Chapter 10 practice Questions

Edwards has decided to use probability-proportional-to-size (PPS) sampling in the audit of a client's accounts receivable balance. Few, if any, errors of overstatement are expected.Edwards plans to use the following PPS sampling table: Calculate the sampling interval and the sample size Edwards should use, given the following information: Tolerable misstatement: $15,000 Risk of Incorrect Acceptance: 5% Number of misstatements allowed: 0 Record amounts of accounts receivable: $300,000 Sampling Interval: ??? Sample Size: ??? Calculate total projected misstatement if the following three misstatements were discovered in a PPS sample: 1st misstatement: Recorded Amount $400 Audit Amount $320 Sampling Interval $1,000 Total Projected Misstatement: ??? 2nd misstatement:Recorded Amount $400 Audit Amount $0 Sampling Interval $1,000 Total Projected Misstatement: ??? 3rd Misstatement: Recorded Amount $3,000 Audit Amount $2,500 Sampling Interval $1,000 Total Projected Misstatement: ???

*If recorded amount is larger than the sampling interval, simply subtract the recorded amount and the audited amount Sample Size = ($300,000/15,000) x 3 Sample Size = 60 Sample Interval = $300,000/60 Sample Interval = $5,000 Total PM: 1st misstatement: Tainting percentage = (400-320)/400) TP = (80/400) = 20% 1st misstatement: 1,000 x 20% = 200 2nd misstatement: Tainting percentage = (500 - 0)/500 TP = (500/500) = 100% 2nd misstatement = 1,000 x 100% = 1,000 3rd misstatement: Tainting percentage = N/A 3rd misstatement = 3,000 - 2,500 = 500 Total PM = 200 + 1,000 + 500 = $1,700

Assume the following misstatements were found in a PPS sample: Sample Item: 1 Book Value: $650 Audit value:$585 Sample Item: 2 Book Value: $540 Audit Value: 0 Sample Item: 3 Book Value: $1,900 Audit Value: 0 Sample Item: 4 Book Value: $2,200 Audit Value: $1,650 Sample Item: 5 Book Value: $2,800 Audit Value: $2,660 Calculate the projected misstatement assuming: 1. The sampling interval was $1,800 2. The sampling interval was $2,000 If a risk of incorrect acceptance of 15% is specified in the sample design, the sampling interval is $2,000, and five misstatements are found as enumerated above, calculate: 1. Basic Precision: 2. The incremental allowance for sampling risk: 3. The upper misstatement limit:

*If the book value is greater than the sampling interval, simply subtract the book value and audit value. If sampling interval was $1,800 projected misstatement = $4,570 Sample Item 1: (650-585)/650) x 1,800 (65/650) x 1,800 = 180 Sample Item 2: (540-0)/540) x 1,800 (540/540) x 1,800 = 1,800 Sample Item 3: 1,900 - 0 = 1,900 Sample Item 4: 2,200 - 1,650 = 550 Sample Item 5: 2,800 - 2,660 = 140 Projected Misstatement = 180 + 1,800 + 1,900 + 550 + 140 = 4,570 If sampling interval was $2,000 projected misstatement = $4,890 (650-585)/650) x 2,000 (65/650) x 1,800 = 200 Sample Item 2: (540-0)/540) x 2,000 (540/540) x 1,800 = 2,000 Sample Item 3: (1,900-0)/1,900) x 2,000 (1,900/1,900) x 1,800 = 2,000 Sample Item 4: 2,200 - 1,650 = 550 Sample Item 5: 2,800 - 2,660 = 140 Projected misstatement = 200 + 2,000 + 2,000 + 550 + 140 = $4,890 Basic Precision: $3,800 Basic Precision = Reliability Factor x Sampling Interval 1.90 x 2,000 BP = $3,800 The incremental allowance for sampling risk: $1,700 The upper misstatement limit: $10,390 UML = 3,800 + 4,890 + 1,700 = $10,390

Which of the following factors would most likely cause an auditor to use audit sampling versus audit data analytics? A) Evidence to Support the Audit Test is Not Available in Electronic Form. B) The audit population is large, and the auditor's tests are supported by reliable and relevant data in electronic form, making ADA efficient. C) Relevant data are reliable and internal controls over the reliability of data are strong. D) Relevant data are clean or can be clean up easily.

A) Evidence to support the audit test is not available in electronic form.

Sampling risk: A) Is the risk that the sample chosen by the auditor is not representative of the population of transactions. B) Is the risk that the results of the test will be misinterpreted by the auditor. C) Can be eliminated by taking a random sample. D) Applies only to samples for substantive testing.

A) Is the risk that the sample chosen by the auditor is not representative of the population of transactions.

When planning a classical variables sample, the risk of incorrect acceptance and the risk of incorrect rejection are related to what general factor that influences sample size? A) The desired level of assurance from the sample. B) Tolerable misstatement. C) Expected misstatement. D) The use of stratification when sampling.

A) The desired level of assurance from the sample.

The auditor's decision about the risk of incorrect acceptance affects which of the following factors in a statistical PPS sample? A) Tolerable misstatement. B) Reliability factor. C) Book value of the population. D) Expected misstatement.

B) Reliability factor.

An auditor is testing accounts receivable for a client that has 1,000 customers with customer balances that range from $150 to $185,000. The auditor subdivided the receivables into three groups: group 1 has all customers with receivable balances between $185,000 and $100,000, group 2 has all customers with receivable balances between $100,000 and $25,000, and group 3 has all customers with receivable balances less than $25,000. The auditor then randomly selects customers out of each group. This is known as: A) random selection. B) stratified sampling. C) haphazard selection. D) block selection.

B) stratified sampling.

An auditor uses nonstatistical ratio estimation to evaluate the results of a sample. The population book value was $2,000,000 and contained 350 items. The auditor selected 100 items with a book value of $500,000. The audited value of the sample was $480,000. The estimated audited value of the population is: A) $1,980,000. B) $1,930,000. C) $1,920,000. D) $1,900,000.

C) $1,920,000 Step 1: Estimated audited value = $2,000,000 - ($20,000/$500,000 x $2,000,000) Step 2: $2,000,000 - (.04 x $2,000,000) Step 3: $2,000,000 - $80,000 EAV = $1,920,000

Audit sampling is defined as a situation where: A) The auditor tests a subset of the population to draw a conclusion about a subset of the population. B) The auditor screens 100% of the population to identify a subset with particular risk traits. C) The auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population. D) The auditor screens less than 100% of the population to identify a subset with particular risk traits.

C) The auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population.

The critical difference between statistical and nonstatistical sampling is: A) the required use of judgment in nonstatistical sampling. B) the elimination of nonsampling risk with statistical sampling. C) the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample. D) that more representative samples are attained with statistical sampling.

C) the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample.

Holding all other factors constant, which of the following factors results in an increase in sample size for substantive tests? A) A decrease in the amount of expected misstatement in the population to be tested. B) Stratifying the population when appropriate. C) An increase in the amount of tolerable misstatement. D) An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population.

D) An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement in the population.

When defining the population and sampling unit, sometimes an auditor must look for a reciprocal population. A reciprocal population is: A) a class of transactions or the account balance to be tested. B) a class of transactions related to the account balance being tested (e.g., sales to accounts receivable). C) a subset of the population that is the basis for sampling. D) a population that is overstated if the population of interest is understated (or vice versa).

D) a population that is overstated if the population of interest is understated (or vice versa).

Nonsampling risk: A) only occurs if you test every item of the population. B) only applies to samples taken for the purposes of substantive testing. C) does not occur if an auditor relies on unreliable evidence. D) is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.

D) is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.