items must have an equal opportunity to be selected any items the auditor deems as non-representative must be excluded the chance of selection must be tied to the size or dollar value of the items
all items must have an equal opportunity to be selected
If a small number of large transactions make up a large percentage of an account, auditors will typically test ______. all the transactions less than a particular dollar amount use analytical procedures instead of testing balances the two largest transactions all the transactions greater than a particular dollar amount
all the transactions greater than a particular dollar amount
In testing a control, the risk that the sample supports a conclusion that the control is operating effectively when, in truth, it is not operating effectively is the risk of ______. assessing control risk too low incorrect acceptance overreliance incorrect rejection
assessing control risk too low incorrect acceptance overreliance
Estimating the portion of a population that possesses a specified characteristic is the basis of _____ sampling. classical variables monetary-unit attribute
attribute
Monetary-unit sampling uses _____ -sampling theory and techniques to estimate monetary misstatements.
attribute
The most common use of ______ sampling is for tests of controls. attribute monetary-unit classical variables
attribute
The amount of reliance to be placed on audit tests and the consequences of a decision error must be considered in determining _____. confidence level expected error whether statistical or nonstatistical sampling should be used tolerable error
confidence level
The three most important factors to determine sample size are ______. confidence level risk tolerance expected error tolerable error risk level
confidence level expected error tolerable error
The three most important factors to determine sample size are: _____ level, _____ error, and expected _____
confidence, tolerable, error
Confidence level is the ______ sampling risk. inverse of converse of same as
converse of
One of the most difficult step of an audit sampling application is generally _____. setting the confidence level defining control deviations determining the sample size defining the population characteristics
determining the sample size
For tests of controls, a departure from adequate performance of the internal control is called a(n) _____. frame deviation attribute error
deviation
In applying attribute sampling to tests of controls, the auditor normally attempts to determine the operating ______ of a control in terms of ______ from a prescribed internal control. completeness; proportions effectiveness; deviations deviations; samples
effectiveness, deviations
The risk of incorrect rejection (Type I) relates to the ______ of the audit. The risk of incorrect acceptance (Type II) relates to the ______ of the audit. efficiency, effectiveness effectiveness, efficiency
efficiency, effectiveness
To apply sampling there must be sufficient margin for _____. changes in population deviation risk error
error
Systematic selection provides a sample where _____. high value sampling units have a higher chance of being selected every sampling unit has an equal chance of being selected high value sampling units have a lower chance of being selected
every sampling unit has an equal chance of being selected
The ______ the tolerable deviation rate, the ______ the sample size. lower; smaller higher; larger lower; larger
lower; larger
If the frame and the population differ, the auditor _____. might draw the wrong conclusion about the frame might draw the wrong conclusion about the population may draw separate conclusions about the frame and the population
might draw the wrong conclusion about the population
Auditors use ______ sampling because it has several advantages over classical variables sampling. attribute qualitative monetary-unit proportional-unit
monetary-unit
Determining the sample size is typically one of the _____ steps of an audit sampling application. final first few most difficult easiest and fastest
most difficult
The risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation is called _____ risk.
nonsampling
The two general approaches to audit sampling are _____ and _____.
nonstatistical and statistical
Unrestricted random sampling without replacement means _____. a starting number is selected first and then every nth item is selected once an item it selected, it cannot be selected a second time items may be selected for a sample multiple times
once an item it selected, it cannot be selected a second time
The risk of incorrect acceptance is also commonly known as the risk of _____. overreliance assessing control risk too high underreliance assessing control risk too low
overreliance assessing control risk too low
Random-number selection is used in many statistical sampling applications because the auditor is required to be able to measure the _____ of selecting the sampling units selected.
probability
When testing automated IT controls, the auditor may decide to test just one of each type of transaction because automated information systems _____. must be tested with substantive audit work, so it doesn't make sense to test controls process transactions consistently unless the system or programs are changed cannot be sampled due to the nature of information technology
process transactions consistently unless the system or programs are changed
The uncertainty related to nonsampling risk can be controlled by _____. enhanced testing increased sampling proper planning adequate training effective supervision
proper planning adequate training effective supervision
Typical sampling applications include _____. analytical procedures reperformance observation inspection of tangible assets confirmation
reperformance inspection of tangible assets confirmation
If a sample item selected is not appropriate for the definition of the control, the auditor should _____. generate a new sample discard the item and report a deviation discard the item and reduce the sample size replace the item with another sample item
replace the item with another sample item
When the evaluation of the sample results leads to the same conclusions that would be drawn if the same audit procedures were applied to the entire population, the auditor has selected a(n) _____ sample.
representative