Module F
The procedures for statistical evaluation of tests of controls with the AICPA Sample Evaluation Tables would not include the following step
Identify the population deviation rate
The audit team is planning to examine a sample of control policies and procedures. Assume that the audit team establishes a tolerable rate of deviation of 6% and, based on past audits, estimates the expected population deviation rate to be 2%. Which of the following is not true with respect to the impact of the risk of overreliance on sample size?
If the audit team reduced the risk of overreliance from 10% to 5%, the resultant decrease in the sample size would be 39 items
What would not be an example of nonsampling risk in an attributes sampling application
Incorrectly estimating the expected population deviation rate
Carson, CPA, judged that his test of controls of the company's 10,000 sales transactions should be based on a risk of overreliance of 10%, a tolerable rate of deviation of 8%, and an expected population deviation rate of 3.75%. Using the AICPA Sample Size tables, which of the following modifications would not affect Carson's sample size?
Increase in the expected population deviation rate from 3.75% to 4%
If the upper limit rate of deviation exceeds the tolerable rate of deviation, the auditor would most likely
Increase the planned effectiveness of substantive procedures
When testing internal controls, what is not true with respect to the use of nonstatistical sampling
When using nonstatistical sampling, auditors are required to quantify the parameters used to determine sample size
What sampling risks are associated with the use of attributes sampling Risk of underreliance: Risk of incorrect rejection:
Yes No
An auditor is examining an important internal control in his audit of ABC Company. Because the account balance affected by this control is highly susceptible to fraud, she will reject the sample if even one deviation is discovered. What type of sampling plan should she use
Discovery Sampling
The risk of underreliance is the risk that the sample selected to test controls
Doesn't support the auditors planned level of control risk when the true operating effectiveness of the control justifies such an assessment
The sampling plan for nonstatistical sampling is the same as statistical sampling except for what
Evaluate the sample results
An audit team would be most likely to use attributes sampling in what situation
Examining purchase requisitions for proper authorization
In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should consider 1.) Likely rate of deviations 2.) Allowable risk of underreliance
1 only
Put in order, 1=Define Population, 2=Determine objective of sampling, 3=Determine Sample Size, 4=Select Sample
2,1,3,4
(Appendix) Smith, CPA, is using attributes sampling to test Swimmer Inc., internal controls related to the accuracy of sales invoices. Smith defined the population as all 5,000 of Swimmer's sales invoices and determined the appropriate sample size was 200 invoices. What is Smith's sampling interval if systematic random selection is used?
25
To determine the appropriate sample size for an attributes sampling application, Williams, CPA, defined the population to be 25,000 sales invoices. Williams then assessed the risk of overreliance to be 10%, the tolerable rate of deviation to be 4%, and the expected population deviation rate to be 2.5%. Using the AICPA Sample Size tables, the appropriate sample size would be
353
If the audit team established a tolerable rate of deviation of 5%, an expected population deviation rate of 3%, and desired to control the risk of overreliance to 5%, what sample size would be appropriate in this situation
361 items
An auditor wanted to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide a 1% risk of overreliance (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper limit rate of deviation to be 8%. The allowance for sampling risk was
4.5%
Williams, CPA, determined that the appropriate samples size for a test of controls related to the completeness of purchase transactions was 148 items. Using the AICPA Sample Size tables, which of the following represent assessments that could have been made by Williams to determine this sample size?
5% risk of overreliance, 7% tolerable rate of deviation, and 3.25% expected population deviation rate
Assume that the audit team established a tolerable rate of deviation of 5%, an expected population deviation rate of 1%, and desired to control the risk of overreliance to 10%. What is the appropriate sample size in this situation
77 items
If the audit team established a tolerable rate of deviation of 3%, an expected population deviation rate of 2%, and desired to control the risk of overreliance to 5%, what sample size would be appropriate in this situation
846 items
Assume that the audit team established a tolerable rate of deviation of 5%, an expected population deviation rate of 1%, and desired to control the risk of overreliance to 5%. What is the appropriate sample size in this situation
93 items
What deviation would probably be of most concern to auditors
A deviation that represents an employee's careless attention to duties
The upper limit rate of deviation in attributes sampling is
A statistical calculation that considers sampling risk
As a result of tests of controls, an auditor assessed control risk too low and decreased the effectiveness of her substantive procedures. This assessment occured because the true deviation rate in the population was
Greater than the deviation rate in the auditor's sample
The risk of underreliance is the probability that the evidence in the sample indicates
High control risk when the actual operating effectiveness of the control would justify a lower control risk assessment
Assume that the audit team wishes to determine the extent to which a particular control policy was functioning as intended. Identifying applications of the control throughout the period under audit would be most closely related to what step in sampling
Defining the population
In the study of internal control, the auditor uses sampling to compare the ____ to the _____
Deviation rate Tolerable rate of deviation
When examining the client's internal control, what is the relationship of each of the following with sample size? Expected rate of deviation Risk of overreliance
Direct Inverse
Why does the risk of overreliance have an inverse relationship with sample size
As the audit team is less concerned with making an incorrect conclusion with respect to reliance on the client's internal control, the audit team can appropriately examine fewer items
In performing test of control over authorization of cash disbursements, what statistical sampling method would be appropriate
Attributes
Williams, CPA, is using attributes sampling to test controls relation to the completeness of purchasing transactions. Williams decided to select all purchase orders from September for testing. This is an example of
Block selection
Mary Todd is auditing White House Furniture. In selecting a sample of purchases, she finds that a purchase order is missing. She should
Consider the sample item a deviation
What component of the audit risk model is most closely associated with attributes sampling
Control Risk
The ultimate purpose of control risk assessment is to
Decide the nature, timing, and extent of further audit procedures
On the basis of attributes sampling, an auditor decided to increase the assessed level of control risk from the level originally planned. To achieve an overall audit risk level that is substantially the same as the original planned level of audit risk, the auditor
Decrease detection risk
As part of the assessment of control risk, the auditor decided to use audit sampling. After specifying the audit objectives, what would the auditor most likely do next?
Define the deviation conditions
The audit team is planning to examine a sample of control policies and procedures. Assume that, based on the intended degree of reliance on internal control, the audit team wishes to control the risk of overreliance to 5%. In addition, based on prior engagements, the audit team anticipates an expected deviation rate of 2%. What would be the impact of reducing the tolerable rate of deviation from 7% to 5% on the sample size?
Increase the sample size by 93 items
What audit tests would an auditor most likely use attributes sampling
Inspecting employee time cards for proper approval by supervisors
What audit test would an auditor most likely use attributes sampling
Inspecting purchase orders for proper approval by supervisors
The purpose of tests of controls is to determine that
Internal control policies and procedures are function as prescribed
When an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective , the auditor would most likely increase the
Level of inherent risk
What is not true with regards to the relationship among control risk, the risk of overreliance, and the tolerable rate of deviation
Lower levels of control risk result in a higher level of the risk of overreliance
Non sampling risk normally occurs during which step of the sampling process
Measuring sample items
What is an auditor's evaluation of a statistical sample for attributes when a test of 100 documents results in 4 deviation if the tolerable rate of deviation is 5%, the expected population deviation rate is 3%, and the allowance for sampling risk is 2%?
Modify planned reliance on the control because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation
As a result of tests of controls, an auditor assessed control risk too low and decreased substantive procedures. This assessment occured because the true deviation rate in the population has
More than the deviation rate in the auditor's sample
The sample size for a test of controls varies inversely with Expected population deviation rate: Tolerable rate of deviation:
No Yes
With respect to the use of attributes sampling, what steps would nonstatistical sampling and statistical sampling differ Defining the population Evaluating sample results
No Yes
While selecting a sample of sales invoices for a test of internal controls, the auditor was unable to locate one invoice and classified this invoice as non-deviation. This is an example of
Nonsampling risk
What is correct regarding nonstatistical sampling
Nonstatistical sampling does not use a formal process to mathematically estimate the allowance for sampling risk
What is true regarding attributes sampling
Once the population reaches a certain size, population size has a limited impact on sample size
The auditor tested a sample of recorded sales invoices for evidence of credit approval. Based on the results of the sample, the auditor concluded that there was a satisfactory rate of approvals. Unknown to the auditor, credit approvals in the population were not satisfactory. This is an example of
Risk of over reliance
An increase in what would cause the sample size in a test of controls to decrease
Risk of overreliance
What does not have a direct relationship with sample size
Risk of overreliance
When performing attributes sampling, the appropriate AICPA sample size table is initially selected based on the auditors' assessment of the
Risk of overreliance
When the auditor concludes that a control is functioning properly when, in fact, it is not, the auditor has committed the
Risk of overreliance
In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the rates observed in prior audits because of the results of prior tests of controls and the overall control environment. The auditor most likely would then increase the planned
Sample Size
After examining sample items and classifying items as deviations, the auditor can divide the number of deviations by the sample size and calculate the
Sample rate of deviation
The AICPA has developed sample size tables for attributes sampling that specifically incorporate all but
Sample rate of deviation
What is not a judgment or estimate auditors must make when performing attributes sampling
Sample rate of deviation
An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the
Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation
A sampling plan in which an initial sample is selected and the audit team either draws a final conclusion or selects additional items before drawing a final conclusion is called
Sequential sampling
What is true with respect to the use of sequential sampling when used with attributes sampling
Sequential sampling may provide a more efficient sample size than the use of traditional attributes sampling
If the auditors were interested in ensuring that all sales have been recorded, the population would be defined as
Shipping documents
Lincoln, CPA, selected a sample of 100 items by dividing the population of 100,000 sales invoices by 100. With a random start, she then selected every 1,000th invoice. This selection process is referred to as
Systematic Random Selection
To statistically evaluate an attributes sampling application, the auditor would not need to know
The actual population
What is true regarding an audit team's documentation requirements for attributes sampling
The audit team's documentation should include information regarding all steps of the sampling process and implications of the conclusions reached on internal control reliance and substantive procedures
What is true when selecting a sample of invoices from a population to perform tests of controls
The audit team's goal in selecting a sample is to increase the likelihood that it is representative of the population
What is the most likely outcome when the upper limit rate of deviation is less than the tolerable rate of deviation
The auditor would be exposed to the risk of overreliance
Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whether
The control procedures are operating effectively
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that
The deviation rate in the auditor's sample is less than the tolerable rate of deviation, but the deviation rate in the populations exceeds the tolerable rate of deviation
An erroneous decision assess control risk at excessively high levels can have an adverse effect on
The efficiency of an audit engagement
What is correct concerning statistical sampling in tests of controls
The expected population deviation rate can either be based on prior audits or a small sample of controls examined in the current year
If an auditor calculated an upper limit rate of deviation of 5% when the tolerable rate of deviation was 4%, the auditor would conclude that
The population deviation may be higher than the necessary to rely on internal control as planned
The audit team is planning to examine a sample of control policies and procedures. Assume that, based on the intended degree of reliance on internal control, the audit team wishes to control the risk of overreliance to 5% and, based on past audits, estimates the expected population deviation rate to be 2%. Initially, the audit team was planning for a moderate degree of reliance on internal control and established a tolerable rate of deviation of 7%; however, it is considering increasing its reliance on internal control and reducing the tolerable rate of deviation to 4%. Which of the following is not true with respect to the impact of the reduction in the tolerable rate of deviation on sample size?
The reduction in the tolerable rate of deviation would result in a smaller sample size
The audit team is planning to examine a sample of control policies and procedures. Assume that, based on the intended degree of reliance on internal control, the audit team wishes to control the risk of overreliance to 5% and establishes a tolerable deviation rate of 8%. Based on past audits, the audit team would normally estimate the expected population deviation rate at 2%; however, because of improvements in the client's internal control, they now feel that a rate of 1.25% is appropriate. Which of the following is not true with respect to the impact of the reduction in the expected population deviation rate on sample size?
The resultant sample size assuming the reduction in the expected population deviation rate would be 77 items
Why is the auditor more concerned with the risk of overreliance than the risk of underreliance
The risk of overreliance may result in the auditor failing to perform sufficient substantive procedures
If an auditor tested 50 transactions and found two deviations from an important control activity, the auditor could conclude that
The sample rate of deviation is 4%
In order for the auditor to decide to perform tests of controls, what relationship should exist
The tolerable rate of deviation should exceed the expected population deviation rate
When selecting a sample of items to perform a test of controls, what is not a representative sample
The transactions should be limited to those processed in a specific geographic area
What is not true with respect to the use of nonstatistical sampling
The use of nonstatistical sampling generally results in a smaller sample size
What is true concerning statistical sampling in tests of controls
There is an inverse relation between the sample size and the tolerable rate of deviation
What is the audit team's primary objective in selecting an attributes sampling selection method
To select a sample that is representative of the population from which it is drawn
Judgements about the frequency of control deviations that identify a particular control risk level are related to
Tolerable rate of deviation
The maximum rate of deviation that may exist in the operation of a control policy or procedure before the auditors would reduce reliance on internal control is referred to as
Tolerable rate of deviation
An auditor wanted to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide a 1% risk of overreliance (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper limit rate of deviation to be 8%. In evaluating this sample, the auditor decide to increase the level of the preliminary assessment of control risk because the
Tolerable rate of deviation (7%) was less than the upper limit rate of deviation (8%).
When considering the results of an attributes sampling application, the auditor compares what two measures
Upper limit rate of deviation Tolerable rate of deviation
In performing attributes sampling, the auditor will conclude that the control is functioning as intended if the ___ is less than or equal to ____
Upper limit rate of deviation Tolerable rate of deviation
What is generally trust about the sample size in statistical sampling when testing internal controls
When evaluation very large populations, the population size has little or no effect of the sample size
An auditor is testing control procedures that are evidenced on an entity's vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher
has been properly voided
An auditor's determination of a lower level of control risk would most likely be associated with
smaller samples for substantive procedures
