Auditing Chapter 8

A benefit of nonstatistical sampling as compared to statistical sampling is that the sample size can be significantly smaller, thereby making the audit more efficient. (T/F)

False

A benefit of statistical sampling as compared to nonstatistical sampling is that less auditor judgment is required because the auditor can leverage the power of probability theory. (T/F)

False

Projected errors for items in the top stratum equal basic precision multiplied by a confidence factor. (T/F)

False

The projected misstatement for items in the upper stratum is calculated as the sampling interval multiplied by the tainting percentage. (T/F)

False

The risk of incorrect acceptance of internal control reliability is the risk that the auditor will conclude that an internal control is not effective when the internal control is effective. (T/F)

False

Top-stratum items are population items whose book values exceed the sampling interval and are therefore excluded from the sample. (T/F)

False

When the auditor detects control deviations, it is best to evaluate them quantitatively rather than qualitatively. (T/F)

False

The division of a population into two or more subgroups is referred to as stratification. (T/F)

True

The population for MUS is defined as the number of dollars in the population being tested. Each dollar in the population has an equal chance of being chosen, but each dollar chosen is associated with a tangible item such as a customer's balance or an inventory item, so items with more dollars have a greater likelihood of being selected. (T/F)

True

When using nonstatistical sampling, the auditor cannot quantitatively assess the risk of making an incorrect inference based on the sample results. (T/F)

True

The application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.

Audit sampling

Define: Simple random sampling Systematic sampling Haphazard sampling Block sampling

Simple random sampling - every item in the population has an equal chance of being selected (statistical and non-statistical sampling application) Systematic sampling - dividing the number of physical units in the population by the sample size to determine a uniform interval (statistical) Haphazard sampling - approximating a random selection -> leads to selection bias (non-statistical) Block sampling - involves selecting a sample that consists of contiguous population items, selecting transactions by day or week (non-statistical)

A characteristic of the population of interest to the auditor.

Attribute

A statistical sampling method used to estimate the rate of control procedure failures based on selecting one sample and performing the appropriate audit procedure.

Attributes sampling

The amount of uncertainty associated with testing only a part of the population (sampling risk). Basic precision is calculated as the sampling interval multiplied by a confidence factor.

Basic precision

A sampling technique that involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week.

Block sampling

A broad construct referring to both qualitative and quantitative analysis tools that enable a decision maker to extract data, categorize it, identify patterns within it, and use it to enhance efficiency and effectiveness in decision making.

Data analytics

An anticipation of the deviation rate in the entire population. Also referred to as the expected failure rate.

Expected population deviation rate

A nonstatistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias, or special reason for including or omitting certain items from the sample.

Haphazard sampling

Items that are not in the top stratum.

Lower-stratum

A sampling method based on attributes estimation sampling but involving dollar misstatements rather than failure rates. MUS is often referred to as probability proportional to size (PPS) sampling.

Monetary unit sampling (MUS)

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

Nonsampling risk

The application of auditor judgment and experience in a sample application to assist the auditor in determining an appropriate sample size and in evaluating the sample results.

Nonstatistical sampling

A group of transactions or the items that make up an account balance for which the auditor wants to estimate some characteristic, such as the effectiveness of a control procedure or estimate the extent of misstatement in an account.

Population

A sampling selection method in which each item in the population has a probability of being included in the sample proportionate to the dollar value of the item. Monetary unit sampling uses this method to select a sample and is considered a subset of PPS sampling.

Probability proportional to size (PPS) sampling

The risk that the auditor will conclude that the account balance contains a material misstatement when the account balance actually does not contain a material misstatement.

Risk of incorrect acceptance of book value

The risk that the auditor will conclude that the state of internal controls is effective when internal controls are actually not effective (also referred to as the risk of assessing control risk too low).

Risk of incorrect acceptance of internal control reliability

The risk that the auditor will conclude that the account balance contains a material misstatement when the account balance actually does not contain a material misstatement.

Risk of incorrect rejection of book value

The risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective (also referred to as the risk of assessing control risk too high).

Risk of incorrect rejection of internal control reliability

population size divided by the sample size

Sampling interval

Monetary unit sampling (MUS)

Sampling method based on attributes sampling, but involving dollar misstatements rather than control failure rates. Several names: Dollar-unit sampling Probability proportional to size (PPS) sampling Combined attributes-variables sampling

The risk that the auditor's conclusion based on a sample might be different from the conclusion he or she would reach if the test were applied in the same way to the entire population.

Sampling risk

Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order.

Simple random sampling

Dividing the population into two or more subgroups.

Stratification

This sampling technique involves systematic sampling in which the first item is selected randomly from the interval.

Systematic random sampling

This sampling technique involves dividing the number of physical units in the population by the sample size to determine a uniform interval; a random starting point is selected in the first interval and one item is selected throughout the population at each of the uniform intervals after the starting point.

Systematic sampling

The percentage of misstatement present in a logical unit, such as the sample item's book value. The tainting percentage equals the amount of misstatement in the item divided by the item's recorded amount.

Tainting percentage

A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. In practical terms, a tolerable misstatement is the maximum amount of misstatement the auditor can accept in the population without requiring an audit adjustment or a qualified audit opinion.

Tolerable misstatement

A rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population. Also referred to as the tolerable failure rate.

Tolerable rate of deviation

Population items whose book values exceed the sampling interval and are therefore all included in the sample. The top stratum consists of all account balances exceeding a specific dollar amount.

Top stratum

Data analytics is a broad construct referring to both qualitative and quantitative analysis tools that enable a decision maker to extract data, categorize it, identify patterns within it, and use it to enhance efficiency and effectiveness in decision making. (T/F)

True

One strength of MUS is that it automatically selects a sample in proportion to an item's dollar amount, thus providing automatic stratification of the sample. (T/F)

True

Sampling risk is the risk that the auditor's conclusion based on a sample might be different from the conclusion that would be reached if the audit procedure were applied in the same way to the entire population. (T/F)

True

Which of the following statements is false with respect to basic precision? a. Basic precision represents the increase in the total estimated misstatement caused by the statistical properties of misstatements detected in the lower stratum. b. Basic precision is the amount of uncertainty associated with testing only a part of the population (sampling risk). c. Basic precision is the amount of error you are confident of not exceeding if no errors are detected in the sample. d. Basic precision is calculated as the sampling interval multiplied by a confidence factor.

a. Basic precision represents the increase in the total estimated misstatement caused by the statistical properties of misstatements detected in the lower stratum.

Which of the following applications are incorporated into statistical sampling? a. Probability and statistical inference with audit judgment. b. Hypergeometric distribution with audit risk. c. Binomial and confidence intervals. d. Random and haphazard selection.

a. Probability and statistical inference with audit judgment.

What is simple random sampling? a. Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order. b. A nonstatistical sample selection method that attempts to approximate a random selection by selecting sampling units without any conscious bias or special reason for including or omitting certain items from the sample. c. A sampling technique that involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week. d. It involves systematic sampling in which the first item is selected randomly from the interval.

a. Selecting a random sample by matching random numbers generated by a computer or selected from a random-number table with, for example, document numbers such as an invoice or a purchase order.

Refer to Exhibit 8.2 and determine which of the following phrases matches this definition: The risk that the auditor will conclude that internal controls are effective when internal controls are actually not effective. a. The risk of incorrect acceptance of internal control reliability. b. The risk of incorrect acceptance of book value. c. The risk of incorrect rejection of internal control reliability. d. The risk of incorrect rejection of book value. e. None of these.

a. The risk of incorrect acceptance of internal control reliability.

Which of the following correctly defines nonsampling risk? a. The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk. b. The risk that the auditor's conclusion based on a sample might be different from the conclusion he or she would reach if the test were applied in the same way to the entire population. c. The risk that the auditor will conclude that the state of internal controls is effective when internal controls are actually not effective (also referred to as the risk of assessing control risk too low). d. The risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective (also referred to as the risk of assessing control risk too high).

a. The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

An example of an attribute of interest to an auditor would be evidence that the client has matched vendor invoice details with the purchase order and receiving report before payment approval and noted that they match before authorizing a payment for the goods received. a. True b. False

a. True

Block sampling involves selecting a sample that consists of contiguous population items, such as selecting transactions by day or week. a. True b. False

a. True

One example of the circumstances in which the auditor might use MUS includes accounts receivable confirmations when credit balances are not significant. a. True b. False

a. True

Sampling can be used for both tests of controls and substantive tests of account balances and assertions. a. True b. False

a. True

The sample size of a MUS sample is a function of the following factors: (1) the risk of incorrect acceptance, (2) the ratio of expected misstatement to tolerable misstatement, and (3) the ratio of tolerable misstatement to the population. a. True b. False

a. True

When the total estimated misstatement exceeds the tolerable misstatement, the auditor has available several possible courses of action. Two of the options are expanding the sample or changing the audit objective to estimating the correct value. a. True b. False

a. True

For which of the following audit procedures would sampling be most appropriate? a. Inquiry. b. Confirmation. c. Analytics. d. Observation.

b. Confirmation.

For which of the following auditing procedures would sampling be most appropriate? a. Examining documents. b. Inquiring of management. c. Observing controls being completed. d. Conducting analytical procedures.

b. Examining Documents

Benford's Law helps predict frequency patterns of deviations of controls. a. True b. False

b. False

Top-stratum items are population items whose book values exceed the sampling interval and are therefore excluded from the sample. a. True b. False

b. False

The acronym KPI relates to which of the following phrases? a. Key Profitability Indicator b. Key Performance Indicator c. Known Performance Increment d. Known Profitability Increment

b. Key Performance Indicator

Which of these is the correct definition of sampling units? a. Sampling units refer to the group of transactions or the items that make up an account balance for which the auditor wants to estimate some characteristic. b. Sampling units refer to the individual items making up the population. c. Both of these are correct. d. Neither of these is correct.

b. Sampling units refer to the individual items making up the population.

Incorrect acceptance is directly related to which of the following? a. The efficiency of the audit. b. The ineffectiveness of the audit. c. The cost of the audit. d. All of the above.

b. The ineffectiveness of the audit.

The auditor should not pursue which of the following options when a control is ineffective? a. Identify a compensating control. b. Take a larger sample. c. Assess control risk as lower than originally planned and change the audit approach accordingly. d. Analyze the nature of the control deviations and identify implications.

c. Assess control risk as lower than originally planned and change the audit approach accordingly.

In analyzing misstatements using sampling techniques, the auditor should analyze the misstatements in what manners? a. Absolutely and proportionately. b. Haphazardly and randomly. c. Qualitatively and quantitatively. d. Methodically and systematically.

c. Qualitatively and quantitatively.

Which of the following activities would be most likely accomplished using sampling? a. Sorting a file to identify the largest items. b. Scanning for unusual transactions. c. Selecting items and tracing them back to source documents. d. Footing the file.

c. Selecting items and tracing them back to source documents.

Which of the following statements is false? a. Top-stratum items are population items whose book values exceed the sampling interval and are therefore all included in the sample. b. Because the auditor knows the amount of errors in the top stratum (all items were evaluated), no estimate of errors is required for the top stratum. c. Stratification of the population into several subpopulations generally reduces audit efficiency. d. Sampling evaluation reflects the sum of top-stratum misstatements and the projected misstatement derived from lower-stratum items. e. None of the above are false.

c. Stratification of the population into several subpopulations generally reduces audit efficiency.

Which of the following describes sampling risk? a. The auditor incorrectly applies sampling methodology. b. The sample size will be larger than needed. c. The sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect. d. The population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect.

c. The sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.

The results of MUS sampling will be unacceptable when the total estimated misstatement exceeds which of the following? a. The tolerable error rate. b. The expected deviation rate. c. The tolerable misstatement amount. d. The expected deviation amount.

c. The tolerable misstatement amount.

Which one of the following is a decision the auditor makes when using attributes sampling? a. The sampling unit. b. Period covered by testing. c. Completeness of the population. d. All of the above are auditor decisions.

d. All of the above are auditor decisions.

Which of the following is a factor that the auditor should consider when choosing between nonstatistical and statistical sampling? a. Whether the audit staff is adequately trained to use statistical sampling. b. Whether the population lends itself to a random-based selection method. c. Whether the auditor wants a statistical measure of the risk of drawing a wrong conclusion. d. All of the above.

d. All of the above.

Which one of the following is a proper course of action for the auditor when the total estimated misstatement exceeds the tolerable misstatement? a. The auditor can ask the client to correct the known misstatements. b. The auditor will analyze the detected misstatements for some common problems. c. The auditor can expand the sample. d. All of the above.

d. All of the above.

Which of the following statements is true of the tolerable rate of deviation? a. It is a rate of deviation set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set is not exceeded by the actual rate of deviation in the population. b. This term is sometimes referred to as the tolerable failure rate. c. The auditor's tolerable rate of deviation is the level at which the control's failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor's planned assessment of control risk in performing tests of account balances. d. All of these statements are true.

d. All of these statements are true.

Which one of the following is not a typical step used to implement an attributes sampling plan? a. Select and test the sample items. b. Define the attributes of interest and what constitutes failure(s). c. Evaluate the sample results. d. Define the nonstatistical sampling method that is most effective and efficient.

d. Define the nonstatistical sampling method that is most effective and efficient.

Which of these statements is false? a. A tolerable misstatement is a monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. b. A factual misstatement is a misstatement that has been specifically identified and about which there is no doubt. c. A misstatement is a dollar amount of misstatement, either intentional or unintentional, that exists in a transaction or financial statement account balance. d. If expected misstatement is smaller than tolerable misstatement, sampling is not appropriate unless it is used to estimate the size of the required adjustment to the account balance.

d. If expected misstatement is smaller than tolerable misstatement, sampling is not appropriate unless it is used to estimate the size of the required adjustment to the account balance.

Which of the following represents the calculation of the sampling interval? a. Tolerable error ÷ Risk of incorrect acceptance. b. Sample size ÷ Population size. c. Tolerable error × Risk of incorrect acceptance. d. Population size ÷ Sample size.

d. Population size ÷ Sample size.

Which of the following represents the calculation of the sampling interval? a. Tolerable error × Risk of incorrect acceptance. b. Sample size ÷ Population size. c. Tolerable error ÷ Risk of incorrect acceptance. d. Population size ÷ Sample size.

d. Population size ÷ Sample size.

Which statement is false regarding the use of sampling and data analytics tools by auditors? a. Auditors use sampling in testing account balances and assertions. b. Auditors use sampling in testing controls. c. Sampling techniques would be appropriate when an auditor wants to perform procedures such as examining documents, reperforming calculations, or sending confirmations. d. Sampling involves looking at all of the transactions that occurred during the period under audit.

d. Sampling involves looking at all of the transactions that occurred during the period under audit.

In attributes sampling, which of the following will not affect the determination of sample size? a. The tolerable rate of deviation. b. The expected population deviation rate. c. Sampling risk. d. The risk of incorrect rejection of book value.

d. The risk of incorrect rejection of book value.

To test the existence assertion for sales, which of the following data analytics tools might you use? a. Compare sales invoices with shipping documents. b. Compare sales invoices with sales contracts. c. Analyze data around year-end to ensure that sales are recorded in the correct period. d. Two of the above (a-c). e. All of the above (a-c).

e. All of the above (a-c).

Which of the following definitions is true? a. Factual misstatement—A misstatement that has been specifically identified and about which there is no doubt. b. Projected misstatement—The auditor's best estimate of the misstatement in a given population based on projecting the sample results to the population. c. Tolerable misstatement—A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. d. Expected misstatement—The level of misstatement that the auditor expects to detect. e. All of the above are true.

e. All of the above are true

In a MUS sample, the total estimated misstatement calculation includes which of the following amounts? a. The factual misstatement in the top-stratum. b. Basic precision. c. The projected misstatement in the lower stratum. d. An incremental allowance for sampling risk in the lower stratum. e. All of the above.

e. All of the above.

Which of the following questions would an auditor ask when sampling to perform tests of controls? a. Which population and sampling unit should be tested, and what characteristics should be examined? b. How many items should be selected for audit testing? c. Which items should be included in the sample? d. What inferences can be made about the overall population from the sample? e. All of the above.

e. All of the above.

Refer to Exhibit 8.4 and determine which of the following statements is true. a. In nonstatistical sampling, sample size is determined by auditor judgment. b. In statistical sampling, the sample must be randomly selected to give each unit in the population an equal chance to be included in the sample. c. In nonstatistical sampling, evaluation is based on auditor judgment and projections are based on sample results. d. In statistical sampling, the auditor is required to define acceptable risk in advance. e. All of these are true.

e. All of these are true.

Which of the following definitions is true? a. Factual misstatement—A misstatement that has been specifically identified and about which there is no doubt. b. Projected misstatement—The auditor's best estimate of the misstatement in a given population based on projecting the sample results to the population. c. Tolerable misstatement—A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. d. Expected misstatement—The level of misstatement that the auditor expects to detect. e. All of these are true.

e. All of these are true.

Which of these questions would an auditor ask when sampling to perform tests of controls? a. Which population and sampling unit should be tested, and what characteristics should be examined? b. How many items should be selected for audit testing? c. Which items should be included in the sample? d. What inferences can be made about the overall population from the sample? e. All of these.

e. All of these.

Benford's Law

helps predict frequency patterns of numbers