Lesson 7: Audit Sampling & Statistical Testing

If analytical procedures are performed with no indications of likely​ misstatements, ARIA will​ ________ and the sample size will​ ________. A. ​increase; decrease B. ​decrease; decrease C. ​decrease; increase D. remain the​ same; increase

increase; decrease

If the auditor decides to assess control risk at the moderate level in a private company​ audit, when in previous years the auditor set control risk at the maximum​ level, then tests of controls for the current year would be A. not performed. B. unchanged from prior planned settings. C. reduced in number. D. increased in number.

increased in number

One of the causes of nonsampling risk is A. inadequate sample size. B. choosing the wrong sample size. C. exceptions being found in the sample. D. ineffective audit procedures.

ineffective audit procedures

There is​ a(n) ________ relationship between acceptable risk of overreliance and planned sample size. A. exponential B. proportional C. direct D. inverse

inverse

The relationship of tolerable exception rate​ (TER) to sample size is A. inverse​ (larger TER​ = smaller​ sample). B. direct​ (larger TER​ = larger​ sample). C. variable​ (sometimes larger, sometimes​ smaller). D. not determinable.

inverse​ (larger TER​ = smaller​ sample).

If an auditor desires a greater level of assurance in auditing a​ balance, the acceptable risk of incorrect acceptance A. is reduced. B. is increased. C. is not changed. D. may be reduced or increased depending upon other circumstances.

is reduced

The most serious shortcoming of the haphazard sample selection method is A. it is time consuming to use. B. it is difficult to remain completely unbiased in the selection. C. it is not subject to statistical sampling methods. D. it is costly to use.

it is difficult to remain completely unbiased in the selection.

Place the following steps in their proper​ order: 1. Analyze exceptions. 2. Select the sample. 3. Define attributes and exception conditions. 4. State the objectives of the audit test. 5. Specify the tolerable exception rate. A. ​1, 2,​ 3, 4, 5 B. ​1, 3,​ 2, 4, 5 C. ​4, 3,​ 1, 2, 5 D. ​4, 3,​ 5, 2, 1

4,3,5,2,1

Tolerable misstatement is used to A. Determine sample size Select the sample Evaluate results No No Yes B. Determine sample size Select the sample Evaluate results Yes No Yes C. Determine sample size Select the sample Evaluate results Yes Yes No D. Determine sample size Select the sample Evaluate results No Yes No

Determine sample size Select the sample Evaluate results Yes No Yes

Which of the following is not a phase in the planning of both statistical and nonstatistical​ sampling? A. Evaluate the results. B. Select the sample and perform the tests. C. Plan the sample. D. Determine the probability that fraud has occurred.

Determine the probability that fraud has occurred

Attributes sampling would be an appropriate method to use on which one of the following procedures in an audit​ program? A. Review the aged schedule of accounts receivable to determine if receivables from officers are included. B. Observe whether the duties of the accounts receivable clerk are separate from handling cash. C. Examine a sample of duplicate sales invoices for credit approval by the credit manager. D. Review sales transactions for large and unreasonable amounts.

Examine a sample of duplicate sales invoices for credit approval by the credit manager.

Audit sampling can be applied for reviewing sales transactions for large​ and/or unusual​ amounts, and also for observing whether the duties and responsibilities of the receivables clerk are separate from the handling of cash​ (a test of​ control).

False

When generating random​ numbers, the random numbers must be obtained with replacement.

False

Which of the following results in a larger sample​ size? A. Increase the estimated population exception rate and increase the tolerable exception rate. B. Decrease the estimated population exception rate and decrease the tolerable exception rate. C. Increase the estimated population exception rate and decrease the tolerable exception rate. D. Decrease the estimated population exception rate and increase the tolerable exception rate.

Increase the estimated population exception rate and decrease the tolerable exception rate.

When the computed upper exception rate​ (CUER) is greater than the tolerable exception rate​ (TER), it is necessary for the auditor to take specific action. Which of the following courses of action would be most difficult to​ justify? A. Write a letter to management which outlines the control deficiencies. B. Revise the assessed control risk upward. C. Reduce the tolerable exception rate so as to accept the sample results. D. Expand the sample size and perform more tests.

Reduce the tolerable exception rate so as to accept the sample results.

Which of the following statements is most correct concerning the quantification of sampling​ risk? A. Sampling risk can be quantified only when nonprobabilistic selection techniques are used to select the sample. B. Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample. C. Sampling risk cannot be quantified. D. None of the above is correct.

Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample.

Tests for rates of occurrence are appropriately used in all but which of the following​ situations? A. Testing of internal controls Substantive testing of transactions Substantive testing of details of balances Yes Yes Yes B. Testing of internal controls Substantive testing of transactions Substantive testing of details of balances No Yes Yes C. Testing of internal controls Substantive testing of transactions Substantive testing of details of balances No No Yes D. Testing of internal controls Substantive testing of transactions Substantive testing of details of balances Yes Yes No

Testing of internal controls Substantive testing of transactions Substantive testing of details of balances Yes Yes No

If an auditor concludes that internal controls are likely to be​ effective, the preliminary assessment of control risk can be​ reduced, leading to which of the following impacts on the acceptable risk of incorrect​ acceptance? A. The acceptable risk of incorrect acceptance will be reduced. B. The acceptable risk of incorrect acceptance will be eliminated. C. The acceptable risk of incorrect acceptance will not be impacted. D. The acceptable risk of incorrect acceptance will be increased.

The acceptable risk of incorrect acceptance will be increased.

Which of the following statements is correct when dealing with sampling for exception​ rates? A. The term exception refers to both deviations from the​ client's control procedures and amounts that are not monetarily correct. B. The actual population exception rate is the same as the sample exception rate. C. In using audit sampling for exception​ rates, the auditor is most concerned with the confidence interval. D. When used with​ sampling, the term deviation is synonymous with the term exception.

The term exception refers to both deviations from the​ client's control procedures and amounts that are not monetarily correct.

You are determining the significance of the​ following: you set a​ 5% risk of assessing control risk too low and your computation of the upper deviation risk is​ 7%. What could you​ conclude? A. There is a​ 5% chance the deviation rate in the population is less than​ 7%. B. There is a​ 95% chance the deviation rate in the population exceeds​ 95%. C. There is a​ 5% chance the deviation rate in the population exceeds​ 7%. D. There is a​ 95% chance the deviation rate in the population is less than​ 5%.

There is a​ 5% chance the deviation rate in the population exceeds​ 7%.

What is the purpose of applying stratified sampling to a​ population? A. To avoid items that may contain misstatements To emphasize certain items and deemphasize others Yes Yes B. To avoid items that may contain misstatements To emphasize certain items and deemphasize others No Yes C. To avoid items that may contain misstatements To emphasize certain items and deemphasize others Yes No D. To avoid items that may contain misstatements To emphasize certain items and deemphasize others No No

To avoid items that may contain misstatements To emphasize certain items and deemphasize others No Yes

When selecting a sample size for substantive tests of balances which​ factor, other factors being​ equal, would result in a larger​ sample? A. an increase in the acceptable risk of incorrect acceptance B. small expected misstatements C. an increase in the tolerable misstatement D. a decrease in the tolerable misstatement

a decrease in the tolerable misstatement

Simple random sampling A. requires both input and output parameters to be set when using a random number generator. B. is a probabilistic sampling method. C. is used when there is a need to emphasize one or more types of population items. D. is generally used with replacement sampling.

a probabilisitc sampling method

The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the A. acceptable risk of overreliance. B. finite correction factor. C. estimated population exception rate. D. tolerable exception rate.

acceptable risk of overreliance

The​ auditor's principal objective when using a sample of tests of details of balances is whether the A. transactions and account balances being audited are fairly stated. B. controls being tested are operating effectively. C. transactions being audited are free of misstatements. D. account balance being audited is fairly stated.

account balance being audited is fairly stated

When defining the​ population, A. the auditor may generalize only about the population that has been sampled. B. it may be necessary to define separate populations for different audit procedures. C. auditors can define the population to include any items they want. D. all of the above

all of the above

Which of the following is an accurate statement regarding​ sampling? A. A 95 percent confidence level provides a 5 percent sampling risk. B. The auditor can perform the audit tests only after the sample items are selected. C. The purpose of planning the sample is to make sure that the audit tests are performed in a manner that provides the desired sampling risk and minimizes the likelihood of nonsampling errors. D. All of the above are accurate statements.

all of the above are accurate statements

The acceptable risk of overreliance A. is normally assessed at a high level when auditing an accelerated filer public company. B. and the control risk will be assessed as low for audits where there is extensive reliance on internal controls. C. and the extent of tests of controls depend on assessed control risk for accelerated filer public companies. D. does not impact the effectiveness of the audit

and the control risk will be assessed as low for audits where there is extensive reliance on internal controls.

In attributes​ sampling, an estimate of the expected population exception rate is necessary to plan the sample size. The relationship of expected population exception rate​ (EPER) to sample size is A. a variable​ (sometimes small, sometimes​ large) dependent on other factors present. B. direct​ (small EPER​ = small​ sample). C. inverse​ (small EPER​ = large​ sample). D. indeterminate.

direct(small EPER = small Sample)

Which of the following is the exception rate that the auditor expects to find before​ testing? A. sample exception rate B. estimated population exception rate C. tolerable exception rate D. computed exception rate

estimated population exception rate

The sample exception rate equals

number of exceptions in the sample divided by the sample size

There are three phases in both statistical and nonstatistical sampling. The first phase is to A. plan the sample. B. select the sample. C. generate random numbers for the sample. D. evaluate the results.

plan the sample

When planning the audit​ sample, the​ ________ is​ (are) those items about which the auditor wishes to generalize. A. sampling unit B. attributes C. population D. sample

population

Which of the following would have the least impact in determining sample​ size? A. acceptable risk of overreliance B. tolerable exception rate C. risk of assessing control risk too low D. population size

population size

An advantage of using statistical sampling techniques is that such techniques A. define the values of precision and reliability required to provide audit satisfaction. B. eliminate the need for judgmental decisions. C. quantify sampling risk. D. have been established in the courts to be superior to judgmental sampling.

quantify sampling risk

A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a A. statistical sample. B. random sample. C. representative sample. D. judgment sample.

random sample

Whenever auditors use​ sampling, they risk making incorrect conclusions about the population. The risk that the auditor concludes that controls are more effective than they actually are is known as the A. risk that the sample is not representative of the population. B. risk of underreliance. C. risk that the sample conclusions cannot be useful because of nonprobability sampling. D. risk of overreliance.

risk of overreliance

A principal advantage of statistical methods of attributes sampling over nonstatistical methods is that they provide a quantifiable basis for establishing the A. expected population exception rate. B. sample size. C. risk of assessing control risk too low. D. tolerable exception rate.

sample size

When errors are found in a​ sample, auditors in practice generally assume A. that the actual sample errors are representative of the population errors. B. that the population errors are smaller than the sample errors. C. that the population errors cannot be determined. D. that the population errors are larger than the sample errors.

that the actual sample errors are representative of the population errors.

The risk the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance under audit is greater than the tolerable misstatement is A. the acceptable risk of incorrect acceptance. B. the upper bound. C. the tolerable risk. D. the lower bound.

the acceptable risk of incorrect acceptance.

In using audit sampling for exception rates A. sampling error is the likelihood that the auditor will miss a monetary misstatement. B. the auditor wants to know the most the exception rate is likely to be. C. the upper limit of the interval estimate is known as the sampling risk. D. the computed upper exception rate​ (CUER) cannot be considered in the context of specific audit objectives.

the auditor wants to know the most the exception rate is likely to be.

Which of the following must be set prior to testing a​ sample? A. achieved upper precision limit B. tolerable exception rate C. sample exception rate D. computed exception rate

tolerable expectation rate

The exception rate the auditor will permit in the population and still be willing to conclude that the control is operating effectively is the A. acceptable risk of overreliance. B. sample exception rate. C. tolerable exception rate. D. estimated population exception rate.

tolerable risk of overreliance

Acceptable risk of overreliance is normally lower for a public company audit than a private company audit.

true

An auditor using nonstatistical sampling cannot formally measure sampling error.

true

It is virtually impossible to reduce sampling risk to zero.

true

Which of the following methods of sample selection is appropriately used when selecting a random​ sample? A. ​Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes Yes B. ​Auditor's judgmental selection of items Use of random number generators Generalized audit software Yes No No C. ​Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes No D. ​Auditor's judgmental selection of items Use of random number generators Generalized audit software Yes No Yes

​Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes Yes