Chapter 8 MC

As lower acceptable levels of the risk of incorrect acceptance and performance materiality are established, the auditor should plan more work on individual accounts to a. find smaller misstatements b. find larger misstatements c. increase the tolerable misstatement in the accounts d. decrease the risk of overreliance

A

In attribute sampling, a 10% change in which of the following factors normally will have the least effect on the size of a statistical sample? a. populations size b. precision (confidence interval) c. reliably (confidence level) d. standard deviation

A

While performing a test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of a. incorrect rejection b. incorrect acceptance c. overreliance d. under reliance

A

A CPA's client wishes to determine inventory shrinkage by weighing a sample of inventory items. If a stratified random sample is to be drawn, the strata should be identified in such a way that a. the overall population is dividends into subpopulations of equal size so that each subpopulation can be given equal weight when estimates are made. b. each stratum differs as much as possible with respect to expected shrinkage, but the shrinkages expected for items within each stratum are as close as possible c. the sample means and standard deviation of each individual stratum will be equal to the means and standard deviations of all other strata d. the items in each stratum will follow a normal distribution so that probability theory can be used in making inferences from the sample data

B

The tolerable deviation rate for a test of controls depends primarily on which of the following? a. the cause of the deviations b. the effect of substantive procedures of the auditor's assessment of the risk of material misstatement c. the amount of any substantive misstatement d. the limit used in audits of similar clients

B

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?

Both the expected amount of misstatements and measure of tolerable misstatement

An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed by the client's internal control. One of the purchase orders in the chosen sample of 20 cannot be found, and the auditor is unable to use alternative procedures to test whether that purchase order was properly approved. The auditor should a. choose another purchase order to replace the missing purchase order in the sample b. consider this test of controls invalid and proceed with substantive procedures because internal control is ineffective c. treat the missing purchase order as a deviation for the purpose of evaluating the sample d. select a completely new set of 20 purchase orders

C

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that a. the deviation rates of both the auditor's sample and the population exceed the tolerable rate b. the deviation rates of both the auditor's sample and the population are less than the tolerable rate c. the deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate d. the deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate

C

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should a. be related to the auditor's business risk b. not be adjusted for qualitative factors c. be related for preliminary judgments about materiality levels d. not be changed during the audit process

C

Which of the following most likely would be an advantage in using classical variables sampling rather than monetary-unit sampling? a. an estimate of the standard deviation of the population's recorded amounts is not required b. the auditor rarely needs the assistance of a computer program to design an efficient sample. c. inclusion of zero and negative balances usually does not require special design considerations d. any amount that is individually significant is automatically identified and selected

C

Which of the following sampling methods is used to eliminate a numerical measurement of a population, such as a dollar value? a. attribute sampling b. stop-or-go sampling c. variables sampling d. random-number sampling

C

A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a. a lower assessment risk of material misstatement b. increased use of analytical procedures to obtain evidence about particular assertions c. smaller expected frequency of deviations d. smaller measure of tolerable misstatement

D

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to a. minimize the failure to detect errors and fraud b. eliminate the risk of nonsampling errors c. reduce the level of audit risk and materiality to a relatively low amount d. measure the sufficiency of the evidence obtained

D

For which of the following audit tests would an auditor most likely use attribute sampling? a. making an independent estimate of the amount of a LIFO inventory b. examining invoices in support of the measurement of fixed asset additions c. selecting accounts receivable for confirmation of account balances d. inspecting employee time cards for proper approval by supervisors

D

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was a. the only deviation discovered in the sample b. identical to a deviation discovered during the prior year's adults c. caused by an employee's misunderstanding of instructions d. initially concealed by a forged document

D

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be the most appropriate? a. variables b. stratified c. ratio d. attributes

D

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

F

A benefit of statistical sampling as compared to non-statistical sampling is that less auditor judgement is required because the auditor can leverage the power of probability theory.

F

Benford's Law helps predict frequency patterns f deviations control

F

In attributes sampling, the attribute of interest is an individual dollar amount in the population.

F

Projected errors for items in the top stratum equal basic precision multiplied by a confidence factor

F

The projected misstatement for items in the upper stratum is calculated as the sampling interval multiplied by the tainting percentage

F

The risk of incorrect acceptance of internal control reliability is the risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective.

F

Top-stratum items are population items whose book values exceed the sampling interval and are therefore excluded from the sample

F

when the auditor detects control deviations, it is best to evaluate them quantitively rather than qualitively

F

haphazard sampling is a statistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias, or special reason for including or omitting certain items from the sample

F; nonstatistical

When using nonstatistical sampling, the auditor cannot quantitatively assess the risk of making an incorrect inference based on the sample results

T

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider

No average dollar value of the check requests and yes allowable risk of overreliance

Attributes sampling is a statistical sampling method used to estimate the rate of control procedure failures based on selecting one sample and performing the appropriate audit procedure.

T

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

T

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

T

One strength of MUS is that it automatically selects a sample in proportion to an item's dollar amount, thus providing automatic stratification of the sample.

T

Sampling risk is the risk that the auditor's conclusion based on a sample might be different from the conclusion that would be reached if the audit procedure were applied in the same way to the entire population.

T

The division of a population into two or more subgroups is referred to as stratification

T

The population for MUS is defined as the number of dollars in the population being tested. Each dollar in the population has an equal chance of being chosen, but each dollar chosen is associated with a tangible item such as a customer's balance or an inventory item, so items with more dollars have a greater likelihood of being selected.

T

The diagram depicts the auditor's estimated maximum deviation rate compared with the tolerable deviation rate and also depicts the true population deviation rate compared with the tolerable deviation rate. As a result of testing controls, the auditor under relies on the controls and increases substantive testing. This is illustrated by

The risk of under reliance is one aspect of sampling risk in testing controls

Auditors can use sampling for testing either the effectiveness of controls (attributes sampling) or direct tests of account balances and assertions (monetary unit sampling)

True

Sampling can be used for both tests of controls and substantive tests of account balances and assertions

True

For which of the following procedures would sampling be most appropriate? a. examining documents b. inquiring of management c. observing controls being completed d. conducting analytical procedures

a

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 expected population deviation rate. d. The risk of incorrect rejection of book value.

a

Refer to Exhibit 8.2 and determine which of the following terms 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 the above

a

Refer to Exhibit 8.6. Assume a 5% risk of over reliance, 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. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 10.3%. b. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 5%. c. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 10.3%. d. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 5%.

a

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

a

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. 28 b. 87 c. 120 d. 162

b

The acronym KPI relates to which of the following phrases a. key profitability ratio b. key performance indicator c. known performance increment d. known profitability increment

b

Use Exhibit 8.5 to determine which of the following statements in false? a. As the tolerable deviation rate rises, the sample size decreases b. as the expected deviation rises, the sample size decreases c. 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 d. 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 less than 109. e. all of the above are false

b

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

c

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

c

Which of the following relationships in inaccurate? a. tolerable deviation rate = HIGH smaller sample and LOW larger sample b. expected population deviation rate = LOW smaller sample and HIGH larger sample c. sampling risk (risk of overreliance) = LOW smaller sample and HIGH larger sample d. Population size = little effect on smaller sample and little effect on larger sample

c

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

c

Which of the following statements is false? a. Top-stratum items are population items whose book values exceed sampling interval and are therefore all included in the sample. b. Because the auditor knows the amount of errors in the top stratum (all items were evaluated), no estimate of errors is required. c. Stratification of the population into several sub populations generally reduces audit efficiency. d. The audit sampling evaluation reflects the sum of top-stratum items and the projected misstatement derived from lower-stratum items. e.None of the above.

c

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

d

Consider the case whereby the risk of overreliance is 5%, the sample size is 20, and the auditor detects no deviations in the operation of the control. What can the auditor conclude? a. this is good news; no deviations were found, so we conclude that the control is working effectively b. the upper limit of deviation is 14%, so we conclude that the control is not working effectively c. if we doubled the sample size , the upper limit of deviations would decrease by about half d. one of the above a-c e. two of the above a-c

e

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 the above

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 the above.

e

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. two of the above (a-c) e. all of the above (a-c)

e

Which of the following definitions is correct? a. Factual misstatements-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 set 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 the above are correct.

e

Which of the following questions would an auditor ask when sampling to perform tests of controls? a. which population and sampling unit should be tested, and what characteristic 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 the above

e