Audit Sampling

Chapter 09

Audit Sampling

True / False Questions

1. Stratification of the population generally results in a more efficient sampling plan.
TRUE

2. Discovery sampling is equivalent to an attributes sampling plan with a specified expected deviation rate of 0 percent.
TRUE

3. Increases in the number of deviations in an attributes sample results in an increase in the achieved upper deviation rate of the attributes sample.
TRUE

4. The definition of a "deviation" for a test of a control should include only those deviations that result in misstatements in the financial statements.
FALSE

5. Statistical sampling be used to test all control activities.
TRUE

6. Using ratio and difference estimation for a sample is an example of a dual purpose test.
FALSE

7. Increases in the tolerable misstatement result in a decreased sample size when using mean-per-unit estimation.
TRUE

8. The mean book value of the items included in a mean-per-unit sample is directly used in the evaluation of sample results.
TRUE

9. When evaluating the results of a variables sampling plan, the projected misstatement is calculated and compared to the tolerable misstatement.
TRUE

10. Auditors project the misstatements found in the sample to the population when using statistical sampling, but when using nonstatistical sampling.
FALSE

Multiple Choice Questions

The 10,000 accounts receivable of DEF Company have a total book value of $120,000. A CPA has selected and audited a sample of 100 accounts with a total book value of $1,000 and an audited value of $1,200.

11. Using the estimation technique, estimated total audited value of the population is:
A. $100,000.
B. $120,000.
C. $140,000.
D. $144,000

12. Using the estimation technique, the estimated total audited value of the population is:
A. $100,000.
B. $120,000.
C. $140,000.
D. $144,000

13. Using the estimation technique, the estimated total audited value of the population is:
A. $100,000.
B. $120,000.
C. $140,000.
D. $144,000.

14. Using the estimation method an auditor has properly calculated the estimated total audited value of a population as $200,000. Her sample included 200 of the population's 40,000 items. She found that, in her sample the average audited value was $1 less than the average book value. What was the average audited value in the sample?
A. $4.
B. $5.
C. $6.
D. $10.

15. Using estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population?
A. $160,000.
B. $161,538.
C. $168,000.
D. $200,000.

16. Using estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population?
A. $160,000.
B. $161,538.
C. $168,000.
D. $200,000.

17. Using estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5.20. What is the estimated total audited value of the population?
A. $160,000.
B. $161,538.
C. $168,000.
D. $200,000.

18. If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable misstatement is $9,000, what would an auditor likely conclude?
A. Since the projected misstatement is less than the tolerable misstatement, the account is not misstated.
B. Since the projected misstatement is less than the tolerable misstatement, the account is misstated.
C. The risk is high that the account is materially misstated.
D. The analysis has been improperly performed since the projected misstatement is unequal to the tolerable misstatement.

19. A dual purpose test simultaneously.
A. Addresses two different accounts.
B. Functions as a substantive test and as a test of controls.
C. Functions as an analytical procedure and a substantive test.
D. Substantiates an ending balance and the transactions making up the balance.

The 1000 accounts receivable of Winco Company have a total book value of $20,000 (Average book value = $20). Bob Duffo, CPA, has selected and audited a sample of 50 accounts with the following mean values:
1. Book value of $19.
2. Audited value of $19.60.

20. What is the estimated total audited value using mean per unit sampling?
A. $19,000.
B. $19,600.
C. $20,000.
D. $20,632.

21. What is the estimated total audited value using difference estimation sampling?
A. $19,387.
B. $19,400.
C. $19,600.
D. $20,600.

22. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and decreasing the risk of assessing control risk too low would have what effect on sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.

23. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate and increasing the estimated population deviation rate would have what effect on sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.

24. An increase in the tolerable misstatement has what effect on the planned allowance for sampling risk?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

25. Which of the following is generally used for selecting samples?
A. Random number tables.
B. Random number generators.
C. Physical representation numbers.
D. Systematic selection.

26. In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this year's sample size compared to last year's sample size?
A. This year's sample is larger than last year's sample.
B. This year's sample is smaller than last year's sample.
C. This year's sample is equal to last year's sample.
D. This year's sample is indeterminate in relation to last year's sample.

27. The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in conformity with random selection procedures:
A. Need not consider the risk of assessing control risk too low.
B. Has committed a nonsampling error.
C. Will have to use discovery sampling techniques to evaluate the results.
D. Should compare the deviation rate of the sample to the tolerable rate.

28. When performing tests of controls over authorization of cash receipts, which of the following sampling methods would be most appropriate?
A. Attributes.
B. Ratio.
C. Stratified.
D. Variables.

29. Which of the following statistical sampling techniques involves taking samples in a series of stages?
A. Systematic sampling.
B. Sequential sampling.
C. Continuous sampling.
D. Multiple location sampling.

30. Which of the following is generally true about statistical sampling as compared to nonstatistical sampling?
A. Statistical samples are more representative of the population.
B. Statistical sample plans involve additional costs of evaluation.
C. Statistical sampling allows a more objective evaluation of sample results.
D. Statistical sampling may assist the auditors in designing more efficient samples.

31. When using statistical sampling, which of the following need be known to evaluate the results of an attributes sample?
A. Sample size.
B. Risk of assessing control risk too low.
C. Number of deviations in the population.
D. Number of deviations found in the sample.

32. When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is that:
A. Designing efficient samples is more difficult.
B. The costs of training staff may be higher.
C. Sampling without replacement must be used.
D. Objectively evaluating results is impossible.

33. Changing from a sampling plan using random selection with replacement to random selection without replacement has what effect on the required sample size?
A. Increases.
B. Decreases
C. No effect.
D. An indeterminate effect.

34. When the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the expected rate of deviations in the sample?
A. Exceed.
B. Equal.
C. Be less than.
D. Indefinite.

35. Increases in the planned allowance for sampling risk have what effect on required sample size?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

36. When using sampling for tests of controls, which of the following audit consequences may follow?
A. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too low.
B. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will be assessed too high.
C. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, the audit is likely to be faulty because of reduced substantive tests.
D. If sample results indicate that the control is not operating effectively, but in fact it is operating effectively, control risk will be assessed too low.

37. The auditors expect a population deviation rate of billing errors of two percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:
A. Attributes sampling.
B. Stratified sequential sampling.
C. Discovery sampling.
D. None, as sampling does not seem appropriate in this situation.

38. The auditors expect a population deviation rate of billing errors of eight percent, and have established a tolerable rate of five percent. The sampling approach most likely to be used is:
A. Attributes sampling.
B. Stratified random sampling.
C. Variables sampling.
D. None, as sampling does not seem appropriate in this situation.

39. Which of the following may be used to reduce the risk of nonsampling errors?
A. Increasing the size of audit samples.
B. Stratifying audit samples.
C. Adequately planning audit samples.
D. Using statistical sampling techniques.

40. Which of the following types of risk is of critical importance to auditors in performing tests of controls?
A. The risk of assessing control risk too low.
B. The risk of assessing control risk too high.
C. The risk of incorrect acceptance.
D. The risk of incorrect rejection.

41. The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure is described as a:
A. Statistical error.
B. Sampling misstatement.
C. Standard error of the mean.
D. Nonsampling error.

42. What effect does obtaining a sample with a standard deviation larger than that estimated during planning have on the adjusted allowance for sampling risk?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.

The 2000 accounts receivable of ABC Company have a total book value of $40,000. Bob Rotter, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,950. The audited value of the 100 accounts in the sample is $1,875.

43. Using the mean-per-unit estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:
A. $37,500
B. $38,462
C. $38,500
D. $41,600

44. Using the ratio estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:
A. $37,500
B. $38,462
C. $38,500
D. $41,600

45. Using the difference estimation technique, Rotter's estimate (to the nearest dollar) of year-end accounts receivable balance would be:
A. $37,500
B. $38,462
C. $38,500
D. $41,600

46. The 3000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $6,000 for the entire population. The audited value of Smith's sample is:
A. $1,700
B. $1,800
C. $1,900
D. $2,300

47. The 3000 accounts receivable of DEF Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $2,100. Using the difference estimation technique, Smith has properly estimated a projected misstatement of a $9,000 overstatement for the entire population. The estimated total audited value of the population is:
A. $51,000
B. $58,000
C. $60,000
D. $69,000

48. The 4000 accounts receivable of GHI Company have a total book value of $60,000. Bob Smith, CPA, has selected and audited a sample of 100 accounts with a total book value of $1,600. Using the mean-per-unit estimation technique, Smith has properly estimated a projected misstatement of a $8,000 overstatement for the entire population. The audited value of Smith's sample is:
A. $1,300
B. $1,400
C. $1,600
D. $1,800

49. Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for substantive tests?
A. When the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the population is not misstated.
B. The closer the projected misstatement is to the tolerable misstatement, the higher the risk of material misstatement.
C. When the projected misstatement is equal to zero, the auditors may conclude with certainty that no misstatements exist in the account.
D. When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will generally conclude that the population is materially misstated.

50. Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $650,000. Based on these results, the auditor would:
A. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that the population does not contain a material misstatement.
B. Because the total audited value  tolerable misstatement includes the book value, conclude that the population does not contain a material misstatement.
C. Because the tolerable misstatement exceeds the adjusted allowance for sampling risk, conclude that there is too great a risk that the account balance is materially misstated.
D. Because the total audited value  adjusted allowance for sampling risk does not include the book value, conclude that there is too great a risk that the account balance is materially misstated.

51. Assume a mean-per-unit estimation variables sampling application with a tolerable misstatement of $70,000 and a book value of $700,000. After performing the sampling plan, the auditors calculated an adjusted allowance for sampling risk of $45,000 and a point estimate of the population's total audited value to be $640,000. The projected misstatement based on this sample is:
A. $ 5,000
B. $45,000
C. $60,000
D. $70,000

52. The auditors have audited a sample with a standard deviation of audited values larger than they had originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level without increasing the size of the sample, which of the following statements is correct?
A. The adjusted allowance for sampling risk will be smaller than had been planned.
B. The adjusted allowance for sampling risk will be larger than had been planned.
C. The risk of incorrect rejection will necessarily decrease.
D. The size of the population must be decreased.

53. In the past, the auditors have found that the book value of a receivable account has been related to the amount the account is misstated (i.e., large accounts have large misstatements and small accounts have small misstatements). Which of the following techniques is most likely to be efficient?
A. Mean-per-unit estimation.
B. Ratio estimation.
C. Difference estimation.
D. Sequential sampling estimation.

54. Which of the following statements is correct concerning the use of nonstatistical sampling for substantive tests?
A. Its use is generally acceptable only for populations with an immaterial book value.
B. It requires the use of structured sample size selection techniques to be acceptable.
C. It may be especially useful in circumstances in which the combination of inherent and control risk is at the maximum level.
D. Results will be projected to the population.

55. Which of the following situations will result in the auditors concluding that the risk of material misstatement is too high when using nonstatistical sampling for substantive tests?
A. The projected misstatement exceeds the tolerable misstatement.
B. The allowance for sampling risk exceeds the projected misstatement.
C. The risk of incorrect acceptance exceeds the risk of incorrect rejection.
D. The tolerable misstatement exceeds the sample net misstatement.

56. During the final planning of the accounts receivable program a CPA specified a tolerable misstatement of $30,000, instead of the $20,000 contained in the preliminary audit program. What would be the impact of this change?
A. A decrease in population standard deviation.
B. An increase in sample standard deviation.
C. An increase in required sample size.
D. A decrease in the required sample size.

57. Which of the following is an advantage of systematic selection over random number selection?
A. It provides a stronger basis for statistical conclusions.
B. It enables the auditor to use the more efficient "sampling with replacement" tables.
C. There may be correlation between the location of items in the population, the feature of sampling interest, and the sampling interval.
D. It does not require establishment of correspondence between random numbers and items in the population.

58. Statistical sampling generally may be applied to test internal control when the client's internal control procedures:
A. Depend primarily on appropriate segregation of duties.
B. Are carefully reduced to writing and are included in client accounting manuals.
C. Leave an audit trail in the form of evidence of compliance.
D. Enable the detection of material fraud in the accounting records.

59. Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?
A. The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.
B. As the likely rate of deviation decreases, the auditor should increase the planned sample size.
C. The allowable risk of assessing control risk too low has no effect on the planned sample size.
D. Of all the factors to be considered, the population size has the greatest effect on the sample size.

60. To determine sample size in an attribute sampling application, what must be specified?
A. Population mean, expected error rate, allowance for sampling risk.
B. Allowance for sampling risk, risk of assessing control risk too low, standard deviation.
C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation rate.
D. Population mean, standard deviation, allowance for sampling risk.

61. The tolerable deviation rate in sampling for tests of controls is:
A. Used to determine the probability of the auditor's conclusion based upon reliance factors.
B. The probability that the financial statements are not materially in error.
C. A measure of the reliability of substantive tests.
D. The rate the auditor will tolerate without modifying the planned assessment of control risk.

62. In testing accounts receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of:
A. Projected misstatement.
B. Sampling error.
C. Standard error.
D. Nonsampling error.