Chapter 10 Intro to Audit
An auditor uses nonstatistical ratio estimation to evaluate the results of a sample. The population book value was $2,000,000 and contained 350 items. The auditor selected 100 items with a book value of $500,000. The audited value of the sample was $480,000. The estimated audited value of the population is:
Answer: $1920000 (2,000,000 -(20,000/ 500,000 x 2,000,000)
Which of the following best illustrates the concept of sampling risk?
Answer: A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
In an audit of a nonissuer's financial statements, projected misstatement is: A)The likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented.B)An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.C)The only amount that the auditor considers in evaluating materiality and fairness of the financial statements.D)An auditor's best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit.
Answer: An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.
Holding all other factors constant, which of the following factors results in an increase in sample size for substantive tests?
Answer: An increase in the desired level of assurance that the tolerable misstatement is not exceeded by the actual amount of misstatement 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?
Answer: Decrease sample size for increased tolerable misstatement and increase sample size for increased assessed level of control risk
Which of the following factors would most likely cause an auditor to use audit sampling versus audit data analytics?
Answer: Evidence to support the audit test is not available in electronic form.
Which of the following best describes the distinguishing feature of statistical sampling?
Answer: It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data. This answer is correct because statistical sampling provides the auditor with a means of assessing sampling risk—the risk that the sample will not accurately reflect the population characteristics.
The auditor's decision about the risk of incorrect acceptance affects which of the following factors in a statistical PPS sample?
Answer: Reliability Factors
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?
Answer: The auditor selecting inappropriate auditing procedures.
When planning a classical variables sample, the risk of incorrect acceptance and the risk of incorrect rejection are related to what general factor that influences sample size?
Answer: The desired level of assurance from the sample.
The sampling unit in PPS (probability proportionate to size) sampling _______.
Answer: The individual dollar amount
Which of the following is the primary objective of probability proportional to sample size?
Answer: To identify overstatement errors.
When defining the population and sampling unit, sometimes an auditor must look for a reciprocal population. A reciprocal population is:
Answer: a population that is overstated if the population of interest is understated (or vice versa).
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?
Answer: incorrect Acceptance
Nonsampling risk:
Answer: is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.
Sampling risk:
Answer: is the risk that the sample chosen by the auditor is not representative of the population of transactions.
An auditor is testing accounts receivable for a client that has 1,000 customers with customer balances that range from $150 to $185,000. The auditor subdivided the receivables into three groups: group 1 has all customers with receivable balances between $185,000 and $100,000, group 2 has all customers with receivable balances between $100,000 and $25,000, and group 3 has all customers with receivable balances less than $25,000. The auditor then randomly selects customers out of each group. This is known as:
Answer: stratified sampling.
Audit sampling is defined as a situation where:
Answer: the auditor tests a representative group that is less than 100% of the population for the purpose of drawing a conclusion about the entire population.
The critical difference between statistical and nonstatistical sampling is:
Answer: the use of the laws of probability in statistical sampling to determine sample size and develop a confidence interval around the results of the sample.
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?
Answer:Stratify the cash disbursements population so that the unusually large disbursements are selected.Stratifying the population will allow the auditor to ensure inclusion of the disbursements. The sampling procedure (selecting less than all items) will then be applied only to the smaller disbursements.
