Module G: Variables Sampling

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. decrease.

Variables sampling methods can be used to estimate Amount of Misstatement Choice a Yes Choice b Yes Choice c No Choice d No True Account Balance Choice a Yes Choice b No Choice c Yes Choice d No A. Choice a B. Choice b C. Choice c D. Choice d

A. Choice a

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. Expected misstatement.

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. Increase the tolerable misstatement and examine additional items.

Which of the following is considered to be an advantage of monetary unit sampling compared to classical variables sampling? Selection of larger components A. Yes B. No C. No D. Yes Ability to identify understatements A. No B. No C. Yes D. Yes A. Option A B. Option B C. Option C D. Option D

A. Option A

The maximum amount by which the account balance or class of transactions can be misstated without influencing the decisions of third-party users is the: A. Tolerable misstatement. B. Expected misstatement. C. Audited value. D. True error.

A. Tolerable misstatement.

In which of the following situations would the use of classical variables sampling (as opposed to monetary unit sampling) be most appropriate? A. When a larger number of misstatements are anticipated. B. When overstatement errors (as opposed to understatement errors) are of more importance. C. When individual components and account balances are larger in comparison to the tolerable misstatement established by the auditor. D. When the auditor wishes to begin sampling during the interim period.

A. When a larger number of misstatements are anticipated.

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. 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 judgment or incorrect applications of generally accepted accounting principles were made is the: A. audited value. B. expected misstatement. C. Recorded balance. D. tolerable misstatement.

A. audited value.

Stratifying a population can also allow the auditor to perform ____ procedures to each stratum. A. different B. duplicate C. exact D. identical E. opposite F. similar

A. different

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. effectiveness of the audit.

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. haphazard selection.

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. 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 _____. 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. upper limit on misstatements; tolerable misstatement

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. Selecting customer balances in accounts receivable for confirmation.

If the upper limit on misstatements is calculated at $17,800 and the tolerable misstatement is $15,000, what is the minimum amount of adjustment necessary for the audit team to issue an unmodified opinion on the client's financial statements? A. $0. B. $2,800. C. $4,800. D. $14,800.

B. $2,800.

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. $540,000

_____ 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 (MUS)

B. Classical variables

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. Incorrect acceptance.

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

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. The auditor should count the logical unit as two selections and proceed as normal.

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. The extent to which an internal control procedure is not functioning as intended.

One of the primary advantages of monetary unit sampling is the fact that A. It is an effective method of sampling for evidence of understatement in asset accounts. B. The sample selection automatically achieves high-dollar selection and stratification. C. The sample selection provides for including a representative number of small-value components. D. Expanding the sample for additional evidence is relatively simple.

B. The sample selection automatically achieves high-dollar selection and stratification.

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. Tolerable misstatement: No; Expected misstatement: Yes

Strata may be ______to provide an estimate of the population as a whole. A. blocked B. combined C. divided D. estimated E. generated F. replaced

B. combined

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. incorrect acceptance and incorrect rejection.

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 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. inventory balance is materially misstated.

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. population size; sample size

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

C. 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)? A. MUS methods typically include transactions or components reflecting relatively large dollar amounts. B. MUS methods are more effective in identifying overstatement errors. C. MUS methods provide a conservative (higher) estimate of misstatement in the account balance or class of transactions. D. MUS methods typically result in relatively small sample sizes.

C. MUS methods provide a conservative (higher) estimate of misstatement in the account balance or class of transactions.

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. Monetary unit sampling.

Which of the following major stages of the audit is most closely related to variables sampling? A. Determining preliminary levels of performance materiality. B. Performing tests of controls procedures. C. Performing substantive procedures. D. Searching for the possible occurrence of subsequent events.

C. Performing substantive procedures.

If the _______ is less than the _______, the audit team would conclude that the account balance is fairly stated. A. Projected misstatement; tolerable misstatement. B. Tolerable misstatement; projected misstatement. C. Upper limit on misstatements; tolerable misstatement. D. Tolerable misstatement; upper limit on misstatements.

C. Upper limit on misstatements; tolerable misstatement.

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. actual 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. A. sample estimate; accept B. sample estimate; reject C. tolerable misstatement; accept D. tolerable misstatement; reject

C. tolerable misstatement; accept

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. tolerable misstatement; upper limit on misstatements

Auditors often ______ a population before computing the required sample size. A. block B. combine C. generate D. select E. stratify F. vouch

E. stratify

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? A. Conclude that the account balance is fairly stated, since the expected misstatement is greater than the expected misstatement. B. Conclude that the account balance is not fairly stated, since the expected misstatement is greater than the tolerable misstatement. C. Conclude that the account balance is not fairly stated, since the expected misstatement is less than the expected misstatement. D. Conclude that the account balance is fairly stated, since the expected misstatement is less than the tolerable misstatement.

D. Conclude that the account balance is fairly stated, since the expected misstatement is less than the tolerable misstatement.

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. Determining whether the client's accounts receivable balance is correctly recorded.

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. Lower levels of tolerable misstatement.

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. 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 5 percent, 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. 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.

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. The risk of incorrect acceptance may ultimately result in the auditor incorrectly issuing an unmodified opinion on the client's financial statements.

When evaluating the results of an MUS application, the audit team should compare the upper limit on misstatements to the A. Expected misstatement. B. Incremental allowance for sampling risk. C. Projected misstatement. D. Tolerable misstatement.

D. Tolerable misstatement.

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. misstated; fairly stated

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. population variability is lower.

Stratified sample results can be used _______or combined. A. never B. once C. rarely D. separately E. together F. twice

D. separately

Stratification is the technique of dividing a population into subgroups called ______. A. blocks B. controls C. groups D. strata E. systems F. vouchers

D. strata

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

D. stratification.

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. variables sampling.