Quiz 5

Which of the following factors is considered in determining the sample size for a test of controls?

Both expected and tolerable deviation rates

In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample?

Number of items in the population

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?

An increase in tolerable misstatement would decrease the sample size; an increase in assessed level of control risk would increase the sample size.

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:

$10,000.

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 audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:

$2,000.

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:

$2,000.

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 a 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% 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 achieved upper precision limit to be 8%. The allowance for sampling risk was:

4.5%.

Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?

An illegal payment to a foreign official that was not recorded

Which of the following statements about materiality is false?

An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?

Attribute

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 misstatements

Both I and II

When relating the identified risks to relevant assertions, the auditor, using professional judgment and materiality, should consider: I. whether the risks are of a magnitude that could result in a material misstatement of the financial statements. II. the likelihood that the risks could result in a material misstatement of the financial statements.

Both I and II

Which of the following types of risks likely would increase if accounts receivable are confirmed three months before year-end?

Detection

Which of the following statements is correct concerning statistical sampling in tests of controls?

Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the: I. likely rate of deviations and II. allowable risk of assessing control risk too high.

I only

The table below depicts an auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate.

III.

For which of the following audit tests would a CPA most likely use attribute sampling?

Identifying entries posted to incorrect accounts

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Inclusion of zero and negative balances generally does not require special design considerations.

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 sampling types of risks?

Incorrect acceptance

Which of the following is not a component of internal control?

Inherent risk

Inherent risk and control risk differ from detection risk in which of the following ways?

Inherent risk and control risk exist independently of the audit.

For which of the following audit tests would an auditor most likely use attribute sampling?

Inspecting employee timecards for proper approval by supervisors

For which of the following audit tests would an auditor most likely use attribute sampling?

Inspecting purchase orders for proper approval by supervisors

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

Make a preliminary judgment about materiality

Which of the following statements is correct concerning materiality in a financial statement audit?

Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate?

Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in three deviations when the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?

Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate

Which of the following statements about audit sampling risks is correct for a nonissuer?

Nonsampling risk can arise because an auditor failed to recognize misstatements.

While performing an audit, the auditor should allow for some misstatements of lesser value than the assessed materiality level so that in total the misstatements might not result in a material misstatement to the financial statements. In order to do so, the auditor sets which of the following lower than the materiality level(s)?

Performance materiality

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

Preliminary judgments about materiality levels

In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. The auditor discovered $4,000 in overstatement in the sample. The company's materiality is $65,000. The tolerable misstatement for purchases is $50,000. What should the auditor do next?

Project the detected error to the entire population

An auditor is performing substantive tests of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicated numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate?

Ratio estimation

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?

Stratify the cash disbursements population so that the unusually large disbursements are selected

Which of the following audit procedures most likely will involve sampling?

Testing of process for approval of credit to customers for sales on account

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?

Tests of controls and tests of details

Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar-unit sampling?

The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.

The degree of audit risk always present in an audit engagement is referred to as a combination of nonsampling and sampling risk. Which of the following is an example of nonsampling risk?

The auditor selecting inappropriate auditing procedures

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?

The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

Which of the following would be a consideration in planning an auditor's sample for a test of controls?

The auditor's allowable risk of assessing control risk is too low.

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?

The entity enters into derivative transactions as hedges.

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

The entity's annualized interim financial statements

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

The entity's financial statements of the prior year

Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls?

The population size has little effect on the sample size.

Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls?

The population size has little or no effect on the sample size.

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?

The sample size would be lower.

Which of the following objectives is achieved when an auditor decides to employ classical variable sampling?

To determine the inventory quantities on hand

Which of the following is the primary objective of probability proportional to sample size?

To identify overstatement errors

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

Variables sampling

The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is:

a payroll register entry.

The expected population deviation rate of client billing errors is 3%. The auditor has established a tolerable rate of 5%. In the review of client invoices the auditor should use:

attribute sampling.

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:

be related to preliminary judgments about materiality levels.

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines:

both the variability in the dollar amounts of inventory items and the risk of incorrect acceptance.

An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it:

changes the company's operating results from a net loss to a net income.

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:

control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

decrease detection risk.

The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as:

detection risk.

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:

does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:

effectiveness of the audit.

The objective of a dual-purpose test of details of transactions performed as tests of controls is to:

evaluate whether controls operated effectively.

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to:

find smaller errors.

An auditor is selecting vouchers for testing an entity's internal control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher:

has been properly voided.

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:

incorrect rejection.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

individual invoices.

In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

individual invoices.

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 were:

initially concealed by a forged document.

When planning an examination, an auditor should:

make preliminary judgments about materiality levels for audit purposes.

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:

measure the sufficiency of the audit evidence obtained.

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was:

more than the deviation rate in the auditor's sample.

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to:

perform the planned auditing procedures closer to the balance sheet date.

An auditor determines that materiality for an audit is to be $X. The auditor determines that some misstatements will exist in his or her audit findings. As a result, the auditor calculates a new amount of 50% of X so that individual or in the aggregate misstatements do not quantitatively exceed the materiality level. This reduced calculation is known as:

performance materiality.

During the performance of an audit, the auditor has encountered several misstatements that could affect the financial statements. Because the auditor set the maximum amount of misstatements allowed at less than the materiality level the auditor did not have to make any adjustments to the financial statements. The level established for misstatements is an example of:

performance materiality.

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:

precision.

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

provide an objective basis for quantitatively evaluating sample risk.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:

receiving reports.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of inherent and control risk is high, an auditor would probably:

request the client to schedule the physical inventory count at the end of the year.

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the:

sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:

shipping document file.

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:

the allowable risk of assessing control risk too low.

The use of the ratio estimation sampling technique is most effective when:

the calculated audit amounts are approximately proportional to the client's book amounts.

An auditor may decide to increase the risk of incorrect rejection when:

the cost and effort of selecting additional sample items is low.

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that:

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.

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:

the population has highly variable recorded amounts.

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1 million. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:

there is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:

tolerable deviation rate.

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 a 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and seven of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:

tolerable rate (7%) was less than the achieved upper precision limit (8%).

The sample size of a test of controls varies inversely with:

tolerable rate.