Which of the following deviations would probably be of most concern to auditors?

Q99:

In each of the following situations,indicate whether Walters,CPA is using unrestricted random (UR),systematic random (SR),haphazard (H),or block (B)selection. 1____.Walters created a list of all sales invoices to verify that they were supported by the appropriate shipping documents.Invoice number 15 was selected first for examination,followed by the invoices numbered 30,45,60,75,90,and so on until 40 invoices had been selected. 2____.To test the occurrence assertion regarding sales invoices,Walters randomly selected invoices from the database storage disk for examination. 3____.To ensure proper authorization of payroll functions,Walters selected all transactions during the last 5 days of each pay period to be included in the sample. 4____.Sales invoices are commonly stored in a filing cabinet during the 30-day return period before being input in the company's database.To ensure the 30-day return period was not exceeded,Walters decided to pull a few invoices from each drawer until the desired sample size was collected for examination. 5____.T&T Company's purchase orders are already pre-numbered and listed in numerical order within the company's database.As a result,Walters was able to use one of the firm's computer programs to identify random numbers and match each number with a corresponding purchase order to test the accuracy assertion. 6____.Using a random number table,Walters identified a series of 50 numbers and located the corresponding employee identification number to select time cards for examination. 7____.Walters used a computer listing of T&T's credit memos,which totaled 2,400 items,to select 4 random starting points for examination.The remaining memos were identified for testing by selecting every 24th item until the sample size reached 100 memos.

Multiple-Choice Questions

1.

easy

A sample in which the characteristics of the sample are the same as those of the population is a(n) b a. variables sample. b. representative sample. c. attributes sample. d. random sample.

2.

easy

When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to be using a a. audit sampling. b. representative sampling. c. poor judgment. d. none of the above.

1. One of the ways to eliminate nonsampling risk is through easy a. proper supervision and instruction of the client’s employees. b b. proper supervision and instruction of the audit team. c. the use of attributes sampling rather than variables sampling. d. controls which ensure that the sample drawn is random and representative.

2. One cause of nonsampling risk is easy a. ineffective use of audit procedures. a b. testing less than the entire population. c. use of extensive tests of controls. d. any of the above.

5.

easy

When the auditor goes through a population and selects items for the sample without regard to their size, source, or other distinguishing characteristics, it is called b a. block sample selection. b. haphazard selection. c. systematic sample selection. d. statistical selection.

6.

easy

When the auditor intends to evaluate a sample statistically, the only acceptable selection method is a a. probabilistic selection. b. judgmental selection. c. haphazard selection. d. block sample selection.

7.

easy

A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a a a. random sample. b. statistical sample. c. judgment sample. d. representative sample.

8.

easy

The process which requires the calculation of an interval and then selects the items based on the size of the interval is c a. statistical sampling. b. random sample selection. c. systematic sample selection. d. computerized sample selection.

9.

easy

In systematic sample selection, the population size is divided by the number of sample items desired in order to determine the a a. interval. b. tolerable exception rate. c. computed upper exceptions rate. d. mean.

1. Sampling risk may be controlled by easy a. adjusting the sample size. d b. always using random sampling. c. using whatever sample selection technique is appropriate for the population. d. a and c.

11.

easy

Which of the following material occurrences would be least likely to attract the auditor’s attention? b a. Deviations from client’s established control procedures. b. Deviations from client’s budgeted values. c. Monetary errors or irregularities in populations of transaction data. d. Monetary errors or irregularities in populations of account balance details.

1. Which of the following statements is correct? easy d

a. A sample of all items of a population will eliminate sampling risk, but increase nonsampling risk. b. The use of an appropriate sample selection technique ensures a representative sample. c. The auditor’s failure to recognize an exception is a significant cause of sampling risk. d. The use of inappropriate audit procedures is a significant cause of nonsampling risk.

13.

easy

The risk which the auditor is willing to take of accepting a control as being effective when it is not is the c a. finite correction factor. b. tolerable exception rate. c. acceptable risk of assessing control risk too low. d. estimated population exception rate.

14.

easy

The exception rate the auditor will permit in the population and still be willing to usethe assessed level of control risk is called the a a. tolerable exception rate. b. estimated population exception rate. c. acceptable risk of overreliance. d. sample exception rate.

1. If the auditor decides to assess control risk at the maximum level, tests of controls are easy a. increased in number. c b. reduced in number. c. not performed. d. unchanged from prior planned settings.

16.

easy

Attributes sampling would be an appropriate method to use on which one of the following procedures in an audit program?

1. One of the ways to reduce sampling risk is to medium a. carefully design the audit procedures to be used. d b. use variables sampling rather than attributes sampling. c. provide proper supervision and instruction of the audit team. d. use an appropriate method of selecting sample items from the population.

2. Which of the following statements is correct with respect to the evaluation of sample results? medium c

a. It is acceptable to make nonstatistical evaluations only when probabilistic sample selection is used. b. It is acceptable to make nonstatistical evaluations only if the auditor cannot quantify sampling risk. c. It is never acceptable to evaluate a nonprobabilistic sample as if it were a statistical one. d. All of the above are correct.

25.

medium

Which of the following statements is a valid criticism of the use of non-statistical sampling methods? d a. Many audit tests, such as footing of journals, must be performed outside a statistical sampling context. b. The cost of performing random selection or testing often exceeds the benefits. c. Non-statistical sampling does not differ substantially from statistical sampling methods. d. Conclusions may be drawn in more precise ways when using statistical sampling methods.

26.

medium

Which of the following methods of sample selection is appropriately used when selecting a random sample? d a. Use of random number tables. b. Use computer generated random numbers. c. Auditor’s random selection of items. d. a and b, but not c.

1. Correspondence is established between the random number table and the population by medium a. identifying each item in the population with a unique number. b b. deciding the number of digits to use in the random number table and their association with the population numbering system. c. defining which digits the auditor uses in a column and the method of reading the table. d. selecting a random starting point on the table.

2. (Public) medium

The acceptable risk of assessing control risk too low will normally be assessed at a ____ level when auditing a public company. c a. higher b. compensating c. lower d. nominal

1. Which of the following statements is not correct (select all that apply)? medium b and c

a. It is acceptable to pick a starting point on a random number table by using a “blind stab” method. b. It is impossible to draw a six-digit random number from a table that is separated into columns of five digits. c. The only reason for selecting a random starting point on a random number table is to eliminate the predictability of the sample. d. When selecting a three-digit number from a table that is separated into columns of five digits, it is permissible to use the first three digits, the middle three digits, or the last three digits.

30.

medium

Which of the following is not one of the types of computer tools used to generate random samples?

d a. Electronic spreadsheet programs. b. Random number generators. c. Generalized audit software. d. Random application search software.

1. Auditors are concerned with which type of exceptions in populations of accounting data? medium a. Deviations from client established controls. d b. Monetary misstatements in transaction data. c. Monetary misstatements in account balance details. d. Auditors are concerned with all of these exceptions.

32.

medium

In using audit sampling for exception rates, the auditor is primarily interested in determining the _____ the exception rate might be. b a. lowest. b. most. c. average range in which. d. none of the above.

33.

medium

The highest estimated exception rate in the population at a given acceptable risk of assessing control risk too low is c a. the upper exception rate. b. estimated population exception rate. c. the computed upper exception rate. d. the tolerable exception rate.

1. The advantage of systematic sample selection is that medium a. it is easy to use. a b. there is limited possibility of it being biased. c. it is unnecessary to determine if the population is arranged randomly. d. all three of the above.

35.

medium

A statistical method used to estimate the proportion of items in a population containing a characteristic of interest is a a. attributes sampling. b. variables sampling. c. estimation sampling. d. population-proportional-to -size sampling.

36.

medium

The exception rate that the auditor will permit in the population and still be willing to use the assessed control risk is called the d a. acceptable exception rate. b. estimated population exception rate. c. sample exception rate. d. tolerable exception rate.

1. The auditor’s best estimate of the population exception rate is the medium a. sample exception rate. a b. tolerable exception rate (TER). c. experience of the previous year. d. computed upper exception rate (CUER).

45.

medium

The acceptable risk of assessing control risk too low (ARACR) is a measure of the level of risk that a a. the auditor is willing to take. b. is predicted by the random number table. c. is predicted by the statistical frequency table. d. is generated as a result of the auditor’s knowledge of the true population exception rate.

46.

medium a

In attributes sampling, an advance estimate of the estimated population exception rate is necessary to plan the appropriate sample size. The relationship of expected population exception rate (EPER) to sample size is a. direct (small EPER = small sample). b. inverse (small EPER = large sample). c. a variable (sometimes small, sometimes large) dependent on other factors present. d. indeterminate.

1. The initial sample size is so called because medium a. there is always another sample to be done. d b. the auditor must take several samples to ensure randomness. c. the auditor must take several samples to ensure that the final sample is representative of the population. d. the exceptions must be evaluated before deciding whether the sample is sufficiently large to achieve the objectives.

48.

medium

Statistical theory proves that in most types of populations to which attributes sampling applies, the population size is b a. not a consideration in determining sample size. b. a minor consideration in determining sample size. c. a major consideration in determining sample size. d. the determining factor in establishing sample size.

1. The sample exception rate equals medium a. the number of exceptions in the population divided by the sample size. c b. the number of items in the population multiplied by the number of exceptions in the sample. c. the number of exceptions in the sample divided by the sample size. d. the number of exceptions in the population divided by the population size.

50.

medium

Before the population can be considered acceptable based on the acceptable risk of assessing control risk too low (ARACR), the computed upper exception rate (CUER) must be c a. greater than or equal to the TER. b. greater than the TER. c. less than or equal to the TER. d. less than the tolerable exception rate (TER).

1. Which of the following combinations of attributes and exception conditions is inappropriate. medium d

a. Existence of sales invoice number in the sales journal – No record of sales invoice number in the sales journal. b. Credit is approved – Lack of initials indicating credit approval. c. Quantity on customer order agree with duplicate sales invoice – Quantity on customer order do not agree with quantity on duplicate sales invoice. d. Evidence that pricing are checked – Lack of initials on duplicate sales invoice indicating that extensions were checked.

1. Which of the following statements is not true? medium a. Random selection is statistical measurement. a b. It is acceptable to use random selection procedures without drawing statistical conclusions. c. It would be inappropriate to draw a statistical conclusion unless the sample were randomly selected. d. Random selection is a part of statistical sampling.

53.

medium

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of d a. accuracy. b. existence. c. control. d. completeness.

1. An example of sampling for attributes would be estimating the medium a. quantity of specific inventory items. c b. probability of losing a patent infringement case. c. percentage of overdue accounts receivable. d. dollar value of accounts receivable.

2. The acceptable risk of assessing control risk too low is medium d

a. the risk that the auditor is willing to take of accepting a control as ineffective when it is effective. b. the risk that the auditor is willing to take of accepting a control as effective when it is ineffective. c. the auditor’s measure of sampling risk. d. b and c, but not a.

1. When using statistical sampling, the auditor would probably require a smaller sample if the medium a. population increases. b b. desired reliability decreases. c. desired precision interval narrows. d. expected exception rate increases.

2. Which of the following best illustrates the concept of sampling risk? medium a

a. A randomly chosen sample may not be representative of the population as a whole on the characteristics of interest. b. An auditor may select audit procedures that are not appropriate to achieve the specific objective. c. An auditor may fail to recognize errors in the documents examined for the chosen sample. d. The documents related to the chosen sample may not be available for inspection.

58.

medium

A principal advantage of statistical methods of attributes sampling over nonstatistical methods is that they provide a scientific basis for planning the d a. risk of assessing control risk too low. b. tolerable exception rate. c. expected population exception rate. d. sample size.

66.

challenging

Unless a precise statement of what constitutes an attribute is made in advance, the staff person who performs the audit procedure will have no guidelines c a. to use when evaluating the results of analytical review procedures. b. to determine what documents to obtain and review for the observation tests. c. for identifying deviations. d. for performing all three of the above.

1. When deciding on the acceptable risk of assessing control risk too low, the auditor should challenging a. rely on his/her professional judgment. a b. err on the side of being conservative. c. consult the professional standards. d. do any of the above.

2. The finite correction factor has the effect of significantly changing the sample size only when challenging a. less than 10% of the population is included in the sample. d b. 5% or more of the population is included in the sample. c. greater than 5% but less than 10% of the population is included in the sample. d. more than 10% of the population is included in the sample.

69.

challenging c

Of the four factors which determine the initial sample size (population size, tolerable exception rate, acceptable risk of overreliance, and expected population exception rate), which combination of two factors has the greatest effect on sample size? a. Population size times expected population exception rate. b. Expected population exception rate plus acceptable risk of overreliance. c. Tolerable exception rate minus expected population exception rate. d. Acceptable risk of overreliance minus tolerable exception rate.

1. Which of the following statements is true? challenging d

a. The audit procedures will vary as a result of using either statistical or nonstatistical sampling. b. The audit procedures will be the same for either statistical or nonstatistical sampling, but they must be performed differently for each. c. Statistical sampling requires quantitative audit procedures, whereas nonstatistical sampling requires judgmental audit procedures. d. The same audit procedures are performed in the same manner for either statistical or nonstatistical sampling.

71.

challenging b

When audit procedures have been completed for an attributes sampling application, the auditor must generalize from the sample to the population. Which of the following statements would be incorrect regarding this process? a. The auditor would use an attributes sampling table to determine the computed upper exception rate. b. The computed upper exception rate is the highest exception rate at a given ARACR. c. It would be wrong for the auditor to conclude that the population exception rate is exactly the same as the sample exception rate. d. In selecting the table corresponding to the risk of overreliance, it should be the same as the ARACR used for determining the initial sample size.

1. A CPA examining inventory may appropriately apply sampling for attributes to estimate the challenging a. average price of inventory items. b b. percentage of slow-moving inventory items. c. dollar value of inventory. d. physical quantity of inventory items.
2. challenging

If an auditor, planning to use statistical sampling, is concerned with the number of a client’s sales invoices that contain mathematical errors, the auditor would most likely utilize b a. random sampling with replacement.

b. sampling for attributes. c. sampling for variables. d. stratified random sampling.

74.

challenging a

If the result obtained from a particular sample will be critical (that is, the auditor would not be able to render an unqualified opinion unless every item in the population were examined), which of the following is the most important to the auditor? a. Acceptable risk of assessing control risk too low. b. Estimated population exception rate. c. Tolerable exception rate. d. Size of the population.

1. The tolerable rate of exceptions for tests of controls is generally challenging a. lower than the estimated population exception rate in the related accounting records. b b. higher than the estimated population exception rate the related accounting records. c. identical to the estimated population exception rate in the related accounting records. d. unrelated to the estimated population exception rate in the related accounting records.

2. An advantage of using statistical sampling techniques is that such techniques challenging a. mathematically measure sampling risk. a b. eliminate the need for judgmental decisions. c. define the values of precision and reliability required to provide audit satisfaction. d. have been established in the courts to be superior to judgmental sampling.

77.

challenging

Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its unique ability to a a. provide a mathematical measurement of uncertainty. b. promote a more legally defensible procedural approach. c. define the precision required to provide audit satisfaction. d. establish conclusive audit evidence with decreased audit effort.

78.

challenging

Which of the following is an advantage of systematic sample selection over random number sampling? d 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.

79.

challenging b

What is an auditor’s evaluation of a statistical sample for attributes when a test of 100 documents results in four exceptions if the tolerable exception rate is 5%, the expected population exception rate is 3%, and the allowance for sampling risk is 2%? a. Accept the sample results as support for planned reliance on the control because the tolerable rate less the allowance for sampling risk equals the expected population exception rate. b. Modify planned reliance on the control because the sample exception rate plus the allowance for sampling risk exceeds the tolerable rate. c. Modify planned reliance on the control because the tolerable rate plus the allowance for sampling risk exceeds the expected population exception rate. d. Accept the sample results as support for planned reliance on the control because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

80.

challenging a

In the evaluation of the results of an attributes sample, the fact that the exception rate in the sample was 2% rather than the estimated population exception rate of 4% would cause the computed upper exception rate to a. be less than the tolerable exception rate.

86.

medium

Discuss two causes of nonsampling risk. Also discuss ways the auditor can control nonsampling risk.

Answer: The two causes of nonsampling risk are (1) the auditor’s failure to recognize exceptions and (2) inappropriate or ineffective audit procedures. The auditor can control nonsampling risk through careful design of audit procedures and through proper instruction, supervision, and review.

87.

medium

What is the key advantage and disadvantage associated with systematic sample selection? How must auditors address this disadvantage? Answer: The key advantage is its ease of use. Generally, systematic samples are easily drawn from the population and supporting documentation is easily developed. The key disadvantage is the potential for bias. Once the first item in the sample is selected, all other items are chosen automatically. Auditors should be careful to consider any potential pattern in the data prior to selecting their sample to ensure that their selection considers the possible bias.

88.

medium

Describe the differences between statistical and nonstatistical sampling in terms of (1) the sample selection methods used, and (2) measurement (quantification) of sampling risk.

Answer: Nonstatistical sampling differs from statistical sampling in that nonprobabilistic sampling can be used for the former but not the latter. In addition, sampling risk can be quantified when using statistical sampling, but not when using nonstatistical sampling.

89.

medium

Describe each of the three types of sample selection methods commonly associated with nonstatistical audit sampling.

Answer: Three types of sample selection methods commonly associated with nonstatistical audit sampling are: - Directed sample selection. Each item in the sample is selected on the basis of some judgmental criteria established by the auditor. - Block sample selection. Several items in the population are selected in sequence. - Haphazard sample selection. Sample items are selected from the population without regard to their size, source, or other distinguishing characteristics.

90.

medium

Describe each of the four types of sample selection methods commonly associated with statistical audit sampling.

Answer: Four types of sample selection methods commonly associated with statistical audit sampling are: - Simple random sample selection. Every possible combination of elements in the population has an equal chance of constituting the sample. - Systematic sample selection. A probabilistic method of sampling in which the auditor calculates an interval (the population size divided by the number of sample items desired) and selects the items for the sample based on the size of the interval. - Probability proportional to size. The probability of selecting any individual population item is proportional to its recorded amount.

• Stratified sample selection. A probabilistic method of sampling in which the population is divided into subpopulations, and subsamples are taken from each of the subpopulations.

91.

medium

Directed sample selection is the selection of each item in the sample based on some judgment criteria established by the auditor. Discuss three commonly-used criteria.

Answer: Commonly-used criteria used in directed sample selection are: - Items most likely to contain misstatements; for example, unusual or complex transactions, overdue receivables. - Items containing selected population characteristics, such as transactions selected from each month during the year or from each location. - Large dollar coverage in which the auditor focuses on selecting the relatively large items in the population for testing.

92.

medium

What types of exceptions are auditors most concerned with when evaluating populations of accounting data?

Answer: There are three types of exceptions that auditors are generally concerned with when evaluating populations of accounting data. They are: 1. Deviations from client’s established controls. 2. Monetary misstatements in populations of transaction data. 3. Monetary misstatements in populations of account balance details.

93.

medium

There are 14 steps to attributes sampling, divided into three sections: plan the sample, select the sample and perform the audit procedures, and evaluate the results. Discuss each of the steps that comprise the “evaluate the results” section.

Answer: The steps that comprise the “evaluate the results” section in attributes sampling are: 1. Generalize from the sample to the population. Tables can be used to determine the upper precision limit (computed upper exception rate) based on the acceptable risk of assessing control risk too low and the sample exception rate. 2. Analyze exceptions. In this step, the auditor should analyze individual exceptions to determine the breakdown in the internal controls that caused them. 3. Decide the acceptability of the population. In the final step, the auditor compares the computed upper exception rate with the tolerable exception rate. If the computed upper exception rate is less than or equal to the tolerable exception rate, then the population is considered acceptable.

94.

medium

Explain the effect on sample size of increasing each of the following: (1) tolerable exception rate, (2) estimated population exception rate, (3) acceptable risk of assessing control risk too low, and (4) population size.

Answer: The tolerable exception rate and acceptable risk of assessing control risk too low are inversely related to sample size; that is, as TER or ARACR increase, sample size will decrease. The estimated population exception rate and the population size are directly related to sample size; as EPER increases, sample size will also increase, and as population size increases, sample size may slightly increase.

estimate of the proportion of items in a population containing a characteristic of interest.

a 5. A nonprobabilistic method of sample selection in which items are chosen without regard to their size, source, or other distinguishing characteristics.

97.

easy b

Sampling risk results from the auditor’s failure to recognize exceptions in transaction data. a. True b. False

98.

easy a

Even when nonsampling risk is zero, there is always a chance that a sample is not reasonably representative. a. True b. False

99.

medium a

When selecting a sample, random numbers may be obtained either with replacement or without replacement. Although both selection methods are theoretically sound, auditors rarely use replacement sampling. a. True b. False

100.

medium b

If a particular internal control is not followed by the client exactly 6% of the time, and the auditor’s tests of that control find three control violations in a sample of 50, the sample is considered to be nonrepresentative. a. True b. False

101.

medium a

In practice, auditors do not know whether a sample is representative, even after all testing is complete. a. True b. False

102.

medium b

The only way to control sampling risk is to increase sample size. a. True b. False

103.

medium a

A sample of all items in a population will have a zero sampling risk. a. True b. False

104.

medium a

It is equally acceptable under professional auditing standards for auditors to use either statistical or nonstatistical sampling methods. a. True b. False

105.

medium b

When using nonstatistical sampling, the sample must be a probabilistic one. a. True b. False

106.

medium b

The use of haphazard sample selection is not allowed under professional auditing standards. a. True b. False

1. Although systematic sample selection is easy to use, its primary disadvantage is that it is not a

medium b

probabilistic sampling method. a. True b. False

108.

medium b

Acceptable risk of assessing control risk too low is the risk that the auditor is willing to take of accepting a control as effective when the true population exception rate is greater than the estimated population exception rate. a. True b. False

109.

medium b

Directed sample selection, block sample selection, and haphazard sample selection are three types of probabilistic sample selection methods. a. True b. False

1. (Public) medium a

ARACR is normally lower for a public company audit than a private company audit. a. True b. False

111.

medium a

The estimated population exception rate is the auditor’s “best estimate” of the actual exception rate in the entire population. a. True b. False

112.

medium a

When the computed upper exception rate is greater than the tolerable exception rate in attributes sampling, one possible appropriate course of action is to increase sample size. a. True b. False

113.

challenging a

Tolerable exception rate (TER) is inversely related to sample size; that is, as TER increases, sample size decreases. a. True b. False

114.

challenging b

The higher the assessed control risk, the lower will be the acceptable risk of assessing control risk too low. a. True b. False

115.

challenging a

In nonstatistical sampling, the calculated sampling error is the difference between the tolerable exception rate and the sample exception rate. a. True b. False

What are the two aspects of sampling risk that an internal auditor is concerned with when testing controls?

Which of the following is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population?

What are the five types of tests auditors use to determine whether financial statements are fairly stated?

Which of the following is the risk that audit test will not uncover existing exception in a sample?