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Flashcards in SU 15: Sampling Deck (51)
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1
Q

Prior experience indicates numerous pricing and extensions errors of perpetual inventory balances what sampling method would be approriate

A

Difference estimation. If population misstatement involves (1) determining the difference between the audit carrying amounts for items in the sample (2) adding the difference (3) recalculating the mean difference (4) multiplying the mean # of items in the poplulation. An allowance for sampling risk is calculated. Ratio estimation is similar except it estimates the population misstatement by multiplying the carrying amount of the population by the ratio of the total audit value of the sample items to the total carrying amount. If has been demonstrated that ratio and difference estimations both reliable and efficient when small misstatements predominate and they are not skewed.

2
Q

Which of the following combinations results in a decrease in sample size for attribute sample. Allowable risk of assessing control risk too low/Tolerable rate/Expected Pop Dev Rate

A

Increase/Increase/Decrease
to determine the sample size for a test of controls, the auditor considers (1) tolerable rate of deviation form the control being tested (2) the expected actual rate of deviations (3) the allowable risk of assessing control risk too low. An increase in allowable risk of assessing control risk too low, an increase in the tolerable rate and decrease in expected rate each has the effect of reducing required sample size.

3
Q

1.) The larger the item in the population, the more likely it will be included in the sample

A

a. B, monetary-unit sampling only. In monetary unit sampling, the probability of selection is related to size of the item

4
Q

2.) Replaces the need for the use of judgement by an auditor

A

a. D, neither MPU or monetary-unit sampling. As noted in AU 350, “Evaluating the appropriateness of evidence is solely a matter of auditing judgement and is not determined by the design and evaluation of an audit sample”

5
Q

3.) Use the average amount of sampled items to estimate the amount of population

A

a. A, Classical variables or MPU sampling only. MPU sampling determines the average amount of sampled items (total audited amount of the sample/number of items in the sample) and then multiplies this average by the number of items in the population to estimate the population amount.

6
Q

4.) Use results from a portion of the population to draw an inference about the total population

A

a. C, both MPU and MUS. AU 350 states “Audit sampling is the application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class”

7
Q

5.) Allow the auditor to measure and control the risk of accepting a materially misstated balance

A

a. C, both MPU and MUS. By using statistical theory, the auditor can quantify sampling risk to assist in limiting it to a level they feel is appropriate

8
Q

6.) Require the auditor to estimate the population standard deviation to determine the appropriate sample size

A

a. A, Classical variables or MPU sampling only. MPU sampling requires the auditor estimate the population’s standard deviation to determine the sample size and evaluate the results. MUS, however, does not require the use of the population standard deviation

9
Q

7.) Is equally useful for selection samples and drawing inferences about asset and liability balances

A

a. A, Classical variables or MPU sampling only. MUS sampling is appropriate only for accounts subject to risk of overstatement (eg assets). Because the focus of liability accounts is ordinarily on the risk of understatement, MUS does not meet the objectives for liabilities

10
Q

8.) Eliminates the need for the auditor to consider materiality

A

a. D, neither. The auditor must quantify the amount considered material for either sampling method. The amount considered material is one of the factors used in calculating the appropriate sample size

11
Q

9.) Automatically stratifies the population during sample selection

A

a. B, monetary-unit sampling only. Because MUS increase the probability of selecting large items, it effectively stratifies the population.

12
Q

10.) Require documentation of results in the working papers

A

a. C, both MPU and MUS. All important evidence and conclusions should be documented in the working papers, regardless of what tools or techniques the auditor uses.

13
Q

Sampling Risk is defined as

A

That a properly drawn sample may not be representative of the population

14
Q

Risk of Assessing control risk too low is

A

The risk the assessed level of control risk based on the sample is less than the true operating effectiveness of internal control. This risk relates to audit effectiveness and is termed a Type II or Beta risk

15
Q

Risk of Assessing control risk too high is

A

The assessed level of control risk based on the sample is greater than the true operating effectiveness of the control. relates to efficiency resulting in greater audit effort. Type I or Alpha risk.

16
Q

Sampling Risk

A

Upper-deviation rate less sample deviation rate

17
Q

Attribute sampling

A

generally used for tests of controls
• Estimate frequency of errors in population based on frequency in sample
• Determine whether or not estimated error rate indicates control is working effectively

18
Q

Classical variables sampling

A

generally used for substantive testing
• Estimate value of population based on value of items in sample
• Determine whether or not estimated value is close enough management’s assertion
as to valuation

19
Q

Probability proportional to size sampling

A

also used for substantive testing
• Form of variables sampling
• Items that are larger in size or value higher probability of being selected for sample

20
Q

Attribute Sampling: If upper precision limit ≤ tolerable rate

A

assessed level of control risk unchanged

21
Q

Attribute Sampling: If upper precision limit > tolerable rate

A

assessed level of control risk increased

22
Q

Attribute Sampling: Upper precision limit =

A

Sample deviation rate + Allowance for sampling risk

23
Q

Attribute Sampling: Calculate the sample deviation rate

A

of errors in sample ÷ # of items in samp

24
Q

Variables Sampling: tolerable misstatement

A

the maximum difference, taking materiality into
account, between the actual balance and the reported balance that will not prevent the
auditor from issuing an unmodified report

25
Q

Variables Sampling: allowable risk of incorrect acceptance or sampling risk

A

the maximum

allowable risk that the auditor will accept an amount that is materially incorrect

26
Q

Variables Sampling: expected amount of misstatement or expected deviation

A

the amount by
which the auditor expects the actual balance to differ from the reported amount based on
the assessed level of control risk

27
Q

Variables Sampling: upper deviation limit

A

the estimated difference between the actual amount

and the reported amount based on the sample

28
Q

Variables Sampling: If precision ≤ tolerable misstatement

A

opinion may require modification

29
Q

Variables Sampling: If precision > tolerable misstatement

A

opinion will not require modification

30
Q

Sample size depends upon

A
  1. The population size.
  2. The acceptable risk.
  3. The variability in the population.
  4. The tolerable misstatement.
31
Q

Sample size is inversely related to

A

the acceptable sampling risk and is affected by many factors, including the tolerable deviation rate, the expected population deviation rate, and population size.

32
Q

the focus of interest in a test of controls.

A

The accountant wants to reach conclusions about all the items (typically documents) in the population.

33
Q

Attribute sampling tests binary

A

yes/no, or error/nonerror questions.
Attribute sampling is used to test the effectiveness of controls because it can estimate a rate of occurrence of control deviations in a population.

34
Q

Sampling for substantive testing attempts to provide evidence about

A

whether an account balance is materially misstated. After taking a sample and drawing a conclusion about the population, the auditor either accepts or rejects the reported number.

35
Q

n =

A

Sample size.

36
Q

The sample size formula for mean-per-unit variables sampling is as follows:

A

n = (C x S x N/A)

37
Q

C =

A

Confidence coefficient or number of standard deviations related to the required confidence level (1 - the risk of incorrect rejection).

38
Q

S =

A

Standard deviation of the population (an estimate based on a pilot sample or from the prior year’s sample).

39
Q

N =

A

Number of items in the population.

40
Q

A =

A

Allowance for sampling risk. This allowance is a total. In some representations, the allowance (precision) is stated in the denominator on a per-item basis, and A and N would not be included in the formula.

41
Q

tolerable deviation rate

A

the maximum error rate the auditor will allow without

increasing the assessed level of control risk

42
Q

Which of the following factors is(are) considered in determining the sample size for a test of controls?

  1. ) Expected Population Deviation Rate
  2. ) Tolerable Population Deviation Rate
A

Attribute sampling is typically used to test controls. The factors necessary to determine sample size include (1) the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, (2) the tolerable population deviation rate, and (3) the expected population deviation rate. The population is usually assumed to be infinite, and tables are used to identify the appropriate sample size.

43
Q

Which of the following statements is true concerning statistical sampling in tests of controls?

A

Deviations from specific control activities increase the likelihood of misstatements but do not always cause misstatements.
Deviations from a specific control increase the risk of misstatements in the accounting records but do not always result in misstatements. Thus, deviations from a specific control at a given rate ordinarily result in misstatements at the financial statement level at a lower rate.

44
Q

A client is holding securities as collateral for an outstanding account receivable. During the course of the audit engagement, the CPA should

A

Examine the securities and determine their fair value.
When an entity holds an asset of another entity as security for an outstanding debt, the auditor should examine the collateral and estimate its fair value to determine the reasonableness of the arrangement. The auditor may refer to published data such as current market quotations to determine the value of securities.

45
Q

Attribute Sampling Relationship to Sample Size: Increase of Assessing Control Risk too Low

A

Decrease sample size

46
Q

Attribute Sampling Relationship to Sample Size: Increase in Tolerable rate

A

Decrease sample size

47
Q

Attribute Sampling Relationship to Sample Size: Increase in Expected Population Deviation rate

A

Increase sample size

48
Q

Attribute Sampling Relationship to Sample Size: Increase Population

A

Increase sample size (slightly)

49
Q

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible misstatement in either direction. This statistical concept is known as

A

Precision.
The precision or confidence interval (allowance for sampling risk) is an interval around the sample statistic that is expected to include the true value of the population at the specified confidence level. When using classical variables sampling, the allowance for sampling risk is calculated based on the normal distribution.

50
Q

Precision

A

is a measure of how closely the sample represents the population.

51
Q

Nonsampling Risk

A

Nonsampling risk is the risk of an erroneous conclusion caused by a factor not related to sampling risk. For example, the auditor may (1) apply inappropriate procedures, (2) misinterpret audit evidence, or (3) not recognize misstatements or control deviations.