Chapter 10 - Evaluating Audit Data Analytics & Sampling
What are the 10 steps in the framework used for selecting and evaluating a sample for substantive procedures?
*1. Determine the objectives of the substantive procedure. *2. Determine the substantive audit procedures to perform. *3. Determine whether the auditor will audit a sample or the entire population. *4. Define the population and sampling unit. 5. Determine whether the auditor will use statistical or nonstatistical sampling and what method will be used to sample the population. 6. Determine sample size based on the sampling method used. 7. Select a representative sample. 8. Apply audit procedures to the sampled items. 9. Evaluate sample results and draw a conclusion about the population. 10. Document conclusions. * = common to all sampling plans
What are the 3 sampling methods that can be used for statistical sampling?
1. Random sampling 2. Stratified random sampling, and 3. Systematic random sampling
In nonstatistical sampling, the auditor determines what 3 things?
1. Sample size 2. Chooses sample selection methods, and 3. Evaluates sample results entirely on the basis of the professional judgment and the experience of those on the audit team
What are the 4 factors that influence sample size in a substantive procedure?
1. Tolerable misstatement 2. The desired level of assurance that tolerable misstatement is not exceeded by the actual misstatement in the population 3. The expected misstatement in the population 4. Stratification of the population into more homogeneous subgroups
AS 2315 and AU-C 530 on Audit Sampling_______. a. provide guidance on audit sampling b. provide guidance on client acceptance c. relate only to private companies d. relate only to companies with subsidiaries
A
Classical variables sampling is best described as: a. A sampling method that uses normal distribution theory to select a sample and evaluate the characteristics of a population based on the results of a sample drawn from the population. b. A non-statistical sampling technique c. A procedure conducted by the internal auditors only d. A sampling technique only applied to receivables
A
In which of the following circumstances must an auditor decide how best to select a sample that is representative of the entire population of items? a. There are numerous transactions or items within an account balance. b. An audit population is sufficiently small. c. A client has a large balance of notes payable and the notes payable are with several banks. d. There are few transactions or few items within an account balance.
A
In which of the following situations is the auditor most likely to use audit data analytics? a. The available data is reliable and comes from a strong system of internal controls. b. Internal controls are weak. c. Certain audit procedures are required by professional standards. d. The auditor needs to have data that is relevant to the audit test.
A
Risk of incorrect acceptance is defined as _______. a. the risk that the auditor concludes that a material misstatement does not exist when it does exist b. the risk that the auditor concludes that a material misstatement does exist when it does exist c. the risk that an audit firm incorrectly accepts a client d. the risk that an audit firm incorrectly issued an unmodified opinion
A
Stratification is often advantageous because _______. a. the combined sample size often will be significantly less than a single sample size based on a non-stratified population b. the combined sample size often will be significantly more than a single sample size based on a non-stratified population c. it is a cheaper approach and will usually result in lower audit fees for the client d. it is usually more expensive and will result in higher audit fees for the client
A
The use of the ratio estimation sampling technique is most effective when a. The calculated audit amounts are approximately proportional to the client's book amounts. b. A relatively small number of differences exist in the population. c. Estimating populations whose records consist of quantities, but not book values. d. Large overstatement differences and large understatement differences exist in the population.
A
When auditing a construction company, the auditor might use audit data analytics (ADA) to determine, _______. a. the gross margin on each construction contract b. the likelihood of receiving audit fees upon conclusion of the audit c. the inherent riskiness of the client's industry d. if appropriate receivables balance confirmations have been returned
A
Which of the following is a characteristic of non-statistical sampling? a. It allows selecting an appropriate sample. b. It helps determine sample size objectively. c. It allows selecting sample size quantitatively. d. It allows a random selection of sample items.
A
Which of the following is a sampling risk that is associated with the efficiency of an audit? a. Risk of assessing control risk too high. b. Risk of incorrect acceptance. c. Inherent risk. d. Detection risk.
A
Which of the following is the primary objective of probability proportional to sample size? a. To identify overstatement errors. b. To increase the proportion of smaller-value items in the sample. c. To identify items where controls were not properly applied. d. To identify zero and negative balances.
A
What is statistical sampling?
An approach to sampling that involves a RANDOM selection of sample items and the use of an appropriate statistical technique to determine sample size and evaluate sample results (including measurement of sampling risk)
Probability-Proportional-to-Size (PPS) sampling uses ____ sampling theory to express a conclusion in dollar amounts.
Attribute - The probability that a particular sampling unit will be chosen in the sample is proportionate to the monetary size of the item - May be used in substantive procedures for both transactions AND balances
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? a. Incorrect rejection. b. Incorrect acceptance. c. Assessing control risk too low. d. Assessing control risk too high.
B
An important aspect of selecting a sample _______. a. involves determining the population and population unit b. involves determining the population and sampling unit c. is ensuring certain accounts are selected for audit d. is ensuring certain accounts are not selected for audit
B
If analytical procedures provide evidence that interest expense is presented fairly, _______. a. then there is no need for the auditor to audit any related accounts, such as notes payable b. the auditor can appropriately limit the assurance needed from tests of details of transactions and related sample sizes when testing interest expense c. then the auditor should direct management to pay the associated expense d. the auditor can appropriately increase the assurance needed from tests of details of transactions and related sample sizes when testing interest expense
B
In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be a. $1,000. b. $2,000. c. $4,000. d. $5,000.
B
In an audit of a nonissuer's financial statements, projected misstatement is a. The likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented. b. An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample. c. The only amount that the auditor considers in evaluating materiality and fairness of the financial statements. d. An auditor's best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit.
B
It is common to use audit sampling _______. a. if no other non-statistical tests are available or appropriate b. when performing substantive tests on a population of transactions or account balances c. when performing tests of controls on a population of transactions or account balances d. if no other statistical tests are available or appropriate
B
Sometimes an audit population may be sufficiently small so that_______. a. the auditor can ignore the account in question b. the auditor can audit every item in the population c. the account in question can be outsourced to the internal audit function for auditing d. expressed written assurance from senior management pertaining to the account is satisfactory
B
Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually a. May be applied to populations where many monetary errors are expected to occur. b. Produces an estimate that has a desired level of precision with a smaller sample size. c. Increases the variability among items in a stratum by grouping sampling units with similar characteristics. d. Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.
B
The PPS (probability proportional to size) sampling technique is such that _______. a. the probability that a particular sampling unit will be chosen in the sample is inversely proportionate to the monetary size of the item b. the probability that a particular sampling unit will be chosen in the sample is proportionate to the monetary size of the item c. clients with larger balances are less likely to be sampled and audited d. only large firms can afford the extra cost associated with this procedure
B
The choice of using audit sampling vs. audit data analytics (ADA) _______. a. is typically left up to senior management b. is often a matter of what is most effective and efficient in determining whether an assertion is presented fairly, in all material respects c. is often a matter of what is most effective and efficient in determining whether a control is presented fairly, in all material respects d. should be determined by the client's legal counsel
B
The population consists of _______. a. all accounts in the client's chart of accounts b. the class of transactions or the account balance to be tested c. neither the class of transactions nor the account balance to be tested d. account balances only
B
The ultimate purpose of a substantive test is to _______. a. obtain absolute assurance that an assertion is presented fairly in all material respects b. obtain reasonable assurance that an assertion is presented fairly in all material respects c. ensure that all controls are functioning properly d. guarantee that no error or fraud exists in the financial statements
B
When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor, rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation? a. Randomly increase the number of items in the substantive test to increase the reliance that may be placed on the overall test. b. Reevaluate the risk of fraud and design alternate tests for the related transactions. c. Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices. d. Count the missing original documents as misstatements and project the total amount of the error based on the size of the population and the dollar amount of the errors.
B
Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? I. Expected amount of misstatements II. Measure of tolerable misstatement a. No; No b. Yes; Yes c. No; Yes d. Yes; No
B
Which of the following statements about audit sampling risks is correct for a nonissuer? a. Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. b. Nonsampling risk can arise because an auditor failed to recognize misstatements. c. Sampling risk is derived from the uncertainty in applying audit procedures to specific risks. d. Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.
B
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? I. Increase in tolerable misstatement II. Increase in assessed level of control risk a. Increase sample size; Increase sample size b. Increase sample size; Decrease sample size c. Decrease sample size; Increase sample size d. Decrease sample size; Decrease sample size
C
In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $2,000. The projected error of this sample was a. $3,000 b. $4,000 c. $6,000 d. $8,000
C
In non-statistical sampling, _______. a. the auditor determines samples size, sample selection methods, and evaluates the sample results entirely on the basis of predetermined statistical parameters. b. the auditor selects a sample of certain balance sheet accounts and exclusively audits them c. the auditor determines samples size, sample selection methods, and evaluates the sample results on the basis of the professional judgment and the auditor's own experience. d. the auditor uses the internal audit function to gather samples
C
Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) 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 generally 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 would be used to estimate a numerical measurement of a population, such as a dollar value? a. Attributes sampling. b. Stop-or-go sampling. c. Variables sampling. d. Random number sampling.
C
Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling? a. The sampling distribution should approximate the normal distribution. b. Overstated units have a lower probability of sample selection than units that are understated. c. The auditor controls the risk of incorrect acceptance by specifying this risk level for the sampling plan. d. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.
C
While performing a test of details during an audit, an 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. Assessing control risk too high. b. Assessing control risk too low. c. Incorrect rejection. d. Incorrect acceptance.
C
A representative audit sample _______. a. should not involve the auditor b. should be agreed upon by management and the auditor c. is unlikely to provide a reasonable basis for drawing a conclusion about an entire population d. is likely to provide a reasonable basis for drawing a conclusion about an entire population
D
An advantage that using statistical sampling has over nonstatistical sampling is that statistical sampling helps an auditor to a. Minimize the failure to detect errors and irregularities. 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 evidential matter obtained.
D
An advantage that using statistical sampling methods have over nonstatistical sampling methods in tests of controls is that the statistical methods a. Can more easily convert the sample into a dual-purpose test useful for substantive testing. b. Eliminate the need to use judgment in determining appropriate sample sizes. c. Afford greater assurance than a nonstatistical sample of equal size. d. Provide an objective basis for quantitatively evaluating sample risk.
D
An auditor is most likely to use audit data analytics (ADA) when _______. a. data is available that is relevant to an audit assertion of interest, whether as a risk assessment procedure or a substantive test b. the available data is reliable and comes from a strong system of internal controls. c. the available data is relatively clean and does not require significant work to make it usable. d. All of these answer choices are correct
D
An auditor may decide to increase the risk of incorrect rejection when a. Increased reliability from the sample is desired. b. Many differences (audit value minus recorded value) are expected. c. Initial sample results do not support the planned level of control risk. d. The cost and effort of selecting additional sample items are low.
D
The common steps in any transaction stream are _______. a. authorization b. executing the transaction c. recording the transaction, and transfer of consideration d. All of these answer choices are correct.
D
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value? a. Discovery sampling. b. Numerical sampling. c. Sampling for attributes. d. Sampling for variables.
D
What is the sampling method that can be used for nonstatistical sampling?
Haphazard sampling - Auditor does not use a formal selection technique BUT haphazardly attempts to select a sample without bias
What is nonstatistical sampling?
Involves ANY sample selection and evaluation method that does NOT have the characteristics of statistical sampling
What is nonsampling risk? What 2 things is it typically controlled by?
Involves any risk that is NOT due to sampling, such as collecting evidence that is not relevant to the assertion or incorrectly evaluating audit evidence - Typically controlled by a firm's quality control procedures AND the review of audit work performed by other in the audit firm
Nonstatistical sampling is an approach to audit sampling that relies on the auditor's ____ to determine what ... things?
Judgment; to determine: 1. Sample size 2. Select the sample 3. Project sample results onto the population, and 4. Evaluate any allowance for sampling risk
Classical variables sampling uses ____ ____ theory to select a sample and develop a conclusion in dollar amounts
Normal Distribution - May be used in substantive procedures for both transactions AND balances
What is audit sampling?
Selecting and evaluating less than 100% of the population of audit relevance
The auditor expects the items selected (the sample) to be representative of what? What is it likely to provide?
The population - Likely to provide a reasonable basis for conclusions about the population
What is sampling risk? What is it caused by?
The risk that the auditor's conclusion based on a sample may be DIFFERENT from the conclusion if the entire population were subjected to the same audit procedure - Caused by a sample not being representative of the ENTIRE population
When developing an audit plan for an assertion, the auditor must determine what? For what purpose?
Whether it is more appropriate to use audit data analytics OR audit sampling - For the purpose of collecting and evaluating data
