Module G MC

13. The risk of incorrect acceptance relates to the A. effectiveness of the audit. B. efficiency of the audit. C. preliminary estimate of materiality. D. allowable risk of tolerable misstatement.

A

66. Which of the following is not a correct relationship between a factor and sample size in a monetary unit sampling application? A. Expected misstatement; Inverse B. Recorded balance of the account; Direct C. Risk of incorrect acceptance; Inverse D. Tolerable misstatement; Inverse

A

88. Which of the following statements is true regarding classical variables sampling? A. A very small dollar account has the same probability of being selected for examination as a very large dollar account. B. The determination of sample size requires to auditors to consider a smaller number of factors than are considered under MUS. C. Classical variables sampling should be used when the auditor has greater concerns for overstatement (rather than understatement) errors. D. The sampling unit is defined as each individual dollar in the account under examination.

A

78. As the auditors' assessments of control risk and analytical procedures risk decrease, which of the following statements is true? A. The sample size will not be affected. B. The allowable risk of incorrect acceptance will increase. C. The sample size will increase. D. The allowable risk of incorrect acceptance will decrease.

B

82. In a classical variables sampling application, the auditor determines there is a 95 percent probability that the true (but unknown) value of an entity's accounts receivable is between $45,000 and $55,000. If the estimated population value is $50,000, the precision is A. $10,000. B. $5,000. C. 95%. D. 5%.

B

83. The audit team is using monetary unit sampling to examine an entity's accounts receivable balance, which is recorded at $500,000. The team has determined the tolerable misstatement to be $25,000, the risk of incorrect acceptance to be 5 percent, and the expected misstatement to be 2 percent. Using the monetary unit sampling Sample Size table, what is the appropriate sample size? A. 75 B. 162 C. 231 D. 300

B

89. Jones, CPA, used a classical variables sampling application to examine the inventory balance of XYZ Company. The recorded value of the inventory was $240,000, and Jones determined a tolerable misstatement of $12,000. Jones' sampling procedures resulted in a precision interval of $224,000 to $236,000. As a result, Jones should conclude that the A. inventory balance is fairly stated. B. inventory balance is materially misstated. C. tolerable misstatement should be increased. D. risk of incorrect acceptance is below the desired level.

B

76. A client's inventory is recorded at $300,000 and is comprised of 1,000 items. If auditors examined a sample of 200 items and found a total misstatement of $20,000 (overstatement), what is the estimated audited balance for inventory? A. $20,000 B. $100,000 C. $200,000 D. $400,000

C

81. As the expected misstatement is large relative to the tolerable misstatement, the audit team would most likely A. increase their degree of reliance on internal controls. B. consider the possibility of an increased level of tolerable misstatement. C. increase the sample size. D. decrease the sample size.

C

85. In a classical variables sampling application, which of the following outcomes would typically not result from stratifying a population? A. A decrease in the population variability B. A decrease in the expected sample size C. An increase in the standard deviation D. A higher likelihood of selecting higher dollar items

C

86. In classical variables sampling, a measure of the variability of the population is known as the A. sampling average. B. tolerable misstatement. C. standard deviation. D. tainting percentage.

C

87. Which of the following is not true with respect to the effect of the population standard deviation in a classical variables sampling application? A. The standard deviation can be determined based on experience from prior audits or a small sample taken during the current audit. B. The standard deviation has a direct relationship with sample size. C. When the standard deviation is larger, the audit team is more likely to select a representative sample. D. The standard deviation represents the variability of the population being examined.

C

Bama's accounts receivable were recorded at $600,000. Assume that the auditor determined a sample size of 20 customer accounts and prepared confirmations to be addressed to those customers. One misstatement was determined; an account recorded at $10,000 was confirmed to have a balance of $5,000. 38. What is the projected misstatement? A. $5,000 B. $10,000 C. $15,000 D. $30,000

C

23. In a classical variables sampling application, the sample size will be smaller when the A. risk of incorrect acceptance is lower. B. risk of incorrect rejection is lower. C. tolerable misstatement is lower. D. population variability is lower.

D

35. Which of the following is found by dividing the amount of misstatement noted in a logical unit by the recorded amount of that logical unit? A. Sample size B. Sampling interval C. Projected misstatement D. Tainting percentage

D

90. Which of the following does not represent a difference between the use of various approaches to classical variables sampling? A. The use of mean-per-unit estimation typically results in a larger standard deviation than the use of either difference estimation or ratio estimation. B. The use of difference and ratio estimation normally provides smaller sample sizes than the use of mean-per-unit estimation. C. The use of difference and ratio estimation require the auditor to expect a certain number of differences to exist in the population while the use of mean-per-unit estimation does not. D. The use of mean-per-unit estimation requires a reliable measure of recorded value while the use of difference and ratio estimation do not.

D

92. Ranger, CPA used nonstatistical sampling to examine the accounts receivable balances of Cowboy Inc., He audited a sample of 150 items and found an audited value of $5,000 less than the recorded value of $25,000. The entire account balance contained 2,000 items and had a total recorded value of $350,000. Using nonstatistical methods and assuming that Ranger used the ratio of audited value to recorded value to estimate the account balance, the estimated total account balance is A. $345,000. B. $330,000. C. $295,000. D. $280,000.

D

93. Romo, CPA performed nonstatistical sampling to examine the inventory balances of Jones Company. The sample included 125 of the total 1,250 items with a recorded value of $550,000. Romo determined the expected misstatement to be $25,000 and the tolerable misstatement to be $40,000. The sample had a recorded value of $54,000 and an audited value of $52,000. What conclusion did Romo draw regarding the account balance? A. Conclude that the account balance is fairly stated, since the estimated misstatement is greater than the expected misstatement. B. Conclude that the account balance is not fairly stated, since the estimated misstatement is greater than the tolerable misstatement. C. Conclude that the account balance is not fairly stated, since the estimated misstatement is less than the expected misstatement. D. Conclude that the account balance is fairly stated, since the estimated misstatement is less than the tolerable misstatement.

D

11. Which of the following is not true with respect to the risk of incorrect acceptance? A. This risk provides the auditor with an efficiency loss. B. This risk results in the auditor making an incorrect conclusion about the client's account balance or class of transactions. C. This risk occurs when the sample results suggest that the account balance is fairly stated. D. This risk is controlled by the auditor in determining sample size under monetary unit sampling (MUS).

A

12. Which of the following would not result in a lower level of the risk of incorrect acceptance? A. An increase in the acceptable level of audit risk from 5% to 10% B. The inability of the auditor to rely on the internal control as planned C. An increase in the susceptibility of the account balance to misstatement D. A reduction in the utilization of analytical procedures in the audit examination

A

26. Which of the following factors is most likely established based on the results of prior audit examinations? A. Expected misstatement B. Population size C. Risk of incorrect acceptance D. Tolerable misstatement

A

28. Which of the following components of the upper limit on misstatements is determined by multiplying the sampling interval by the confidence factor for the acceptable risk of incorrect acceptance? A. Basic allowance for sampling risk B. Incremental allowance for sampling risk C. Projected misstatement D. Sampling interval

A

36. Which of the following components of the upper limit on misstatements will exist in all monetary unit sampling applications, even in those where no misstatements are found? A. Basic allowance for sampling risk B. Computed allowance for sampling risk C. Incremental allowance for sampling risk D. Projected misstatement

A

41. If a customer's account was recorded at $45,000, the audited value was $30,000, and the sampling interval was $30,000, the projected misstatement would be A. $10,000. B. $15,000. C. $20,000. D. $30,000.

A

50. Pujols, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Wieserbud Brewing Inc., and estimated the account balance based on the ratio of audited value to recorded balances. He audited 120 items from a sample and found an audited value of $24,600. The sample had a recorded value of $30,000. If the entire inventory contained 2,400 items and the total recorded value of the inventory was $480,000, the estimated account balance using nonstatistical methods is A. $393,600. B. $474,500. C. $480,000. D. $500,000.

A

52. Solo, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Hope Inc., and estimated the account balance by projecting the misstatement based on the number of items examined. In selecting her sample of 70 items, she used an expected misstatement of $40,000 and a tolerable misstatement of $65,000. The account balance consisted of 1,050 items totaling $1,200,000. The sample recorded value was $80,000, and the audited value was $76,000. What conclusion did Solo draw regarding the account balance? A. Accept because the expected misstatement is less than the tolerable misstatement B. Reject because the expected misstatement is greater than the expected misstatement C. Accept because the expected misstatement is less than the expected misstatement D. Reject because the expected misstatement is greater than the tolerable misstatement

A

56. The upper limit on misstatements is A. an adjustment of the sample estimate of misstatement to reflect the desired level of sampling risk. B. an adjustment of the sample deviation rate to reflect the desired level of sampling risk. C. the maximum rate of deviation that could exist before auditors would reduce the reliance on an internal control. D. the maximum misstatement that could exist before auditors would conclude that the account balance is not fairly stated.

A

60. When conducting variables sampling, auditors typically examine A. transactions of components of the account balance or class of transactions. B. the balances in an account balance or class of transactions from one or more prior years. C. the separation of duties among client personnel for transactions related to the account balance or class of transactions. D. minutes from meetings of the client's board of directors.

A

7. The amount at which an item would be recorded assuming no mistakes in judgment or incorrect applications of generally accepted accounting principles were made is the A. audited value. B. expected misstatement. C. recorded value. D. tolerable misstatement.

A

8. The auditor's sample would indicate that the client's account balance is fairly stated when the _____ is less than the _____. A. upper limit on misstatements; tolerable misstatement B. actual misstatement; tolerable misstatement C. tolerable misstatement; upper limit on misstatements D. tolerable misstatement; actual misstatement

A

84. If an audit team performing a monetary unit sampling application selects a sample using a systematic random selection method, which of the following is true with respect to accounts with a balance greater than the sampling interval? A. They have a 100% probability of being selected. B. They have no probability of being selected. C. They have a greater than 50% probability of being selected. D. They have a less than 50% probability of being selected.

A

91. Which of the following is not an acceptable course of action the audit team can choose when sample evidence suggests that the account balance is materially misstated? A. Increase the tolerable misstatement and examine additional items. B. Increase the sample size and examine additional items. C. Recommend adjustment of the client's account balance. D. All of these are acceptable courses of action.

A

95. Cruz, CPA decided to use nonstatistical sampling to examine the accounts payable balances of Maverick Inc., Based on his professional judgment, Cruz judgmentally selected sample invoices from a file, but did so without any intentional bias. The selection method used by Cruz was A. haphazard selection. B. block selection. C. systematic selection. D. random selection.

A

63. Which of the following is considered to be an advantage of monetary unit sampling compared to classical variables sampling? A. Option A B. Option B C. Option C D. Option D

A (see Q 63 for options)

14. When performing substantive procedures, auditors run the sampling risk(s) of A. assessing control risk too high or too low. B. incorrect acceptance and incorrect rejection. C. assessing control risk too low only. D. incorrect acceptance only.

B

19. Which of the following is true with respect to the risk of incorrect acceptance? A. The risk of incorrect acceptance is determined in the planning stages of the audit prior to the study of internal control. B. The risk of incorrect acceptance has an inverse relationship with sample size. C. The risk of incorrect acceptance exposes the auditor to an efficiency loss. D. The risk of incorrect acceptance may occur when the true (but unknown) account balance is fairly stated.

B

24. Which of the following factors has a direct relationship with sample size in a variables sampling application? A. Tolerable misstatement: Yes; Expected misstatement: Yes B. Tolerable misstatement: No; Expected misstatement: Yes C. Tolerable misstatement: Yes; Expected misstatement: No D. Tolerable misstatement: No; Expected misstatement: No

B

25. How does the auditor establish the level of tolerable misstatement in a variables sampling application? A. Based on prior assessments of audit risk, risk of material misstatement, and analytical procedures risk B. Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals C. Based on the findings in prior audits or based on a small sample taken during the current year D. Based on the anticipated cost of conducting additional substantive procedures

B

3. Which of the following would not be estimated using variables sampling? A. The balance in the client's accounts receivable B. The extent to which an internal control procedure is not functioning as intended C. The amount of misstatement in a client's inventory D. All of these would be estimated using variables sampling

B

31. Which of the following expresses the relationship between changes in the factors and changes in sample size in variables sampling? A. Tolerable misstatement: Direct; Expected misstatement: Inverse; Risk of incorrect rejection: Direct B. Tolerable misstatement: Inverse; Expected misstatement: Direct; Risk of incorrect rejection: Inverse C. Tolerable misstatement: Inverse; Expected misstatement: Inverse; Risk of incorrect rejection: Inverse D. Tolerable misstatement: Inverse; Expected misstatement: Inverse; Risk of incorrect rejection: Direct

B

32. Under monetary unit sampling, the sampling interval is determined by dividing the _____ by the _____. A. sample size; population size B. population size; sample size C. tolerable misstatement; population size D. population size; tolerable misstatement

B

34. What is the auditor's normal course of action if a "logical unit" is selected twice in monetary unit sampling? A. The auditor should count the logical unit as a single selection and proceed as normal. B. The auditor should count the logical unit as two selections and proceed as normal. C. The auditor should not include the logical unit as a selection, since the dollar amount of this unit is excessively large. D. The auditor should replicate the sample using an alternative random start.

B

4. Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements? A. Set the tolerable misstatement at a lower level than originally planned. B. Stratify the cash disbursements population so that the unusually large disbursements are selected. C. Increase the sample size to reduce the effect of the unusually large disbursements. D. Continue to draw new samples until all the unusually large disbursements appear in the sample.

B

40. The amount by which a projected misstatement in an account balance or class of transactions differs from an actual misstatement as a result of the sample not being representative of the population would typically arise from A. a misunderstanding of accounting principles. B. sampling risk. C. management override of an internal control policy or procedure. D. risk of incorrect acceptance.

B

42. _____ sampling methods use normal distribution theory and the central limit theorem to provide a range estimate of the account balance or class of transactions or the misstatement in the account balance or class of transactions. A. Attributes B. Classical variables C. Nonstatistical D. Monetary unit sampling (MUS)

B

47. Which of the following is considered in determining the sample size in a classical variables sampling application but not in a monetary unit sampling application? A. Standard deviation: Yes; Risk of incorrect acceptance: Yes B. Standard deviation: Yes; Risk of incorrect acceptance: No C. Standard deviation: No; Risk of incorrect acceptance: Yes D. Standard deviation: No; Risk of incorrect acceptance: No

B

57. 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

58. Which of the following would be the most likely situation in which an auditor would use variables sampling? A. Comparing the recorded balance in accounts receivable to expected balances or prior-years' balances B. Selecting customer balances in accounts receivable for confirmation C. Evaluating sales invoices for evidence of authorization by client personnel D. Mathematically evaluating the client's provision for the allowance for doubtful accounts

B

62. Which of the following is not true with respect to the use of monetary unit sampling (MUS)? A. MUS selects individual dollars from an account balance for verification. B. Compared to classical variables sampling, MUS allows the auditors to more effectively control their exposure to sampling risk. C. MUS estimates the extent of misstatement in an account balance or class of transactions. D. MUS provides the auditor with a more conservative estimate of the misstatement than classical variables sampling.

B

64. SCA is auditing a client's accounts receivable balance recorded at $10 million using MUS sampling. The following parameters have been established for this account: • Tolerable misstatement = $500,000 • Expected misstatement = $100,000 • Risk of incorrect acceptance = 10% Which of the following statements would not be true with respect to the sample size in this situation? A. The correct sample size is 69 customer accounts. B. Decreasing tolerable misstatement from $500,000 to $200,000 (holding all other factors constant) will reduce the sample size by 331 accounts. C. If SCA wishes to reduce its exposure to the risk of incorrect acceptance to 5% (holding all other factors constant), sample size will be increased by 24 accounts. D. Increasing expected misstatement to $200,000 (holding all other factors constant) will increase the sample size to 115 customer accounts.

B

70. Which of the following components of the upper limit on misstatements is based on the possibility that the sampling interval contains a greater degree of misstatement than the item examined by the auditor? A. Basic allowance for sampling risk B. Incremental allowance for sampling risk C. Projected misstatement D. Risk of incorrect acceptance

B

72. Auditors are evaluating an account with a recorded balance of $500,000 using mean-per-unit estimation. This account is comprised of 1,000 individual components. The auditors sampled 100 items and determined a total audited value of $52,500. Using a risk of incorrect acceptance of 10%, the auditors determined a precision of $40,000. If the tolerable misstatement is $50,000, which of the following is not true? A. The estimated recorded value of this account is $525,000. B. A 90% probability exists that the true population value falls between $460,000 and $540,000. C. The auditors would conclude that the account balance is fairly stated. D. The probability that the auditors will incorrectly accept a materially misstated account balance is 10%.

B

75. Law, CPA is using nonstatistical sampling in his examination of Jye Company's accounts receivable. The recorded balance of Jye's accounts receivable was $750,000. Law selected a sample of customer accounts for examination, which were recorded at $50,000. Based on the responses received from accounts receivable confirmations, Law determined an audited value of $45,000 for the accounts receivable. If tolerable misstatement is $60,000, which of the following statements is not true? A. The actual misstatement identified by Law is $5,000. B. The estimated account balance would be $825,000. C. Law would conclude that the account balance is not fairly stated, since the estimated misstatement is greater than the tolerable misstatement. D. Law is not able to provide a quantitative conclusion as to the exposure to the risk of incorrect acceptance.

B

77. A client's inventory is recorded at $600,000 and is comprised of 1,000 items. The auditors examined a sample of items with a recorded balance of $100,000 and determined an audited value of $90,000. What is the estimated audited value for inventory? A. $90,000 B. $540,000 C. $590,000 D. $666,666

B

15. When the _____ exceeds the _____, the audit team is exposed to the risk of incorrect acceptance. A. upper limit on misstatements; tolerable misstatement B. tolerable misstatement; expected misstatement C. tolerable misstatement; upper limit on misstatements D. upper limit on misstatements; expected misstatement

C

22. All other factors being equal, as the risk of incorrect acceptance and tolerable misstatement increase, the sample size will A. not be affected. B. increase. C. decrease. D. cannot determine from the information given.

C

30. Which of the following set of conditions would provide the auditor with the smallest sample size under monetary unit sampling (RIA = risk of incorrect acceptance, EM = expected misstatement, TM = tolerable misstatement, PS = population size)? A. RIA = 5%, EM = $7,500, TM = $15,000, PS = $150,000 B. RIA = 5%, EM = $5,000, TM = $10,000, PS = $200,000 C. RIA = 5%, EM = $2,000, TM = $10,000, PS = $100,000 D. RIA = 5%, EM = $7,500, TM = $15,000, PS = $300,000

C

33. Brown, CPA, was using monetary unit sampling to audit an inventory of $3,000,000 that was comprised of 6,000 items. A sample size of 500 was determined and a tolerable misstatement of $20,000 was established. The sampling interval would be A. $500. B. $5,000. C. $6,000. D. $20,000.

C

43. In which of the following situations would the auditor be more likely to use monetary unit sampling as opposed to classical variables sampling? A. Larger expected misstatement: Yes; Concern with overstatements: Yes B. Larger expected misstatement: Yes; Concern with overstatements: No C. Larger expected misstatement: No; Concern with overstatements: Yes D. Larger expected misstatement: No; Concern with overstatements: No

C

44. Samantha, CPA decided to stratify the population in her statistical sampling plan. Which of the following is the most likely reason she used this approach? A. It eliminates the need for random selection. B. The population is relatively homogenous in terms of the dollar amount of components or transactions. C. It reduces her expected sample size. D. It eliminates the need for calculating the projected misstatement in the account being examined.

C

46. What is one of the primary benefits of stratifying a population? A. Stratifying the population allows different types of audit procedures to be performed on larger and smaller transactions or components. B. Stratifying the population allows the auditor to have a higher likelihood of reaching a favorable conclusion with respect to the client's financial statements. C. Stratifying the population allows the auditor to reduce the necessary sample size. D. Stratifying the population reduces the auditor's exposure to nonsampling risk.

C

48. In a classical variables sampling application, if the _____ exceeds the maximum difference between the recorded balance and any point within the precision interval, the auditor would decide to _____ the account balance as fairly stated. A. sample estimate; accept B. sample estimate; reject C. tolerable misstatement; accept D. tolerable misstatement; reject

C

5. The total amount of misstatement identified in a sample is referred to as the A. projected misstatement. B. tolerable misstatement. C. actual misstatement. D. incremental allowance for sampling risk.

C

51. Jeter, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Big Apple Company and estimated the account balance based on the ratio of audited value to recorded balances. He audited 200 items from a sample and found an audited value of $36,000. The sample had a recorded value of $40,000. If the entire inventory contained 3,000 items and the total recorded value of the inventory was $500,000, the estimated account balance using nonstatistical estimation and projecting the error based on number of items examined is A. $393,600. B. $474,500. C. $450,000. D. $540,000.

C

53. Summitt, CPA, performed a nonstatistical sampling plan to examine the inventory balances of Hero Inc., Which of the following methods of sample selection are available to her? A. Random and systematic only B. Block and haphazard only C. Any method she believes will result in a representative sample D. Any method where the results can be probabilistically estimated

C

6. Which of the following is not an advantage associated with monetary unit sampling (MUS)? A. MUS sampling methods typically include transactions or components reflecting relatively large dollar amounts. B. MUS sampling methods are more effective in identifying overstatement errors. C. MUS sampling methods provide a conservative (higher) estimate of misstatement in the account balance or class of transactions. D. MUS sampling methods typically result in relatively small sample sizes.

C

61. Which of the following selection methods selects individual dollars within an account balance or class of transactions for examination? A. Attribute sampling B. Classical variables sampling C. Monetary unit sampling D. Nonstatistical variables sampling

C

71. Which of the following represents a major difference in the use of monetary unit sampling (MUS) and classical variables sampling? A. MUS is more effective in controlling the auditors' exposure to sampling risk than classical variables sampling. B. MUS considers both the expected misstatement and tolerable misstatement in the determination of sample size, while classical variables sampling only considers the expected misstatement. C. MUS defines the sampling unit as a dollar of an account balance while classical variables sampling defines the sampling unit as a component of an account balance. D. MUS is a nonstatistical sampling method while classical variables sampling is a statistical sampling method.

C

74. Auditors are evaluating an account with a recorded balance of $700,000 using classical variables sampling. Based on an allowable risk of incorrect acceptance of 10%, the auditors have determined the following: • Estimated account balance = $640,000 • Precision = $20,000 • Tolerable misstatement = $50,000 Which of the following best describes the auditors' decision and rationale for that decision? A. The auditors would accept the account balance as fairly stated, since the sample estimate falls outside of the precision interval. B. The auditors would conclude that the account balance is not fairly stated, since the sample estimate falls outside of the precision interval. C. The auditors would accept the account balance as fairly stated, since the difference between the upper bound of the precision interval and recorded balance is less than the tolerable misstatement. D. The auditors would conclude that the account balance is not fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement.

C

9. How does monetary unit sampling (MUS) ensure that larger dollar components are selected for examination? A. MUS sampling requires the auditor to identify all items having a balance greater than performance materiality prior to beginning the sample selection process. B. MUS sampling requires the auditor to stratify the sample into larger and smaller dollar components prior to beginning the sample selection process. C. MUS sampling defines the sampling unit as an individual dollar within an account balance or class of transactions. D. MUS sampling selects components having larger balances in the prior audit.

C

Bama's accounts receivable were recorded at $600,000. Assume that the auditor determined a sample size of 20 customer accounts and prepared confirmations to be addressed to those customers. One misstatement was determined; an account recorded at $10,000 was confirmed to have a balance of $5,000 39. Using an incremental confidence factor of 1.58 (corresponding to the risk of incorrect acceptance of 10%), what is the incremental allowance for sampling risk? A. $5,000 B. $7,900 C. $8,700 D. $23,700

C

1. Which component of the expanded audit risk model is most closely associated with the risk of incorrect acceptance? A. Analytical procedures risk B. Risk of material misstatement C. Nonsampling risk D. Test of details risk

D

10. Why is the auditor more concerned with controlling the exposure to the risk of incorrect acceptance than with the risk of incorrect rejection? A. Only the risk of incorrect acceptance results in an incorrect decision by the auditor. B. The risk of incorrect rejection is not related to the auditor's substantive procedures. C. The risk of incorrect rejection can be controlled by performing substantive procedures during the interim period. D. The risk of incorrect acceptance may ultimately result in the auditor incorrectly issuing an unmodified opinion on the client's financial statements.

D

16. Incorrect rejection occurs when the auditor concludes that the account balance is _____ when in fact it is _____. A. material; immaterial B. immaterial; material C. fairly stated; misstated D. misstated; fairly stated

D

17. Which of the following is not true with respect to the risk of incorrect rejection? A. Incorrect rejection occurs when the auditor concludes that the account balance is not fairly stated. B. The risk of incorrect rejection has an inverse relationship with sample size. C. The risk of incorrect rejection exposes the auditor to an efficiency loss. D. Incorrect rejection occurs when the true (but unknown) account balance is materially misstated.

D

18. An auditor may decide to increase the risk of incorrect rejection when A. increased reliability from the sample is desired. B. many differences are expected. C. initial sample results do not support the planned level of control risk. D. the cost and effort of selecting additional items is low.

D

2. The sampling method used to examine a population when the auditor wants to estimate a continuous amount (or value) of the population is A. attributes sampling. B. balance sampling. C. discovery sampling. D. variables sampling.

D

20. How does the auditor typically determine the appropriate level of the risk of incorrect rejection when using classical variables sampling? A. Based on prior assessments of audit risk, risk of material misstatement, and analytical procedures risk B. Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals C. Based on the findings in prior audits or based on a small sample taken during the current year D. Based on the anticipated cost of conducting additional substantive procedures

D

21. Which of the following is not considered in establishing the sample size in a monetary unit sampling application? A. Expected misstatement B. Population size C. Risk of incorrect acceptance D. All of these are considered

D

27. Which of the following factors that affect sample size can be determined by considering the recorded account balance of the account or class of transactions as well as the relationship between the recorded account balance or class of transactions with important financial statement subtotals? A. Expected misstatement B. Population size C. Risk of incorrect acceptance D. Tolerable misstatement

D

29. A number of factors influence the sample size for a variables sampling application. All other factors held constant, which of the following would lead to a larger sample size? A. A lower assessed level of risk of material misstatement B. Increased use of analytical procedures to obtain evidence about particular assertions C. Lower frequency and magnitude of misstatements D. Lower levels of tolerable misstatement

D

45. The process of subdividing a population into more homogeneous subgroups is known as A. classification. B. identification. C. sampling. D. stratification.

D

49. Green, CPA, performed a mean-per-unit sampling plan to examine the inventory balances of ABC Company. Green audited 120 items from a sample and found an audited value of $24,600. The sample had a recorded value of $30,000. If the entire inventory contained 2,400 items and the total recorded value of the inventory was $480,000, the estimated account balance using mean per unit estimation is A. $393,600. B. $474,500. C. $480,000. D. $492,000.

D

54. In which of the following circumstances would the auditor most likely use variables sampling? A. Identifying the susceptibility of the account balance to misstatement B. Evaluating the operating effectiveness of specific control procedures C. Evaluating the operating design of specific control procedures D. Determining whether the client's accounts receivable balance is correctly recorded

D

55. Which of the following is the least likely outcome when the upper limit on misstatements exceeds the tolerable misstatement? A. The auditor would be exposed to the risk of incorrect rejection. B. The auditor would be exposed to an efficiency loss. C. The auditor would consider expanding the sample to evaluate additional transactions or components of the account balance. D. The auditor would conclude that the account balance is fairly stated.

D

59. Which of the following statements is not true regarding variables sampling? A. Two approaches to variables sampling are monetary unit sampling and classical variables sampling. B. Both statistical and nonstatistical approaches to variables sampling can be used under GAAS. C. The objective of variables sampling is to estimate either the true balance or the extent of misstatement in an account balance or class of transactions. D. Variables sampling is appropriate when the distribution of the population is binary in nature.

D

65. MES is auditing a client's accounts receivable balance recorded at $2 million using MUS sampling. The following parameters have been established for this account: • Tolerable misstatement = $200,000 • Expected misstatement = $100,000 • Risk of incorrect acceptance = 5% Which of the following statements would not be true with respect to the sample size in this situation? A. The correct sample size is 116 customer accounts. B. Increasing tolerable misstatement from $200,000 to $600,000 (holding all other factors constant) will increase the sample size. C. If MES can accept a risk of incorrect acceptance of 10% (holding all other factors constant), sample size will be decreased to 80 accounts. D. Because the size of the population is relatively large, this element does not affect sample size.

D

73. Auditors are evaluating an account with a recorded balance of $600,000 using classical variables sampling. Based on an allowable risk of incorrect acceptance of 5%, the auditors have determined the following: • Estimated account balance = $680,000 • Precision = $20,000 • Tolerable misstatement = $50,000 Which of the following best describes the auditors' decision and rationale for that decision? A. The auditors would accept the account balance as fairly stated, since the sample estimate falls outside of the precision interval. B. The auditors would conclude that the account balance is not fairly stated, since the sample estimate falls outside of the precision interval. C. The auditors would accept the account balance as fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement. D. The auditors would conclude that the account balance is not fairly stated, since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement.

D

79. Holding other factors constant in a classical variables sampling application, an increase in which of these factors will cause sample size to increase? A. Risk of incorrect rejection: Yes; Risk of incorrect acceptance: No B. Risk of incorrect rejection: No; Risk of incorrect acceptance: Yes C. Risk of incorrect rejection: Yes; Risk of incorrect acceptance: Yes D. Risk of incorrect rejection: No; Risk of incorrect acceptance: No

D

80. Which of the following statements is true regarding performance materiality in a monetary unit sampling application? A. Performance materiality replaces the overall level of financial statement materiality. B. Expected misstatement is the application of performance materiality to a particular sampling procedure. C. Performance materiality addresses the risk that the aggregate of individually material misstatements may not cause the financial statements to be materially misstated. D. Performance materiality provides auditors with a conservative measure that considers the presence of undetected misstatements.

D

94. In a variables sampling application, which of the following would not ordinarily be documented by the audit team? A. A description of the substantive procedures performed on each item selected B. Information on how the audit team verified the completeness of the identified population C. The method and parameters used to determine sample size D. The audit team's rationale for the use of monetary unit sampling as opposed to other sampling techniques

D

Bama's accounts receivable were recorded at $600,000. Assume that the auditor determined a sample size of 20 customer accounts and prepared confirmations to be addressed to those customers. One misstatement was determined; an account recorded at $10,000 was confirmed to have a balance of $5,000. 37. What is the appropriate sampling interval? A. $60 B. $250 C. $500 D. $30,000

D