Chapter 17 Multiple-Choice Questions 1. easy c
Sampling used for tests of details provides results in terms of: a. exception rates. b. percentages. c. dollars. d. expect pecta ation tion ra rates tes.
2. #asy d
oth sampling and nonsampling ris!s are associated "ith: $ests of controls. a. b. c. d.
%es &o %es &o
Substantive tests of transactions. %es &o &o %es
'. easy a
$olerable misstatements for overstatements and understatements: a. may be di(erent amounts. b. must be di(erent amounts. c. must must be set set at at the the same same amou amount nt.. d. must must be expr express essed ed in percen percentag tages. es.
). easy d
Monetary-unit sampling is most commonly used "hen: a. several exceptions are expected. b. a dollar result is desired. c. the popu populat lation ion dat data a are are mainta maintaine ined d on manua manuall *les. *les. d. the auditor auditor is is sear searchin ching g for for underst understatem atements ents only.
+. easy b
Monetary-unit sampling is is not pa particularly e( e(ective at detecting: a. overstatements. b. understatements. c. err errors ors in curr curren entt asse assets ts.. d. erro errors rs in in non noncu curr rren entt asse assets ts..
,.
$ests fo for ra rates of of oc occurrence ar are ap appropriately us used in in al all bu but "h "hich of of th the follo"ing situations
#asy c
a. b. c. d. . easy b
$esting of internal controls %es &o %es &o
Substantive testing of transactions %es %es %es &o
Substantive testing of details of balances %es %es &o %es
/hich of the follo"ing is not a type of statistical method that provides results in dollar terms a. 0ariables sampling. b. ttributes sampling. c. Mo Mone neta tary ry-u -uni nitt samp sampli ling ng.. d. Sampl Sampling ing "ith "ith proba probabil bility ity propo proporti rtiona onall to sie. sie.
Arens/Elder/Beasley Arens/Elder/Beasley
3. easy d
/hich of the follo"ing is not a term term relev relevant ant to sampl sampling ing for tests tests of details a. cceptable ris! of incorrect re4ection b. nalysis of misstatements c. #stim #stimate ate missta misstatem tement ents s in the popula populatio tion n d. 5e*n 5e*ne e the the exce except ptio ion n cond condit itio ions ns
Arens/Elder/Beasley Arens/Elder/Beasley
6. easy a
18. easy
/hen auditors sample for tests of details of balances7 the ob4ective is to determine "hether the: a. account balance being audited is fairly stated. b. transactions being audited are free of misstatements. c. controls being tested are operating e(ectively. d. transactions and account balances being audited are fairly stated. $he auditor must consider the possibility that the true population misstatement is greater than the amount of misstatement that is tolerable "hen the auditor is performing:
d
a. b. c. d. 11. #asy d
&onstatistical sampling. %es &o %es &o
Monetary-unit sampling. %es &o &o %es
/hat is the purpose of applying strati*ed sampling to a population
a. b. c. d.
$o avoid items that may contain misstatements %es &o %es &o
$o emphasie certain items and deemphasie others %es &o &o %es
12. medium a
9f an auditor desires a greater level of assurance in auditing a balance7 the acceptable ris! of incorrect acceptance: a. is reduced. b. is increased. c. is not changed. d. may be reduced or increased depending upon other circumstances.
1'.
/hich of the follo"ing is not a li!ely item on "hich to apply strati*cation techniues a. aging of accounts receivable b. dollar value of accounts receivable c. customer names of account receivables d. number of sales per customer in a period
medium c
1). medium a
9n estimating the population misstatement7 the *rst step in pro4ecting from the sample to the population is to: a. ma!e a point estimate. b. revise the upper error bound. c. calculate the precision interval. d. determine the population mean.
1+. Medium cc
$olerable misstatement is used to:
a. b. Arens/Elder/Beasley
5etermine sample sie. %es &o
Select the sample. %es %es
#valuate results. &o &o
c. d. 1,. medium a
&o %es
&o &o
%es %es
$he relationship bet"een reuired sample sie and the acceptable ris! of incorrect acceptance is: a. inverse. b. direct. c. proportional. d. indeterminate.
1. medium a
$he *nal step in the evaluation of the audit results is the decision to: a. accept the population as fairly stated or to reuire further action. b. determine sampling error and calculate the estimated total population error. c. pro4ect the point estimate. d. determine the error in each sample.
13.
$he most commonly used method of statistical sampling for tests of details of balances is: a. attributes sampling. b. systematic sampling. c. discovery sampling. d. monetary-unit sampling.
medium d
16. medium b
/hich of the follo"ing does not have to be considered in determining the initial sample sie of a test of details a. tolerable misstatement b. acceptable ris! of incorrect re4ection c. estimate of misstatements in the population d. acceptable audit ris!
28. medium b
9f an auditor concludes that internal controls are li!ely to be e(ective7 the preliminary assessment of control ris! can be reduced7 leading to a;n< ====== the acceptable ris! of incorrect acceptance. a. reduction in b. increase in c. elimination of d. increase or decrease
21. medium a
/hen using monetary-unit sampling7 the recorded dollar population is a de*nition of all the items in the: a. population. b. population "hich the auditor has included in the sample. c. population "hich contain errors. d. sample "hich contain errors.
22. medium a
9f acceptable audit ris! is increased7 >9 should be: a. increased. b. reduced. c. una(ected. d. modi*ed.
2'.
s the acceptable ris! of incorrect acceptance is reduced7 the reuired sample sie =========. a. increases b. decreases
medium a
Arens/Elder/Beasley
c. d.
is una(ected increases or decreases
2). medium c
$he acceptable ris! of incorrect acceptance is most related to: a. audit e?ciency. b. audit results. c. audit e(ectiveness. d. audit estimation.
2+. medium b
9n monetary-unit sampling7 the relationship bet"een tolerable misstatement sie and reuired sample sie is: a. direct. b. inverse. c. varied. d. indeterminable.
2,. medium
$he ris! the auditor is "illing to ta!e of accepting a balance as correct "hen the true misstatement in the balance under audit is greater than the tolerable misstatement is: a. the upper bound. b. the tolerable ris!. c. the acceptable ris! of incorrect acceptance. d. the lo"er bound.
c
2. medium b
s the amount of misstatements expected in the population approaches tolerable misstatement7 the planned sample sie "ill: a. decrease. b. increase. c. vary based on characteristics of the population. d. be una(ected.
23. medium d
/hich of the follo"ing is the auditor least li!ely to consider "hen estimating misstatements in the population a. @rior experience "ith the client. b. >esults of current year tests of controls. c. >esults of analytical procedures already performed. d. cceptable audit ris!.
26. medium
n accounts receivable population contains a total of four customers. $he accounts7 the amounts7 and the cumulative total are sho"n belo". Monetary-unit sampling is to be used. ccount >ecorded Cumulative &ame mount $otal lue A '+ A '+ ro"n 231 ,'3 Bray ,8 ,63 Breen +) 1722 ased on the information above7 the population sie is: a. ). b. +). c. 1722. d. A27,3).
c
'8. medium a
n auditor using nonstatistical sampling cannot formally measure sampling error and therefore must sub4ectively consider the possibility that the true population misstatement exceeds a tolerable amount. /hich of the
Arens/Elder/Beasley
follo"ing factors should be considered by the auditor in ma!ing this assessment
a. b. c. d.
$he dollar di(erence bet"een the point estimate and tolerable misstatement. %es &o %es &o
$he extent to "hich items in the population have been audited 188 percent. %es &o &o %es
'1. medium b
/hen using systematic selection procedures "ith monetary-unit sampling of accounts receivable7 the interval is determined by: a. consulting a random number table. b. dividing the population sie by the desired sample sie. c. dividing the sample sie by the account "ith the largest dollar value. d. dividing the population sie by the account receivable "ith the largest dollar value.
'2. medium b
9n a probability proportional to sie ;@@S< sample7 all population physical audit units "ith an amount eual to or greater than the amount of the interval "ill automatically be included in the sample if the auditor uses: a. random selection. b. systematic selection. c. bloc! selection. d. strati*ed selection.
''. medium a
Monetary unit sampling is also referred to as all of the follo"ing except: a. attribute sampling. b. dollar unit sampling. c. cumulative monetary amount sampling. d. sampling "ith probability proportional to sie.
'). medium c
$he appropriate assumption to ma!e regarding the overall percent of error in those population items containing an error is: a. determined using random number tables. b. set after a uantitative analysis of clients internal control system. c. based on the auditors personal 4udgment in the circumstances. d. based on statistical analysis using con*dence limits.
'+. medium d
/hen errors are found7 a common assumption in practice is to assume: a. a 188D assumption for all errors. b. that the population errors are larger than the sample errors. c. that the population errors are smaller than the sample errors. d. that the actual sample errors are representative of the population errors.
',. medium b
/hich of the follo"ing does not need to be considered "hen the auditor generalies from the sample to the population
a. b. c. d. Arens/Elder/Beasley
cceptable ris! of incorrect acceptance. %es &o %es &o
cceptable ris! of incorrect re4ection. %es &o &o %es
'. medium d
'3. medium b
'6. medium b
)8. medium a
$he auditor must deal "ith layers of the computed upper deviation rate from the attributes table because there are di(erent error assumptions for each error. ssume a sample of 188 had found one error7 and the computed upper deviation rate is sho"n in the follo"ing table: &umber Epper @recision of #rrors Fimit from $able 8 .82' 1 .8'3 $he precision limit for the layer "ith one error is: a. 2.'D. b. '.3D c. ,.1D. d. 1.+D. /hich balance-related audit ob4ective cannot be assessed using monetary unit sampling a. ccuracy. b. Completeness. c. #xistence. d. ll of the above can be assessed using monetary unit sampling. $he con*dence limits in variables sampling are similar to the monetary-unit samplings: a. point estimate. b. misstatement bounds. c. standard deviation. d. standard error of the mean. $he method used to measure the estimated total error amount in a population "hen there is both a recorded value and an audited value for each item in the sample is: a. di(erence estimation. b. mean-per-unit estimation. c. ratio estimation. d. monetary-unit sampling.
)1. medium b
$he variables sampling method "hich generally results in smaller sample sies than any other method is: a. ratio estimation. b. di(erence estimation. c. monetary-unit sampling. d. mean-per-unit estimation.
)2. medium b
$he auditor is concerned "ith the audited value rather than the error amount of each item in the sample "hen using: a. di(erence estimation. b. mean-per-unit estimation. c. ratio estimation. d. monetary-unit sampling.
)'. medium a
@@S samples can be obtained in an e?cient manner using all but "hich of the follo"ing a. Gand selection by the auditor. b. Computer soft"are. c. >andom number tables. d. Systematic sampling techniues.
Arens/Elder/Beasley
)). medium a
/hich of the follo"ing items is not needed to apply MES
a. b. c. d. )+. medium a
point estimate for misstatements. &o %es &o %es
sample sie. %es &o %es &o
n estimated error rate. &o %es %es &o
/hile performing a substantive test of details during an audit7 the auditor determined that the sample results supported the conclusion that the recorded account balance "as materially misstated. 9t "as7 in fact7 not materially misstated. $his situation illustrates the ris! of: a. incorrect re4ection. b. incorrect acceptance. c. assessing control ris! too lo". d. assessing control ris! too high.
Arens/Elder/Beasley
),. challenging b
/hile performing a substantive test of details during an audit7 the auditor determined that the sample results supported the conclusion that the recorded account balance "as materially misstated. /hich of the follo"ing is not li!ely to be an acceptable reaction to this discovery a. @erform expanded audit tests in the relevant areas b. 9ncrease detection ris! in the relevant areas c. 9ncrease the sample sie d. $a!e no action until tests of other audit areas are completed
). challenging
/hen selecting a strati*ed sample7 the sample sie is: a. determined for the unstrati*ed population and then apportioned to each stratum. b. determined for each stratum and selected from that stratum. c. determined for each stratum and selected randomly from the entire unstrati*ed population. d. al"ays larger than if unstrati*ed sampling had been used.
b
)3. Challenging c
n auditor using nonstatistical sampling cannot:
a. b. c. d.
determine a point estimate for the population. %es &o %es &o
mathematically measure the precision of the point estimate. %es &o &o %es
)6. challenging d
9n monetary-unit sampling7 the values of the estimated li!ely maximum misstatements are referred to as the: a. point estimates. b. precision intervals. c. con*dence intervals. d. misstatement bounds.
+8. challenging b
/hen using monetary-unit sampling7 evaluating the li!elihood of unrecorded items in the population is: a. unnecessary. b. impossible. c. possible but di?cult. d. an automatic outcome of the process.
+1. challenging c
cceptable ris! of incorrect re4ection a(ects auditors action only "hen they conclude that a population is: a. fairly stated. b. acceptable. c. not fairly stated. d. acceptable after certain ad4ustments.
+2. challenging b
$he statistical methods used to evaluate monetary-unit samples: a. neither exclude nor include units t"ice. b. permit the inclusion of a unit in the sample more than once. c. do not permit a unit to be included in the sample more than once. d. ignore the possibility that a unit may be included in a sample more than once.
Arens/Elder/Beasley
+'. challenging b
/hich of the follo"ing is not a problem "ith monetary-unit selection a. @opulation items "ith a ero recorded balance. b. @opulation items that should have a ero balance but do not. c. ccounts "ith negative balances. d. ccounts "ith small recorded balances that are signi*cantly understated.
+). challenging b
$here are many !inds of statistical estimates that an auditor may *nd useful7 but basically every accounting estimate is either of a uantity or of an error rate. $he statistical terms that roughly correspond to HuantitiesI and Herror rate7I respectively7 are: a. attributes and variables. b. variables and attributes. c. constants and attributes. d. constants and variables.
++. challenging
9f the auditor believes that there "ill be more than 4ust a fe" exceptions discovered7 and desires an accurate estimate of the dollar value of the exceptions7 he or she "ill use: a. attributes sampling. b. monetary-unit sampling. c. bloc! sampling. d. variables sampling.
d
+,. challenging a
+. challenging b
+3. challenging a
/hile acceptable ris! of incorrect acceptance is al"ays important7 the ris! of incorrect re4ection is important only "hen there is a ======= cost to increasing the sample sie. a. high b. lo" c. moderate d. marginal /hich of the follo"ing is not a disadvantage of monetary-unit-sampling a. 9t may be di?cult to select samples from large population "ithout computer assistance. b. $he total misstatement bounds resulting "hen misstatements are found may be too lo" to be useful to the auditor. c. $he total misstatement bounds resulting "hen misstatements are found may be too high to be useful to the auditor. d. #ach of the above is a disadvantage. Calculating the sample sie using monetary-unit-sampling depends on "hich of the follo"ing factors
a. b. c. d. +6. challenging d
assumptions of the average percent of misstatement for population items that contain misstatements %es &o %es &o
recorded population value %es &o &o %es
Strati*ed sampling is applicable to di(erence7 mean-per-unit7 and ratio estimation7 but it is most commonly used "ith: a. ratio estimation.
Arens/Elder/Beasley
b. c. d. ,8. challenging b
discovery sampling. di(erence estimation. mean-per-unit estimation.
n important statistic to consider "hen using a statistical sampling audit plan is the population variability. $he population variability is measured by the: a. sample mean. b. standard deviation. c. standard error of the sample mean. d. estimated population total minus the actual population.
,1. challenging d
/hich of the follo"ing sampling plans "ould be designed to estimate a numerical measurement of a population7 such as a dollar value a. &umerical sampling. b. 5iscovery sampling. c. Sampling for attributes. d. Sampling for variables.
,2. challenging c
Esing statistical sampling to assist in verifying the year-end accounts payable balance7 an auditor has accumulated the follo"ing data: alance &umber of oo! determined by accounts balance the auditor @opulation: )7188 A+78887888 Sample: 288 A 2+87888 A'887888 Esing the ratio estimation techniue7 the auditors estimate of year-end accounts payable balance "ould be: a. A+78+87888. b. A+712+7888. c. A,78887888. d. A,71+87888.
,'. challenging b
Ese of the ratio estimation sampling techniue to estimated dollar amounts is inappropriate "hen: a. the total boo! value is !no"n and corresponds to the sum of all the individual boo! values. b. a boo! value for each sample item is un!no"n. c. there are some observed di(erences bet"een audited values and boo! values. d. the audited values are nearly proportional to the boo! values.
,). challenging b
$he ma4or reason that the di(erence and ratio estimation methods "ould be expected to produce audit e?ciency is that the: a. beta ris! may be completely ignored. b. variability of the populations of di(erences or ratios is less than that of the populations of boo! values or audited values. c. number of members of the populations of di(erences or ratios is smaller than the number of members of the population of boo! values. d. calculations reuired in using di(erence or ratio estimation are less arduous and fe"er than those reuired "hen using direct estimation. $he follo"ing information applies to the uestions belo": n audit partner is developing an o?ce-training program to familiarie his professional sta( "ith statistical decision models applicable to the audit of dollar-value balances. Ge "ishes to demonstrate the relationship of sample
Arens/Elder/Beasley
sies to population sie and variability and the auditors speci*cations as to precision and con*dence level. $he partner prepared the follo"ing table to sho" comparative population characteristics and audit speci*cations of t"o populations. udit speci*cations of Characteristics of a sample from population 1 population 1 relative relative to a sample to population 2 from population 2 Speci*ed Speci*ed con*dence Sie 0ariability precision level Case 1 #ual #ual #ual Gigher Case 2 #ual Farger $ighter #ual Case ' Farger #ual $ighter Fo"er Case ) Smaller Smaller #ual Fo"er Case + Farger #ual #ual Gigher ,+. challenging a
ased on the information presented above7 you are to indicate for the speci*ed case from the table the reuired sample sie to be selected from population 1 relative to the sample from population 2. 9n case 17 the reuired sample from population 1 is: a. larger than the reuired sample sie from population 2. b. eual to the reuired sample sie from population 2. c. smaller than the reuired sample sie from population 2. d. indeterminate relative to the reuired sample sie from population 2.
,,. challenging a
ased on the information presented above7 you are to indicate for the speci*ed case from the table the reuired sample sie to be selected from population 1 relative to the sample from population 2. 9n case 27 the reuired sample from population 1 is: a. larger than the reuired sample sie from population 2. b. eual to the reuired sample sie from population 2. c. smaller than the reuired sample sie from population 2. d. indeterminate relative to the reuired sample sie from population 2.
,. challenging d
ased on the information presented above7 you are to indicate for the speci*ed case from the table the reuired sample sie to be selected from population 1 relative to the sample from population 2. 9n case '7 the reuired sample from population 1 is: a. larger than the reuired sample sie from population 2. b. eual to the reuired sample sie from population 2. c. smaller than the reuired sample sie from population 2. d. indeterminate relative to the reuired sample sie from population 2.
,3. challenging c
ased on the information presented above7 you are to indicate for the speci*ed case from the table the reuired sample sie to be selected from population 1 relative to the sample from population 2. 9n case )7 the reuired sample from population 1 is: a. larger than the reuired sample sie from population 2. b. eual to the reuired sample sie from population 2. c. smaller than the reuired sample sie from population 2. d. indeterminate relative to the reuired sample sie from population 2.
,6.
ased on the information presented above7 you are to indicate for the
Arens/Elder/Beasley
challenging a
speci*ed case from the table the reuired sample sie to be selected from population 1 relative to the sample from population 2. 9n case +7 the reuired sample from population 1 is: a. larger than the reuired sample sie from population 2. b. eual to the reuired sample sie from population 2. c. smaller than the reuired sample sie from population 2. d. indeterminate relative to the reuired sample sie from population 2.
8. challenging
/hy do auditors *nd MES appealing a. MES increases the li!elihood of selecting a balance of high and lo" dollar items. b. MES is easy to use in the audit environment. c. MES provides a nonstatistical7 rather than a statistical7 conclusion. d. /hen misstatements are found7 MES rarely produces bounds in excess of materiality.
b
1. challenging c
/hat is the primary ob4ective of using strati*ed sampling in auditing a. $o increase the con*dence level at "hich a decision "ill be reached from the results of the sample selected. b. $o determine the occurrence rate for a given characteristic in the population being studied. c. $o decrease the e(ect of variance in the total population. d. $o determine the precision range of the sample selected.
2. medium
9n the application of statistical techniues to the estimation of dollar amounts7 a preliminary sample is usually ta!en primarily for the purpose of estimating the population: a. mode. b. range. c. median. d. variability.
d
#ssay Questions '. easy
#xplain the decision rule used in monetary-unit sampling to determine "hether the population is acceptable. ns"er: $he auditor "ill accept the conclusion that the population ;boo! value< is not misstated by a material amount if both the lo"er misstatement bound and the upper misstatement bound fall bet"een the understatement and overstatement tolerable misstatement amounts .
). easy
/hat are the three primary types of sampling methods used for calculating dollar misstatements in auditing ns"er: &onstatistical sampling.
+. easy
sampling7
monetary
unit
sampling7
and
variables
#xplain "hy monetary-unit sampling7 or probability proportional to sie sampling7 is not useful for detecting understatements. ns"er: Monetary-unit sampling is a techniue that assigns physical units to an
Arens/Elder/Beasley
,. medium
item in the population based on the dollar value of the item. Farger dollar items are more li!ely to be chosen for the sample than smaller items. So7 if a client has understated an item there is less li!elihood that the item "ill be selected. Conseuently7 auditors do not commonly use monetary-unit sampling "hen they are concerned "ith potential understatements. $here are 1) steps to audit sampling for details of balances7 divided into three sections: plan the sample7 select the sample and perform the audit procedures7 and evaluate the results. 5iscuss each of the steps included in the Hevaluate the resultsI section for nonstatistical sampling. ns"er: $he steps included in the Hevaluate the resultsI section are: 1. Generalize from the sample to the population . $his involves ;1< pro4ecting misstatements found in the sample to the population and ;2< allo"ing for sampling ris!. 2. Analyze the misstatements . $he auditor should evaluate the nature and cause of each misstatement found in the sample. '. Decide the acceptability of the population . 9f the pro4ected misstatement ;point estimate<7 combined "ith the allo"ance for sampling ris!7 is less than tolerable misstatement7 the auditor "ill accept the population as fairly stated.
. medium
$here are four steps to generalie from the sample to the population using di(erence estimation sampling. 9dentify each of these four steps. ns"er: $he four steps to generalie from the sample to the population using di(erence estimation sampling are: 1. Compute the point estimate of the total misstatement. 2. Compute an estimate of the population standard deviation. '. Compute the precision interval. ). Compute the con*dence limits.
3. medium
$he most important di(erence among tests of controls7 substantive tests of transactions7 and tests of details of balances lies in "hat the auditor "ants to measure. #xplain "hat each type of test attempts to measure. ns"er: $ests of controls focus on testing the e(ectiveness of internal controls. 9n substantive tests of transactions7 the auditor is concerned about both the e(ectiveness of internal controls and the monetary correctness of transactions in the accounting system. 9n tests of details of balances7 the concern is determining "hether the dollar amount of an account balance is materially misstated.
6. medium
5iscuss the advantages and disadvantages of monetary-unit sampling over other sampling methods. ns"er: dvantages of monetary-unit sampling: 9t automatically increases the li!elihood of selecting high dollar items from the population being audited. 9t freuently reduces the cost of doing the audit testing because •
•
Arens/Elder/Beasley
• •
several sample items are tested at once. 9t is appealing to auditors because of its ease of application. 9t provides a statistical conclusion rather than a nonstatistical one7 "hich aids auditors in ma!ing better and more defensible conclusions.
5isadvantages of monetary-unit sampling: $he total misstatement bounds resulting "hen exceptions are found may be too high to be useful to the auditor. 9t is cumbersome to select probability proportional to sie samples from large populations "ithout computer assistance. •
•
38. medium
#xplain the decision rule used "ith di(erence estimation sampling to determine "hether the population is acceptable. ns"er: $he auditor "ill decide to accept the population as fairly stated "hen the t"o-sided con*dence interval for the misstatements is completely "ithin the plus and minus tolerable misstatements. Jther"ise7 the auditor "ill conclude that the boo! value is misstated by a material amount.
31. medium
Go" might auditors include negative balances "hen using monetary-unit sampling to evaluate a population ns"er: $here are t"o basic alternatives to testing negative balances "hen using MES. Kirst7 the auditor may choose to ignore negative balances for MES selection and test those amounts by some other means. Second7 the auditor could treat the negative balances as positive and add them to the number of monetary units being tested.
32. challenging
Consider the steps in sampling for tests of details and for tests of controls. #xplain the di(erences in applying sampling to these t"o types of tests. ns"er: $he di(erences are as follo"s: $ests of 5etails $ests of Controls 1. 5e*ne a misstatement 1. 5e*ne attributes and exception conditions 2. Specify tolerable misstatement 2. Specify tolerable exception rate '. Specify >9 '. Specify >C> ). #stimate misstatements in the population ). #stimate #@#> +. nalye misstatements +. nalye exceptions
3'. challenging
#xplain >9 and >9> "ithin the context of variables sampling. ns"er: fter an audit test is performed and statistical results are calculated7 the auditor must conclude either that the population is not materially misstated or that it is materially misstated. >9 is the statistical ris! that the auditor has accepted a population that is actually materially misstated. $his is a serious concern to auditors because there are
Arens/Elder/Beasley
potential legal implications in concluding that an account balance is fairly stated "hen it is misstated by a material amount.
3). challenging
>9> is the statistical ris! that the auditor has concluded that a population is materially misstated "hen it is not. $he only time that >9> a(ects the auditors actions is "hen an auditor concludes that a population is not fairly stated. >9> is important only "hen there is a high cost to increasing the sample sie or performing other tests. 9dentify each of the seven factors that inLuence sample sie for nonstatistical tests of details of balances7 and state "hether each factor is directly or inversely related to sample sie. ns"er: Kactors that inLuence sample sie for nonstatistical tests are: Control risk . Control ris! is directly related to sample sie as control ris! increases7 sample sie also increases. Risk for other substantive tests related to the same assertion . 5irectly related to sample sie as these ris!s increase7 sample sie also increases. Acceptable audit risk . 9nversely related to sample sie as > increases7 sample sie decreases. Tolerable misstatement . 9nversely related as tolerable misstatement increases7 sample sie decreases. Inherent risk . 5irectly related as inherent ris! increases7 sample sie also increases. Epected size and fre!uency of misstatements . 5irectly related as the sie and freuency of expected misstatements increase7 sample sie also increases. "umber of items in the population . 5irectly related7 but has only a minor e(ect on sample sie. •
•
•
•
•
•
•
3+. challenging
$here are 1) steps to audit sampling for details of balances7 divided into three sections: plan the sample7 select the sample and perform the audit procedures7 and evaluate the results. 5iscuss each of the steps included in the Hplan the sampleI section for nonstatistical sampling. ns"er: $he steps comprising the Hplan the sampleI section are: 1. #tate the ob$ective of the audit test . Kor tests of details of balances7 the ob4ective is to determine "hether the account balance being audited is fairly stated. 2. Decide if audit samplin% applies . 9n certain situations7 the auditor may choose to test all large items and no small items. 9n those situations7 the auditor has not sampled. '. De&ne misstatement conditions . Misstatement conditions are any conditions that represent a monetary misstatement in a sample item. ). De&ne the population . $he recorded boo! value of the account being audited is the population. +. De&ne the samplin% unit . Kor nonstatistical sampling in tests of details of balances7 the sampling unit is almost al"ays the item ma!ing up the account balance. ,. #pecify tolerable misstatement . $his is the amount of materiality allocated to the account under audit. . #pecify the acceptable risk of incorrect acceptance . $his is the ris!
Arens/Elder/Beasley
that the auditor is "illing to ta!e of accepting a balance as correct "hen the true misstatement in the balance is greater than tolerable misstatement. 3. Estimate misstatements in the population. 6. Determine the initial sample size . 9n nonstatistical sampling7 this is determined 4udgmentally considering the previous eight factors.
3,. challenging
/hen using nonstatistical sampling7 the auditor must sub4ectively consider "hether the true population misstatement exceeds a tolerable amount. $his is done by considering *ve factors. Jne factor is the di(erence bet"een the point estimate and tolerable misstatement. State the other four factors the auditor must consider. ns"er: Jther factors the auditor must consider are: $he extent to "hich items in the population have been audited 188D. /hether misstatements tend to be o(setting or in only one direction. $he amounts of individual misstatements. Sample sie. •
•
• •
3. challenging
5iscuss each of the six possible courses of action the auditor can ta!e "hen he or she has concluded that the population is misstated by more than a tolerable amount. ns"er: $he six possible courses of action the auditor can ta!e "hen he or she has concluded that the population is misstated by more than a tolerable amount are: Take no action until tests of other audit areas are completed . 9f o(setting misstatements are found in other parts of the audit7 the auditor may conclude that the population is acceptable. 'erform epanded audit tests in speci&c areas . Increase the sample size . s sample sie increases7 sampling error is reduced if the rate of misstatements in the expanded sample7 their dollar amount7 and their direction are similar to those in the original sample. $his may result in the population being acceptable. Ad$ust the account balance. 9n some circumstances7 if the client corrects the misstatements discovered by the auditor7 the boo! value of the account may become acceptable. Re!uest the client to correct the entire population . Refuse to %ive an un!uali&ed opinion . 9f none of the prior courses of action results in an acceptable population7 the auditor "ill have to issue either a uali*ed or an adverse opinion. •
• •
•
• •
33. challenging
$here are seven steps to calculate ad4usted misstatement bounds "hen both overstatement and understatement errors are discovered in monetaryunit sampling. Step one is H5etermine misstatement for each sample item7 !eeping overstatements and understatements separate.I 5iscuss each of the remaining six steps.
Arens/Elder/Beasley
ns"er: $he remaining six steps are: Calculate misstatement per dollar unit in each sample item ;misstatementNrecorded value<. Fayer misstatements per dollar unit from highest to lo"est. 5etermine upper precision limit from attributes sampling table7 and calculate the percent misstatement bound for each misstatement ;layer<. Calculate initial upper and lo"er misstatement bounds for each layer and total. Calculate point estimate for overstatements and understatements. Calculate ad4usted upper and lo"er misstatement bounds. •
• •
•
• •
36. challenging
$he nine steps in planning the sample are almost identical for nonstatistical sampling and di(erence estimation. Go"ever7 there are three important di(erences. 5iscuss each of the three di(erences. ns"er: $he three di(erences in the steps in planning the sample for nonstatistical sampling and di(erence estimation are: /hen using di(erence estimation7 in addition to acceptable ris! of incorrect acceptance7 the auditor speci*es acceptable ris! of incorrect re4ection. /hen using di(erence estimation7 the auditor ma!es an advance estimate of the population standard deviation. /hen using di(erence estimation7 the sample sie is calculated using a formula. •
•
•
Jther Jb4ective ns"er Kormat Questions 68. medium
Match six of the terms ;a-l< "ith the de*nitions provided belo" ;1-,<: a. b. c. d. e. f. g. h. i. 4. !. l.
cceptable ris! of incorrect acceptance cceptable ris! of incorrect re4ection 5i(erence estimation Misstatement bounds Monetary-unit sampling Mean-per-unit estimation @oint estimate @robability proportional to sie sample selection >atio estimation Statistical inferences Strati*ed sampling 0ariable sampling
4
1.
Conclusions dra"n from sample results based on !no"ledge of sampling distributions.
l
2.
Sampling techniues for tests of details that use the statistical inference processes.
Arens/Elder/Beasley
b
'.
$he ris! that the auditor is "illing to ta!e of concluding a balance is materially misstated "hen it is7 in fact7 fairly stated.
e
).
statistical sampling method that provides upper and lo"er misstatement bounds expressed in monetary amounts.
c
+.
method of variables sampling in "hich the auditor estimates the population misstatement by multiplying the average misstatement in the sample by the total number of population items and also calculates sampling ris!.
a
,.
$he ris! that the auditor is "illing to ta!e of accepting a balance as correct "hen the true misstatement in the balance is greater than tolerable misstatement.
Arens/Elder/Beasley
61. easy b
$he primary factor a(ecting the auditors acceptable ris! of incorrect acceptance is assessed inherent ris!. a. $rue b. Kalse
62. easy b
9n evaluating results for tests of details7 auditors must evaluate exceptions identi*ed. a. $rue b. Kalse
6'. easy b
$he t"o primary types of sampling methods used for calculating dollar misstatements are attributable sampling and monetary unit sampling. a. $rue b. Kalse
6). easy b
cceptable ris! of incorrect acceptance is indirectly a(ected by acceptable audit ris!. a. $rue b. Kalse
6+. easy b
9n monetary-unit sampling7 the li!elihood of high dollar items from the population being included in the sample is lo"er than the li!elihood for small dollar items. a. $rue b. Kalse
6,. easy a
cceptable ris! of incorrect re4ection is the statistical ris! that the auditor has concluded that a population is materially misstated "hen it is not. a. $rue b. Kalse
6. easy b
/hen auditors apply MES to a sample7 the sample is selected using random sampling techniues. a. $rue b. Kalse
63. medium a
$olerable misstatement is inversely related to sample sie. a. $rue b. Kalse
66. medium a
cceptable ris! of incorrect acceptance ;>9< and sample sie are inversely related that is7 as >9 increases7 sample sie decreases. a. $rue b. Kalse
188. medium b
#stimated misstatement in the population and sample sie are inversely related that is7 as estimated misstatement increases7 sample sie decreases. a. $rue b. Kalse
181. medium a
$he purpose of strati*cation is to permit auditors to emphasie certain aspects of a population and deemphasie others. a. $rue b. Kalse
Arens/Elder/Beasley
Arens/Elder/Beasley
182. medium a
n auditor using nonstatistical sampling cannot formally measure sampling error. a. $rue b. Kalse
18'. medium a
ttributes sampling tables can be used to evaluate results of tests of details "ith >C> being replaced "ith >9. a. $rue b. Kalse
18). medium a
/hen using nonstatistical sampling7 the larger the sample sie7 the greater the auditors con*dence that the point estimate is close to the true population value. a. $rue b. Kalse
18+. medium a
>euired sample sie increases as the auditors tolerable misstatement for an account balance or class of transactions decreases. a. $rue b. Kalse
18,. medium b
$he use of monetary-unit sampling is most appropriate "hen the auditor expects to *nd many errors and "hen a monetary result is desired. a. $rue b. Kalse
18. medium a
5i(erence estimation freuently results in smaller sample sies than any other variables sampling method. a. $rue b. Kalse
183. medium a
Jverstatement and understatement amounts are dealt "ith separately and then combined "hen generaliing from the sample to the population "hen applying MES. a. $rue b. Kalse
186. medium a
$he sample sie is inversely related to the computed precision interval in di(erence estimation that is7 as sample sie increases7 the computed precision interval decreases. a. $rue b. Kalse
118. medium a
9n di(erence estimation sampling7 the con*dence limits are calculated by combining the point estimate of the total misstatements and the computed precision interval at the desired con*dence level. a. $rue b. Kalse
111. medium b
$he primary factor a(ecting the auditors decision about >9 is assessed inherent ris!. a. $rue b. Kalse
112.
$he purpose of strati*ed sampling is to achieve a greater con*dence level
Arens/Elder/Beasley
challenging b
;lo"er ris! of incorrect acceptance< for a given sample sie. a. $rue b. Kalse
Arens/Elder/Beasley
11'. challenging a
cceptable ris! of assessing control ris! too lo" ;>C>< and acceptable ris! of incorrect acceptance ;>9< are inversely related that is7 a decrease in >C> is accompanied by an increase in >9. a. $rue b. Kalse
11). challenging b
cceptable audit ris! ;>< and acceptable ris! of incorrect acceptance ;>9< are inversely related that is7 as > increases7 >9 decreases. a. $rue b. Kalse
11+. challenging a
ccounts "ith ero or negative year-end balances have no chance of being included in a standard probability proportional to sie ;@@S< sample. a. $rue b. Kalse
11,. challenging b
$he statistical results "hen MES is used are called exception bounds. a. $rue b. Kalse
11. challenging b
cceptable ris! of incorrect acceptance ;>9< is directly related to the computed precision interval in di(erence estimation that is7 as >9 increases7 the computed precision interval decreases. a. $rue b. Kalse
113. challenging b
$he population standard deviation of the misstatements from the sample is inversely related to the computed precision interval in di(erence estimation that is7 as the standard deviation increases7 the computed precision interval decreases. a. $rue b. Kalse
Arens/Elder/Beasley
