Chapter 8 Practice Questions

Attributes sampling for testing controls should only be done by the auditor at the end of the fiscal period under audit. a. True b. False

False

In attributes sampling, if the upper limit of the possible deviation rate exceeds the tolerable rate, the auditor can rely upon the control as being effective. a. True b. False

False

Monetary unit sampling (MUS) is designed to test whether there is an acceptable risk of account balance understatement. a. True b. False

False

Sample size varies directly with sampling risk. a. True b. False

False

Statistical sampling is used when an auditor chooses to examine all purchases of equipment exceeding $1,000.00 and to test the remaining items by analytical procedures. a. True b. False

False

The risk of incorrect acceptance of internal control reliability is the risk that the auditor will conclude that an internal control is not effective when the internal control is effective. a. True b. False

False

The tolerable misstatement is the level of misstatement the auditor expects to detect in the population. a. True b. False

False

Top-stratum items are population items whose book values exceed the sampling interval and are therefore excluded from the sample. a. True b. False

False

When evaluating an MUS sample, if the auditor finds no misstatements in the sample, the misstatement projection is zero dollars, and the total estimated misstatement will equal the projected misstatement for items in lower-stratum. a. True b. False

False

When the auditor detects control deviations, it is best to evaluate them quantitatively rather than qualitatively. a. True b. False

False

The division of a population into two or more subgroups is referred to as stratification. a. True b. False

True

The expected population deviation rate is the auditor's best estimate of the percentage of transactions processed for which a control is not effectively applied. a. True b. False

True

The tolerable failure rate is the level at which the control's failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor's planned assessment of control risk in performing tests of account balances. a. True b. False

True

Which one of the following issues need not be addressed when planning an audit sample to test control procedures? a. Minimum failure rate. b. Audit objective of the test. c. Expected population deviation rate. d. Auditor's allowable risk of assessing control risk too low.

a

Which of the following statistical sampling methods is most commonly used to test control procedures? a. Attributes sampling. b. Variable sampling. c. Ratio estimation sampling. d. Dollar unit sampling.

a

A benefit of nonstatistical sampling as compared to statistical sampling is that the sample size can be significantly smaller, thereby making the audit more efficient. a. True b. False

False

An example of attributes testing involves obtaining evidence that the client has matched the vendor invoice details with a purchase order and receiving report before payment approval. a. True b. False

True

Audit sampling implies the gathering of evidence to use as a basis for making valid inferences about the characteristics of the population as a whole without examining every transaction. a. True b. False

True

Block sampling involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week. a. True b. False

True

Data analytics is a broad construct referring to both qualitative and quantitative analysis tools that enable a decision maker to extract data, categorize it, identify patterns within it, and use it to enhance efficiency and effectiveness in decision making. a. True b. False

True

Evaluating statistical sample results is one of the tasks that can be performed by data analytics tools. a. True b. False

True

Extracting data from the client's computer system is one of the tasks that can be performed by data analytics tools. a. True b. False

True

For tests of controls, the most commonly used statistical method is attributes sampling. a. True b. False

True

In analysis of the results of an attributes sampling plan, an auditor may determine that the sample size must be increased. a. True b. False

True

In attributes sampling if the selected item cannot be located, the auditor should assume that the control procedure was not followed and assess that item as a failure. a. True b. False

True

Increasing the expected failure rate will cause the sample size to increase. a. True b. False

True

Sampling risk is defined as the risk that an inference drawn from a sample will be incorrect. a. True b. False

True

Stratification of the population into several homogeneous subpopulations generally creates audit efficiency. a. True b. False

True

Attributes sampling is used in which of the following situations? a. Testing rates of deviations of controls. b. Testing the reasonableness of account balances. c. Testing accuracy of estimates in accounts. d. Both A and B.

a

Blockchain is a rapidly evolving phenomenon that is useful in recording which of the following types of transactions? a. Digital currency transactions. b. Transactions requiring a high level of authorization. c. Related party transaction. d. Multi-national transactions.

a

Dividing the population into relatively homogeneous groups in order to reduce sample size is the definition of which of the following terms? a. Stratification. b. MUS sampling. c. Ratio estimation. d. Difference estimation.

a

For which of the following auditing procedures would sampling be most appropriate? a. Examining documents. b. Inquiring of management. c. Conducting analytical procedures. d. Observing controls being completed.

a

In attributes sampling, which of the following does the risk of incorrect acceptance deal with? a. Effectiveness. b. Efficiency. c. Reliability. d. Both A and B.

a

In selecting a sample for attributes testing, haphazard selection involves which of the following approaches? a. An arbitrary selection with no conscious bias. b. Each item in the population having an equal chance of selection. c. Selecting all items on a day or week. d. Every nth item being selected after a random start.

a

In testing account balances, haphazard sampling is an acceptable method of sampling provided the auditor believes the sample to be which of the following? a. Representative of the population. b. Statistically sound. c. Representative of the sample. d. In the upper stratum.

a

Refer to Exhibit 8.2 and determine which of the following phrases matches this definition: The risk that the auditor will conclude that internal controls are effective when internal controls are actually not effective. a. The risk of incorrect acceptance of internal control reliability. b. The risk of incorrect acceptance of book value. c. The risk of incorrect rejection of internal control reliability. d. The risk of incorrect rejection of book value. e. None of these.

a

The acronym KPI relates to which of the following phrases? a. Key Performance Indicator. b. Key Profitability Indicator. c. Known Performance Increment. d. Known Profitability Increment.

a

The auditor should not pursue which of the following options when a control is ineffective? a. Assess control risk as lower than originally planned and change the audit approach accordingly. b. Identify a compensating control. c. Take a larger sample. d. Analyze the nature of the control deviations and identify implications.

a

When performing attributes sampling, which of the following varies directly with the sample size? a. The expected failure rate. b. The risk of overreliance. c. The tolerable failure rate. d. The nonsampling risk.

a

Which of the following data analytics tools might an auditor use to test the completeness assertion for sales? a. Analyze data to assess the proper operation of sales cutoff tests around year-end. b. Age accounts receivable. c. Use data visualization tools to evaluate disclosures about sales and profitability. d. All of the above.

a

Which of the following is a disadvantage of MUS sampling? a. It is not designed to test for understatement. b. It directly controls for the risk of incorrect acceptance. c. Sample selection is relatively easy. d. Sample sizes are relatively small.

a

Which of the following is not a type of statistical method that provides results in dollar terms? a. Attributes sampling. b. Variables sampling. c. Probability proportional to size sampling. d. Monetary unit sampling.

a

Which of the following occurs when, based on sample results, control risk is assessed excessively high? a. Audit inefficiency. b. A less expensive audit. c. Reduction of substantive testing. d. Errors that are more likely to occur than anticipated.

a

Which of the following statements is false? a. Stratification of the population into several subpopulations generally reduces audit efficiency. b. Sampling evaluation reflects the sum of top-stratum misstatements and the projected misstatement derived from lower-stratum items. c. Because the auditor knows the amount of errors in the top stratum (all items were evaluated), no estimate of errors is required for the top stratum. d. Top-stratum items are population items whose book values exceed the sampling interval and are therefore all included in the sample.

a

While auditors may use either statistical or nonstatistical sampling, some auditors restrict the use of nonstatistical sampling for what reason? a. It is less objective. b. It is less efficient. c. It is less effective. d. It is less risky.

a

Concluding that the book value of inventory is correct when it is materially misstated is an example of which of the following risks? a. Incorrect rejection. b. Incorrect acceptance. c. Insufficient sample size. d. None of the above.

b

Consider the case whereby the risk of overreliance is 5%, the sample size is 40, and the auditor detects no deviations in the operation of the control. What can we conclude? a. The sample size is too small. b. A conclusion cannot be made without a specified tolerable deviation rate. c. This is good news; no deviations were found, so we conclude that the control is working effectively. d. The upper limit of deviations is 7.3%, so we conclude that the control is not working effectively.

b

In analyzing misstatements using sampling techniques, the auditor should analyze the misstatements in what manners? a. Absolutely and proportionately. b. Qualitatively and quantitatively. c. Haphazardly and randomly. d. Methodically and systematically.

b

In attributes sampling, the risk of incorrect rejection deals with which of the following? a. Effectiveness. b. Efficiency. c. Reliability. d. Both A and B

b

In selecting a sample for attributes testing, block sampling involves which of the following approaches? a. Every nth item being selected after a random start. b. Selecting all items on a day or week. c. Each item in the population having an equal chance of selection. d. An arbitrary selection with no conscious bias.

b

In testing the reasonableness of an account balance, if MUS sampling cannot be used because of its limitations, what is an alternative statistical method? a. Attribute sampling. b. Classical variables sampling. c. Discovery sampling. d. All of the above.

b

Incorrect acceptance is directly related to which of the following? a. The efficiency of the audit. b. The ineffectiveness of the audit. c. The cost of the audit. d. All of the above.

b

MUS sampling has all of the following advantages over other statistical methods except which of the following? a. Easier to apply than other statistical sampling approaches. b. It is a relatively easy way to make sure that negative balances and zero balances are included in the sample. c. Usually results in a highly efficient sample size. d. Sample sizes are relatively small.

b

Sampling risk deals with which of the following? a. Not carrying out the appropriate audit procedure. b. Drawing an incorrect inference from the sample results. c. Inappropriately diagnosing client's problems. d. Both A and C.

b

The auditor will do which of the following when the results of sample testing conclude that there is misstatement in excess of the tolerable misstatement? a. Issue a disclaimer of opinion. b. Propose adjustments to the client. c. Disclose the misstatement in the client's financial statements. d. Throw out the sample.

b

When an auditor uses MUS and analyzes misstatements in the lower stratum, which of the following will be multiplied by the sampling interval to calculate the projected misstatement for each misstated item? a. Tolerable misstatement. b. Tainting percentage. c. Audit value. d. Sampling interval.

b

When using MUS, an auditor found that the sampling interval should be $15,755. If selecting the sample manually, the auditor should round the sample interval to which of the following amounts? a. $14,000. b. $15,000. c. $16,000. d. $10,000.

b

Which of the following describes sampling risk? a. The population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect. b. The sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect. c. The sample size will be larger than needed. d. The auditor incorrectly applies sampling methodology.

b

Which of the following does the design of a MUS sample not require the auditor to determine? a. Ratio of expected misstatement to tolerable misstatement. b. Inherent risk. c. Ratio of tolerable misstatement to the total population value. d. Risk of incorrect acceptance.

b

Which of the following is a factor of nonsampling risk? a. Having a sample which does not represent the population. b. Not carrying out the appropriate audit procedure. c. Using nonstatistical sampling. d. Using a random sample selection.

b

Which of the following is a method of reducing nonsampling risk? a. The use of attributes sampling rather than variables sampling. b. Proper supervision and instruction of the audit team. c. Proper supervision and instruction of the client's employees. d. Controls to ensure that the sample drawn is random and representative.

b

Which of the following is not considered when obtaining audit evidence through sampling? a. The effectiveness of control procedures. b. The efficiency of control procedures. c. The dollar accuracy of classes of transactions. d. The dollar accuracy of account balances.

b

Which one of the following is not a decision the auditor makes when using attributes sampling? a. Evaluation of sample information. b. Whether to document all phases of the sampling process. c. Selection of items included in the sample. d. Sample size.

b

For which of the following audit procedures would sampling be most appropriate? a. Analytics. b. Observation. c. Confirmation. d. Inquiry.

c

In MUS, what is meant by a sampling interval of 900? a. Every 900th item will be selected. b. Expected misstatement is 900. c. Every 900th dollar will be selected. d. Tolerable misstatement is 900.

c

In attributes sampling, which of the following will not affect the determination of sample size? a. Sampling risk. b. The tolerable rate of deviation. c. The risk of incorrect rejection of book value. d. The expected population deviation rate.

c

In using MUS, once the auditor has determined the sample size, which of the following is needed to determine the sampling interval? a. Expected misstatement. b. Mean. c. Population size. d. Tolerable misstatement.

c

Refer to Exhibit 8.7. Assume that the risk of incorrect acceptance is 10%, tolerable misstatement is 5% of population dollars, and expected misstatement is 30% of tolerable misstatement (in other words, 1.5% of the population dollars). What is the minimum sample size that the auditor should use? a. 162 b. 120 c. 87 d. 28

c

When confirming receivables in testing for overstatements, assume that there are few or no misstatements expected and the selection will be based on the dollar value of individual items. Which of the following is the auditor most likely to use? a. Attribute sampling. b. Stratified mean-per-unit sampling. c. MUS sampling. d. Ratio estimation sampling.

c

When performing sampling, the auditor is most concerned with which of the following? a. Risk of excess sample size. b. Risk of errors in the population. c. Risk of incorrect acceptance. d. Risk of incorrect rejection.

c

Which of the following activities would be most likely to be accomplished using sampling? a. Footing the file. b. Scanning for unusual transactions. c. Selecting items and tracing them back to source documents. d. Sorting a file to identify the largest items.

c

Which of the following applications are incorporated into statistical sampling? a. Hypergeometric distribution with audit risk. b. Random and haphazard selection. c. Probability and statistical inference with audit judgment. d. Binomial and confidence intervals.

c

Which of the following is not considered to be nonsampling risk? a. Use of improper audit procedure. b. Misinterpretation of information. c. The sample does not represent the population. d. Carelessness of the auditor.

c

Which of the following represents the calculation of the sampling interval? a. Tolerable error × Risk of incorrect acceptance. b. Sample size ÷ Population size. c. Population size ÷ Sample size. d. Tolerable error ÷ Risk of incorrect acceptance.

c

Which one of the following is not a typical step used to implement an attributes sampling plan? a. Select and test the sample items. b. Evaluate the sample results. c. Define the nonstatistical sampling method that is most effective and efficient. d. Define the attributes of interest and what constitutes failure(s).

c

In selecting a sample for attributes testing, systematic selection involves which of the following approaches? a. Selecting all items on a day or week. b. Each item in the population having an equal chance of selection. c. An arbitrary selection with no conscious bias. d. Every nth item being selected after a random start.

d

MUS is based on which of following? a. Classical variables sampling. b. Expected error sampling. c. Population variability sampling. d. Attributes sampling.

d

MUS is designed to test for which of the following? a. Either understatements or overstatements. b. Neither understatements nor overstatements. c. Understatements. d. Overstatements.

d

Refer to Exhibit 8.6. Assume a 5% risk of overreliance, a tolerable deviation rate of 8%, a sample size of 100, and that the number of deviations is five. What is the upper limit of the possible deviation rate, and what does it mean? a. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 10.3%. b. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 5%. c. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 5%. d. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 10.3%.

d

The results of MUS sampling will be unacceptable when the total estimated misstatement exceeds which of the following? a. The expected deviation rate. b. The tolerable error rate. c. The expected deviation amount. d. The tolerable misstatement amount.

d

To test the existence assertion for sales, which of the following data analytics tools might you use? a. Compare sales invoices with shipping documents. b. Compare sales invoices with sales contracts. c. Analyze data around year-end to ensure that sales are recorded in the correct period. d. All of these.

d

Use Exhibit 8.5 to determine which of the following statements is false. a. If the auditor accepts a 5% risk of overreliance, a 7% tolerable deviation rate, and expects a deviation rate of 2.5%, the sample size will equal 109. b. If the auditor accepts a 10% risk of overreliance, a 7% tolerable deviation rate, and expects a deviation rate of 2.5%, the sample size will be a number less than 109. c. As the tolerable deviation rate rises, the sample size decreases. d. As the expected deviation rises, the sample size decreases.

d

When determining sample size in attributes sampling, which of the following is usually true? a. Sampling risk will be too high. b. Tolerable misstatement amount is determined. c. A failure rate is not to be expected. d. Population size is not a major factor.

d

When evaluating the MUS sample results, the auditor calculates the total estimated misstatement in the account balance based on the sampling process using which of the following components? a. Basic precision. b. Projected misstatement for items in lower-stratum. c. Incremental Allowance for Sampling Error. d. All of the above.

d

When planning a test of details using MUS sampling, tolerable misstatement is usually set at what level? a. Higher than the expected error amount. b. Lower than the expected error amount. c. Higher than performance materiality. d. Lower than performance materiality

d

Which of the following are limitations of using the MUS sampling method? a. MUS is not very useful in testing for understatement. b. MUS is not very useful in testing for zero and negative amounts. c. MUS is not very useful in testing if the auditor expects numerous misstatements. d. All of the above

d

Which of the following is a factor that the auditor should consider when choosing between nonstatistical and statistical sampling? a. Whether the audit staff is adequately trained to use statistical sampling. b. Whether the population lends itself to a random-based selection method. c. Whether the auditor wants a statistical measure of the risk of drawing a wrong conclusion. d. All of the above.

d

Which of the following is not an item the auditor needs to determine in designing sampling for substantive testing? a. Expected misstatement conditions. b. The audit objective. c. The method of selecting a sample. d. Expected deviation rate.

d

Which of the following is not one of the processes involved in data mining? a. Deploying models. b. Data exploration. c. Data capture and cleaning. d. Data architecture.

d

Which of the following is the level at which the control's failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor's planned assessment of control risk in performing tests of account balances? a. Allowance for sampling error. b. Allowable risk of assessing control risk too low. c. Expected failure rate. d. Tolerable failure rate.

d

Which of the following relationships is inaccurate? a. Tolerable deviation rate b. Expected population deviation rate c. Population size d. Sampling risk (risk of overreliance)

d

Which of the following statements is false with respect to basic precision? a. Basic precision is the amount of uncertainty associated with testing only a part of the population (sampling risk). b. Basic precision is calculated as the sampling interval multiplied by a confidence factor. c. Basic precision is the amount of error you are confident of not exceeding if no errors are detected in the sample. d. Basic precision represents the increase in the total estimated misstatement caused by the statistical properties of misstatements detected in the lower stratum.

d

Which of the following statements is false? a. When properly used, either nonstatistical or statistical sampling can be effective in providing sufficient appropriate audit evidence. b. Combining statistical sampling with audit judgment generally produces a higher quality audit conclusion than using audit judgment alone. c. Statistical sampling allows the auditor to measure the risk of making an incorrect inference about the population from which the sample is taken, whereas nonstatistical sampling does not allow for such measurement. d. Nonstatistical sampling may help avoid second guessing by regulators or jurors should those parties question the quality of the sampling method used.

d

Which one of the following is a decision the auditor makes when using attributes sampling? a. The sampling unit. b. Period covered by testing. c. Completeness of the population. d. All of the above are auditor decisions.

d

Which one of the following is a proper course of action for the auditor when the total estimated misstatement exceeds the tolerable misstatement? a. The auditor can ask the client to correct the known misstatements. b. The auditor will analyze the detected misstatements for some common problems. c. The auditor can expand the sample. d. All of the above.

d

In a MUS sample, the total estimated misstatement calculation includes which of the following amounts? a. The factual misstatement in the top-stratum. b. Basic precision. c. The projected misstatement in the lower stratum. d. An incremental allowance for sampling risk in the lower stratum. e. All of these.

e

Refer to Exhibit 8.4 and determine which of the following statements is true. a. In nonstatistical sampling, sample size is determined by auditor judgment. b. In statistical sampling, the sample must be randomly selected to give each unit in the population an equal chance to be included in the sample. c. In nonstatistical sampling, evaluation is based on auditor judgment and projections are based on sample results. d. In statistical sampling, the auditor is required to define acceptable risk in advance. e. All of these are true.

e

Which of the following definitions is true? a. Factual misstatement—A misstatement that has been specifically identified and about which there is no doubt. b. Projected misstatement—The auditor's best estimate of the misstatement in a given population based on projecting the sample results to the population. c. Tolerable misstatement—A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. d. Expected misstatement—The level of misstatement that the auditor expects to detect. e. All of these are true.

e

Which of the following tasks is not performed by data analytics tools? a. Footing a file. b. Obtaining file statistics. c. Checking for gaps in processing sequences. d. Preparing custom reports. e. All of the above tasks can be performed using data analytics tools.

e

Which of these questions would an auditor ask when sampling to perform tests of controls? a. Which population and sampling unit should be tested, and what characteristics should be examined? b. How many items should be selected for audit testing? c. Which items should be included in the sample? d. What inferences can be made about the overall population from the sample? e. All of these.

e