Exam 2
Moderately important control
A higher tolerable deviation rate (6 to 10 percent) is used when the auditor plans to test the effectiveness of a
Highly important control
A low tolerable deviation rate (such as 3 to 5 percent) is used when the auditor plans to test the effectiveness of a
Smaller amount of tolerable misstatement
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?
(1) design an efficient sample, (2) measure the sufficiency of evidence obtained, and (3) quantify sampling risk.
Advantages of Statistical Sampling
Measure the sufficiency of the evidential matter obtained
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
Effectiveness
An audit needs to have the correct balance of efficiency and __________.
4½ percent
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1 percent risk of assessing control risk too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The auditor estimated from previous experience that about 2½ percent of the sales invoices lacked approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The auditor then determined the computed upper deviation rate to be 8 percent. Based on the information above, the planned allowance for sampling risk was
Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent)
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1 percent risk of assessing control risk too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The auditor estimated from previous experience that about 2½ percent of the sales invoices lacked approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The auditor then determined the computed upper deviation rate to be 8 percent. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the
Classical variables sampling
An auditor is performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates that there may be numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate?
The deviation rate in the auditor's sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate
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
Reduction
Assessing the control risk too low results in an inappropriate __________ of the extent of substantive procedures.
Efficiency
Audit __________ is affected when too much substantive testing is done.
Testing
Audit effectiveness is impacted when the auditor doesn't do enough __________.
Allowance for sampling risk
Auditing Standards refer to Precision as the
Represent the population
Auditing standards require that the sample items be selected in such a way that the sample can be expected to
Low
Auditors must carefully control the risk of assessing risk too high or __________ when performing test of controls.
Stratify
Auditors often __________ a population before computing the required sample size.
Risk of Incorrect Acceptance
Confidence level and ____________ are complements.
Direct
Expected population deviation rate - relationship to sample size
Population Deviation Rate / Tolerable Deviation Rate
If the auditor believes that the expected ___________ exceeds the ____________, the statistical testing should not be performed. Instead, the auditor should perform additional substantive procedures rather than relying on the control.
Risk of incorrect rejection (Type I)
In a test of internal controls, it is the risk that the sample supports a conclusion that the control is not operating effectively when, in fact, it is operating effectively. In substantive testing, it is the risk that the sample indicates that the recorded balance is materially misstated when, in fact, it is not.
Risk of incorrect acceptance (Type II)
In a test of internal controls, it is the risk that the sample supports a conclusion that the control is operating effectively when, in fact, it is not operating effectively. In substantive testing, it is the risk that the sample supports the recorded balance when it is, in fact, materially misstated.
The acceptable level of risk
In classical variables sampling, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor's needs in a given situation?
Plan, Perform, and Evaluate
In conducting a statistical sample for a test of controls, auditing standards require the auditor to properly _____________________ the sampling application and to adequately document each phase of the sampling application.
Risk of Incorrect Acceptance
In determining an acceptable __________, the auditor should consider the components of the audit risk model: the acceptable level of audit risk and risk of material misstatement.
Overstatement errors
MUS is designed primarily to test for ___________________.
Largely by how much the tolerable error exceeds expected error.
Once the desired confidence level is established, the sample size is determined
Expected and Tolerable Deviation Rates
Precision, at the planning stage of audit sampling, is the difference between the
Low error rates
Recent research indicates that account balances sampled by auditors typically do have _______________________.
The controls are operating effectively.
Samples to test internal controls are intended to provide a basis for an auditor to conclude whether
Human Involvement
Some level of deviation may be expected because the controls that auditors typically use sampling to test will be dependent on some
Combined
Strata may be __________ to provide an estimate of the population as a whole.
Strata
Stratification is the technique of dividing a population into subgroups called __________.
Separately
Stratified sample results can be used __________ or combined.
Different
Stratifying a population can also allow the auditor to perform __________ procedures to each stratum.
Risk of Incorrect Acceptance
The _______ is the risk that the sample supports the conclusion that the recorded account balance is fairly stated when in fact it is not (a Type II error).
Lower
The __________ the acceptable risk of incorrect acceptance, the larger the sample size must be.
Spreadsheet application or audit sampling software
The auditor may select a random sample using random numbers generated by a
Probability-proportional-to-size selection
The auditor selects a sample for MUS by using a systematic selection approach called ___________, often with the help of a computer program such as IDEA.
Logical Unit
The customer account or transaction that contains the selected dollar is called the
Attribute Sampling
The most common use of ________ is for tests of controls.
Monetary-unit sampling (MUS)
The objective of _________ for substantive tests of details is to test the assertion that no material misstatements exist in an account balance, a class of transactions, or a disclosure component of the financial statements.
Attribute Sampling
The objective of _____________ when used for tests of controls is to evaluate the operating effectiveness of the internal control.
Sampling Risk
The possibility that the sample drawn is not representative of the population and that, as a result, the auditor reaches an incorrect conclusion about the reliability of the control, the account balance, or class of transactions based on the sample.
Sampling Risk
The possibility that the sample drawn is not representative of the population.
Audit Sampling
The purpose of __________ is to draw inferences about the entire population (the reported inventory account balance in the example above) from the results of a sample.
Effectiveness of the audit
The risk of incorrect acceptance relates to the
Direct / Larger
The sample size has a ____ relationship to the expected population deviation rate; the ____ the expected population deviation rate, the larger the sample size, all else equal.
Upper Misstatement Limit
The total of the projected misstatement plus the allowance for sampling risk.
The first reason is technical and relates to sampling risk.
There are two reasons auditors will tolerate deviations and still consider a control to be effective.
Risk of incorrect rejection (Type I) Risk of incorrect acceptance (Type II)
There are two types of sampling risk.
Inverse Relationship
There is an _________ between the risk of incorrect acceptance and sample size.
The planned assessed level of control risk should be modified because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate
There is an inverse relationship between the sample size and the tolerable deviation rate.
Monetary-Unit Sampling
This technique is used extensively because it has a number of advantages over classical variables sampling.
The desired level of assurance in the results (or confidence level) Acceptable defect rate (or tolerable error) The historical defect rate (or expected error)
Three Important Factors in Determining Sample Size:
Inverse
Tolerable deviation rate - relationship to sample size
Attribute Sampling
Used to estimate the proportion of a population that possess a specified characteristic. The most common use of this sampling is for tests of controls.
Monetary-unit sampling (MUS)
What uses attribute sampling theory to estimate the dollar amount of misstatement for a class of transactions or an account balance.
Statistical Sampling
What uses the laws of probability to compute sample size and evaluate results. The auditor is able to use the most efficient sample size and quantify sampling risk.
Non statistical Sampling
When a ____________ application is used in determining sample size, the auditor should consider the desired confidence, the tolerable deviation rate, and the expected population deviation rate.
A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded
When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why
Statistical Sampling
Which general approach to audit sampling uses the laws of probability to compute sample size and evaluate the sample results.
Desired Confidence Level (Decrease) // Tolerable Deviation Rate (Increase) // Expected Population Deviation Rate (Decrease)
Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls?
Variable Sampling
Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value?
The auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan
Which of the following statements concerning monetary-unit sampling is correct?
An auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling
Which of the following statements concerning the auditor's use of statistical sampling is correct?
There is an inverse relationship between the sample size and the tolerable deviation rate
Which of the following statements is correct concerning statistical sampling in tests of controls?
Inclusion of zero and negative balances generally does not require special design considerations
Which of the following would most likely be an advantage in using classical variables sampling rather than monetary-unit sampling?
Test monetary amounts
While MUS is based on attribute-sampling theory, the fact that MUS is designed to ________________________.
Individual dollar
With MUS, an ______ represents the sampling unit.
Monetary-unit sampling (MUS)
______ is most appropriate for low-error-rate populations because it provides as effective a test as classical variables sampling does but has a more efficient sample size.
Monetary-unit sampling (MUS)
__________ is based on attribute-sampling theory modified to express a monetary conclusion rather than a rate of occurrence.
Confidence level
__________ is the complement of sampling risk.
Statistical Sampling
_____________ permits the auditor to use the most efficient sample size and to quantify the sampling risk for the purpose of reaching a statistical conclusion about the population.
Tolerable Deviation Rate
________________________ is the maximum deviation rate from a prescribed control that the auditor is willing to accept and still consider the control effective.
Monetary-unit sampling (MUS)
__________________________ is commonly used by auditors to test accounts such as accounts receivable, loans receivable, investment securities, and inventory.
Monetary-unit sampling (MUS)
_____________________________ is designed primarily to test for overstatement errors.
Expected Population Deviation
_____________________________ rate is the rate the auditor expects to exist in the population. The larger the _______________ rate, the larger the sample size must be, all else equal.
