Audit Module F
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:
$15,000
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 balance 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
$280,000
SCA is auditing a client's accounts receivable balance recorded at $10 million using MUS. The following parameters have been established for this account: -Tolerable misstatement = $500,000 -Expected misstatement = $100,000 -Risk of incorrect acceptance = 10 percent. Which of the following statements would not be true with respect to the sample size in this situation?
Decreasing tolerable misstatement from $500,000 to $200,000 (holding all other factors constant) will reduce the sample size by 331 accounts
Which of the following is not true with respect to the risk of incorrect acceptance?
The risk of incorrect acceptance exposes the auditor to an efficiency loss
Which of the following factors has a direct relationship with sample size in a variables sampling application?
Tolerable misstatement: No; Expected misstatement: Yes
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?
162
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 value for inventory?
$200,000
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 froma sample and found an audited value of $24,600. the sample had a recorded balance of $30,000. If the entire inventory contained 2,400 items and the total recorded balance of the inventory was $480,000, the estimated account balance using nonstatistical methods is:
$393,600
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 balance of $40,000. If the entire inventory contained 3,000 items and the total recorded balance of the inventory was $500,000, the estimated account balance using nonstatistical estimation and projecting the error based on number of items examined is:
$450,000
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 balance of $30,000. If the entire inventory contain 2,400 items and the total recorded balance of the inventory was $480,000, the estimated account balance using mean per unit estimation is:
$492,000
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
$5,000
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?
$540,000
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:
$6,000
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 percent, the auditors determined a precision of $40,000. If the tolerable misstatement is $50,000, which of the following is not true?
A 90 percent probability exists that the true population value falls between $460,000 and $540,000
Which of the following statements is true regarding classical variables sampling?
A very small dollar account has the same probability of being selected for examination as a very large dollar account
Which of the following is not considered in establishing the sample size in a monetary unit sampling application?
All of these choices are considered
Which of the following would not result in a lower level of the risk of incorrect acceptance?
An increase in the acceptable level of audit risk from 5 percent to 10 percent
Auditor B is conducting a monetary unit sampling application on C Company's accounts receivable having a recorded balance of $10,000,000 and established a tolerable misstatement of $500,000, expected misstatement of $100,000, and a risk of incorrect acceptance of 5%. Which of the following independent modifications to these parameters would result in the largest increase in sample size?
An increase in the expected misstatement to $200,000
In a classical variables sampling application, which of the following outcomes would typically not result from a stratifying population?
An increase in the standard deviation
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?
Any method she believes will result in a representative sample
How does the auditor typically determine the appropriate level of the risk of incorrect rejection when using classical variables sampling?
Based on the anticipated cost of conducting additional substantive procedures
How does the auditor establish the level of tolerable misstatement in a variables sampling application?
Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals
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?
Basic allowance for sampling risk
Which of the following components of the upper limit on misstatements is affected by misstatements detected during the audit examination?
Basic allowance for sampling risk: no; Incremental allowance for sampling risk: yes
MES is auditing a client's accounts receivable balance recorded at $2 million using MUS. The following parameters have been established for this account: -Tolerable misstatement = $200,000 -Expected misstatement = $100,000 -Risk of incorrect acceptance = 5 percent. Which of the following statements would not be true with respect to the sample size in this situation?
Because the size of the population is relatively large, this element does not affect sample size
Which of the following is not true with respect to the use of monetary unit sampling (MUS)?
Compared to classical variables sampling, MUS allows the auditors to more effectively control their exposure to sampling risk
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 balance 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 balance of $54,000 and an audited value of $52,000. What conclusion did Romo draw regarding the account balance?
Conclude that the account balance is fairly stated, since the estimated misstatement is less than the tolerable misstatement
In which of the following circumstances would the auditor most likely use variables sampling?
Determining whether the client's accounts receivable balance is correctly recorded
Cub Company's inventory was recorded at $1,000,000. Assume that Wrigley, CPA's desired risk of incorrect acceptance was 5%, which of the following levels of expected misstatement and tolerable misstatement is not associated with the correct sample size?
Expected misstatement = $10,000, Tolerable misstatement = $50,000, 120 items
Which of the following is not a correct relationship between a factor and sample size in a monetary unit sampling application?
Expected misstatement; Inverse
Dawson Company's inventory was recorded at $2,500,000. Assume that Andre, CPA established a tolerable misstatement of 10% of the recorded balance and, based on previous audits, expected misstatements of 4% in the accounts. If Andre's desired risk of incorrect acceptance was 5%, which of the following would not be true with respect to the necessary sample size and sampling interval in a monetary unit sampling application?
Holding all other factors constant, an increase in the risk of incorrect acceptance to 10% would result in an increase in the sampling interval to $12,239
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?
Incorrect acceptance
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?
Increase the tolerable misstatement and examine additional items
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?
Incremental allowance for sampling risk
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?
It reduces her expected sample size
In which of the following situations would the auditor be more likely to use monetary unit sampling as opposed to classical variables sampling?
Larger expected misstatement: no; Concern with overstatements: yes
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?
Lower levels of tolerable misstatement
Which of the following represents a major difference in the use of monetary unit sampling (MUS) and classical variables sampling?
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
How does monetary unit sampling (MUS) ensure that larger dollar components are selected for examination?
MUS defines the sampling unit as an individual dollar within an account balance or class of transactions
Which of the following is not an advantage associated with monetary unit sampling (MUS)?
MUS methods provide a conservative (higher) estimate of misstatement in the account balance or class of transactions
Which of the following statements is true regarding performance materiality in a monetary unit sampling application?
Performance materiality provides auditors with a conservative measure that considers the presence of undetected misstatements
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)?
RIA = 5 percent, EM = $2,000, TM = $10,000, PS = $100,000
Holding other factors constant in a classical variables sampling application, an increase in which of these factors will cause sample size to increase?
Risk of incorrect rejection: no; Risk of incorrect acceptance: no
Which of the following would be the most likely situation in which an auditor would use variables sampling?
Selecting customer balances in accounts receivable for confirmation
Which of the following is considered to be an advantage of monetary unit sampling compared to classical variables sampling?
Selection of larger components: yes; Ability to identify understatements: no
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?
Standard deviation: yes; Risk of incorrect acceptance: no
What is one of the primary benefits of stratifying a population?
Stratifying the population allows the auditor to reduce the necessary sample size
As the auditors' assessments of control risk and analytical procedures risk decrease, which of the following statements is true?
The allowable risk of incorrect acceptance will increase
In a variables sampling application, which of the following would not ordinarily be documented by the audit team?
The audit team's rationale for the use of monetary unit sampling as opposed to other sampling techniques
What is the auditor's normal course of action if a "logical unit" is selected twice in monetary unit sampling?
The auditor should count the logical unit as two selections and proceed as normal
Which of the following is the least likely outcome when the upper limit on misstatements exceeds the tolerable misstatement?
The auditor would conclude that the account balance is fairly stated
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 5percent, 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?
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
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 10percent, 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?
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
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?
The estimated account balance would be $825,000
Which of the following would not be estimated using variables sampling?
The extent to which an internal control procedure is not functioning as intended
Which of the following is true with respect to the risk of incorrect acceptance?
The risk of incorrect acceptance has an inverse relationship with sample size
Why is the auditor more concerned with controlling the exposure to the risk of incorrect acceptance than with the risk of incorrect rejection?
The risk of incorrect acceptance may ultimately result in the auditor incorrectly issuing an unmodified opinion on the client's financial statements
Which of the following does not represent a difference between the use of various approaches to classical variables sampling?
The use of mean-per-unit estimation requires a reliable measure of recorded balance while the use of difference and ratio estimation do not
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?
They have a 100 percent probability of being selected
Which of the following is not true with respect to the risk of incorrect acceptance?
This risk provides the auditor with an efficiency loss
Using AICPA monetary unit sample size tables, which of the following combination of factors would result in the smallest sample size for accounts receivable with a recorded balance at $3,000,000?
Tolerable misstatement = $150,000; Expected misstatement = $30,000; Risk of incorrect acceptance = 10%.
Using AICPA monetary unit sampling sample size tables, which of the following combination of factors would result in the largest sample size for accounts receivable with a recorded balance of $5,000,000?
Tolerable misstatement = $250,000; Expected misstatement = $100,000; Risk of incorrect acceptance = 5%
Which of the following expresses the relationship between changes in the factors and changes in sample size in variable sampling?
Tolerable misstatement: inverse; Expected misstatement: direct; Risk of incorrect rejection: inverse
Which of the following statements is not true regarding variables sampling?
Variables sampling is appropriate when the distribution of the population is binary in nature
Which of the following is not true with respect to the effect of the population standard deviation in a classical variables sampling application?
When the standard deviation is larger, the audit team is more likely to select a representative sample
The total amount of misstatement identified in a sample is referred to as the:
actual misstatement
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:
allowance for sampling risk
The upper limit on misstatements is:
an adjustment of the sample estimate of misstatement to reflect the desired level of sampling risk
The amount at which an item would be recorded assuming no mistakes in judgement or incorrect applications of generally accepted accounting principles were made is the:
audited value
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?
basic allowance for sampling risk
______ 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
classical variables
All other factors being equal, as the risk of incorrect acceptance and tolerable misstatement increase, the sample size will:
decrease
The risk of incorrect acceptance relates to the:
effectiveness of the audit
Which of the following factors is most likely established based on the results of prior audit examinations?
expected misstatement
Cruz, CPA, decided to use nonstatistical sampling to examine the accounts payable balances of Maverick Inc. Based on his professional judgement, Cruz judgmentally selected sample invoices from a file, but did so without any intentional bias. The selection method used by Cruz was
haphazard selection
When performing substantive procedures, auditors run the sampling risk(s) of:
incorrect acceptance and incorrect rejection
As the expected misstatement is large relative to the tolerable misstatement, the audit team would most likely
increase the sample size
Jones, CPA, used a classical variables sampling application to examine the inventory balance of XYZ Company. The recorded balance 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
inventory valance is materially misstated
Incorrect rejection occurs when the auditor concludes that the account balance is _____ when in fact it is ______
misstated; fairly stated
Which of the following selection methods selects individual dollars within an account balance or class of transactions for examination?
monetary unit sampling
Under monetary unit sampling, the sampling interval is determined by dividing the _____ by the _______
population size; sample size
In a classical variables sampling application, the sample size will be smaller when the:
population variability is lower
In a classical variables sampling, a measure of the variability of the population is known as the
standard deviation
The process of subdividing a population into more homogenous subgroups is known as:
stratification
Which of the following courses of action would an auditor 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 is found by dividing the amount of misstatement noted in a logical unit by the recorded amount of that logical unti?
tainting percentage
Which component of the expanded audit risk model is most closely associated with the risk of incorrect acceptance?
test of details risk
An auditor may decide to increase the risk of incorrect rejection when:
the cost and effort of selection additional items is low
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?
tolerable misstatement
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.
tolerable misstatement; accept
When the ______ exceeds the ______, the audit team is exposed to the risk of incorrect acceptance.
tolerable misstatement; upper limit on misstatements
When conducting variables sampling, auditors typically examine
transactions of components of the account balance or class of transactions
The auditor's sample would indicate that the client's account balance is fairly stated when the _______ is less than the _____
upper limit on misstatements; tolerable misstatement
The sampling method used to examine a population when the auditor wants to estimate a continuous amount (or value) of the population is:
variables sampling