Deck 11: Audit Sampling Concepts

Question 1

One of the ways to eliminate nonsampling risk is through

A) proper supervision and instruction of the client's employees.
B) proper supervision and instruction of the audit team.
C) the use of attribute sampling rather than variables sampling.
D) controls that ensure the sample drawn is random and representative.

Answer 1

B

Question 2

An underlying feature of the random-based selection of items is that each

A) stratum of the population be given equal representation in the sample.
B) each item in the population must be randomly ordered.
C) each item in the population should have an equal opportunity to be selected.
D) each item must be systematically selected using replacement.

Answer 2

C

Question 3

A) Describe the differences between statistical and nonstatistical sampling in terms of 1) the sample selection methods used, and 2) measurement (quantification) of sampling risk.
B) Describe each of the three types of sample selection methods commonly associated with nonstatistical audit sampling.
C) Directed sample selection is the selection of each item in the sample based on some judgment criteria established by the auditor. Describe three commonly used criteria.

Answer 3

A)Nonstatistical sampling differs from statistical sampling in that nonprobabilistic sampling can be used for nonstatistical sampling but not for statistical sampling.In addition, sampling risk can be quantified when using statistical sampling, but not when using nonstatistical sampling.
B)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.
C)Commonly-used criteria used in directed sample selection are:
•Items most likely to contain misstatements; e.g., 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.

Question 4

The auditing standards indicate that

A) it is preferable to use statistical sampling instead of non-statistical sampling.
B) it is preferable to use non-statistical sampling instead of statistical sampling.
C) it is equally acceptable to use either statistical or non-statistical sampling.
D) non-statistical sampling should only be used if statistical sampling is too costly to use.

Question 5

Sampling risk (sampling error) is an inherent part of sampling that results from

A) inappropriate audit procedures.
B) failure to recognize exceptions.
C) testing less than the entire population.
D) weaknesses in the client's internal control system.

Question 6

One of the ways to reduce sampling risk is to

A) use an appropriate method of selecting sample items from the population.
B) carefully design the audit procedures to be used.
C) provide proper supervision and instruction of the audit team.
D) use variables sampling rather than attribute sampling.

Question 7

When the auditor intends to evaluate a sample statistically, the only acceptable selection method is

A) probabilistic selection.
B) judgmental selection.
C) haphazard selection.
D) block selection.

Question 8

One of the purposes of using statistical sampling is to quantify sampling risk. For which of the following audit tests would sampling risk be zero?

A) The auditor used monetary unit sampling to select a sample of payroll payments.
B) The auditor used attribute sampling to select a sample of shipping documents.
C) The auditor sent empty (zero balance) external confirmations to suppliers with large dollar balances.
D) The auditor sent external confirmations to all financial institutions used by the client.

Question 9

One of the causes of nonsampling error is

A) the use of inappropriate or ineffective audit procedures.
B) failure to draw a random sample.
C) failure to draw a representative sample.
D) the use of attribute sampling instead of variables sampling.

Question 10

You have recently been hired as an audit trainee with an internal audit department. Your first assignment will be to select the sample for a test of new capital assets acquired over the last two years. Your review of the internal audit files indicates that the last time this work was done the sample to be tested was selected on a judgmental nonstatistical basis. Based on your university/college auditing course, you believe the work offers good potential for the use of statistical sampling techniques. You know that you will have to be able to explain and justify your opinion to the internal audit manager.
Required:
Both statistical sampling and nonstatistical or judgmental sampling have advantages and disadvantages. Briefly state two advantages and two disadvantages of statistical sampling and one advantage and one disadvantage of nonstatistical sampling.

Question 11

Assume that the client's internal controls require a clerk to attach a shipping document to every duplicate sales invoice but this procedure is not followed exactly 3 percent of the time. If the auditor selects a sample of 200 duplicate sales invoices, which of the following sample results is most representative of the population?

A) three shipping documents are missing
B) six shipping documents are missing
C) five shipping document are missing
D) there were no shipping documents missing

Question 12

Nonsampling errors occur when audit tests do not uncover existing exceptions in the

A) population.
B) sample.
C) planning stage.
D) financial statements.

Question 13

A sample in which the characteristics of the sample are the same as those of the population is a(n)

A) random sample.
B) variables sample.
C) attribute sample.
D) representative sample.

Question 14

Kyle is performing a test of detail using a non-statistical sample.

A) Can Kyle formally measure sampling error?
B) What should Kyle consider in determining the sampling error?

Question 15

Carrie found an error in the sample she tested from the population of accounts receivable that was over 90 days old. The error found by Carrie should be extrapolated to the population of

A) all past-due accounts receivable.
B) accounts receivable over 90 days.
C) all accounts receivable.
D) current accounts receivable.

Question 16

CAS 530 has a very specific definition of sampling. Assuming that each item (described as a sampling unit) in the populations below could be selected as part of the sample, which of the following illustrates the other part of the CAS 530 definition of sampling?

A) looking at 50 sales invoices from the current population of 100 000
B) recalculating interest calculations for notes payable
C) estimating the gross profit by product for all company products
D) inspecting all legal invoices for potential contingent liabilities

Question 17

A) Discuss what is meant by "sampling risk."
B) Discuss what is meant by "nonsampling risk."
C) Discuss two causes of nonsampling risk. Also discuss ways the auditor can control nonsampling risk.
D) Discuss two ways the auditor can control sampling risk.

Question 18

Which of the following statements is a valid criticism of the use of non-statistical sampling methods?

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) Nonstatistical sampling does not differ substantially from statistical sampling methods.
D) It can be difficult to remain unbiased in the selection of items.

Question 19

When statistical sampling is used, the sample selected must be a probabilistic one. In addition, the auditor should

A) use the haphazard selection method to make sure that the sample is properly selected.
B) use appropriate statistical evaluation methods of non-sampling risk computations.
C) request the client to review the sample and approve all items that are selected.
D) use appropriate statistical evaluation methods of sampling risk computations.

Question 20

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods

A) afford greater assurance and clarity than a nonstatistical sample of equal size.
B) provide an objective basis for quantitatively evaluating sample risks.
C) can more easily convert the sample into a dual-purpose test useful for substantive testing.
D) eliminate the need to use judgment in determining appropriate sample sizes.

Question 21

An example of judgmental sampling is

A) block sampling.
B) simple random sample selection.
C) systematic sample selection.
D) proportionate-to-size sample selection.

Question 22

In performing a review of his client's cash disbursements, a public accountant uses systematic sampling with a random start. The primary disadvantage of systematic sampling is that population items

A) must be reordered in a systematic pattern before the sample can be drawn.
B) may occur in a systematic pattern, thus negating the randomness of the sample.
C) may occur twice in the sample.
D) must be replaced in the population after sampling to permit valid statistical inference.

Question 23

A statistical method used to estimate the proportion of items in a population containing a characteristic of interest is

A) population-proportional-to-size sampling.
B) attribute sampling.
C) variables sampling.
D) estimation sampling.

Question 24

As part of the audit program for the audit of sales, the auditor will "review sales transactions for large and unusual amounts." Which of the following types of sampling would be suitable for this audit procedure?

A) systematic
B) attribute
C) block
D) directed

Question 25

The auditor wants to trace credits from the accounts receivable transaction history files to the duplicate bank deposit slips and other authorized sources as a test for fictitious credits in the data files. Which of the following sampling methods would be the least costly to use in this situation?

A) simple random
B) block
C) systematic
D) probability proportionate-to-size

Question 26

A method of sampling in which all the items in the population are divided into two or more subpopulations is

A) variables sampling.
B) attribute sampling.
C) stratified sampling.
D) divisible sampling.

Question 27

The auditor has selected a sequence of 200 payroll cheques to verify the numerical continuity of the cheque numbers. What type of sampling is the auditor doing?

A) haphazard
B) systematic
C) directed
D) block

Question 28

Helen found that the expense reports were not properly approved while the senior accounts payable clerk was on vacation in July. Helen decided to perform a test of control on the authorization of expense reports for all the months except for July, which she will test substantively. Helen is allowed to do this because

A) the authorized expense reports for July are not material.
B) it would not be cost beneficial to test the entire population substantively.
C) the authorizations for the month of July are not representative of the population as a whole.
D) compensating controls exist in the payroll reconciliation process.

Question 29

In systematic selection, population size is divided by the number of sample items desired in order to determine the

A) interval.
B) tolerable exception rate.
C) computed upper exception rate.
D) mean.

Question 30

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

A) block selection.
B) haphazard selection.
C) systematic selection.
D) statistical selection.

Question 31

The final step in the evaluation of the audit results is the decision to

A) determine the acceptability of the population.
B) determine sampling error and calculate the estimated total population error.
C) analyze exceptions or misstatements.
D) determine the error in each sample.

Question 32

The auditor has decided to audit all accounts receivable amounts that are over 120 days old and over $5000. What type of sample selection method is the auditor using?

A) haphazard
B) systematic
C) directed
D) block

Question 33

The process that requires the calculation of an interval and then selects the items based on the size of the interval is

A) statistical sampling.
B) random selection.
C) systematic selection.
D) computerized selection.

Question 34

When the auditor would like to improve the efficiency of the audit by focusing work on transactions that may be more subject to material error in a particular area of the population, the auditor will use

A) block testing.
B) haphazard sample selection.
C) random sample selection.
D) stratified sample selection.

Question 35

When does the auditor use simple random sampling?

A) when the auditor has a particular judgmental criteria that is used to select the sample
B) where the auditor wants numbers in sequence and would like to select the sample rapidly
C) for testing of cutoff after the year end with respect to accounts payable
D) for populations where each item is considered to have the same characteristics for audit purposes

Question 36

When systematic sample selection is used, the first item is selected randomly and all other items are selected automatically. If the characteristic of interest is not distributed randomly in the population, the systematic selection creates the possibility of

A) bias.
B) abnormal frequency distribution.
C) judgmental intervention in the process.
D) selecting mostly larger dollar items.

Question 37

A) Describe three types of sample selection methods commonly associated with statistical audit sampling.
B) Explain the difference between sampling with replacement and without replacement. Which method is more common in audit practice?
C) Describe the steps involved in systematic sampling.

Question 38

The overall objectives of the audit test must be stated in terms of the

A) anticipated results.
B) transaction cycle being tested.
C) risks addressed and the transaction cycle being tested.
D) risk addressed and the anticipated results.

Question 39

A common use of block testing is testing

A) cutoff.
B) existence.
C) authorization.
D) valuation.

Question 40

In statistical terms, acceptable risk of assessing control risk too low (ARACR) corresponds with

A) sampling risk.
B) inherent risk.
C) control risk.
D) nonsampling risk.

Question 41

The most common method used for performing statistical tests of controls is

A) variables sampling.
B) attribute sampling.
C) judgment sampling.
D) random selection of samples.

Question 42

The tolerable exception rate (TER) has a significant effect on sample size. The relationship of TER to sample size is

A) direct (larger TER = larger sample).
B) inverse (larger TER = smaller sample).
C) variable (sometimes larger, sometimes smaller).
D) not determinable.

Question 43

Establishing the tolerable exception rate (TER) requires

A) statistical frequency probability tables.
B) random number tables.
C) a computer program.
D) professional judgment.

Question 44

Which of the following best describes what the auditor means by the exception rate in the attribute sampling plan? The

A) number of errors that can reasonably be expected to be found in a population.
B) frequency with which a certain characteristic occurs within a population.
C) degree of confidence that the sample is representative of the population.
D) dollar range within which the true population total can be expected to fall.

Question 45

The sample exception rate equals the number of

A) exceptions in the population divided by the sample size.
B) items in the population multiplied by the number of exceptions in the sample.
C) exceptions in the sample divided by the sample size.
D) exceptions in the population divided by the population size.

Question 46

The auditor is going to select a sample that is a statistical probabilistic method of sample evaluation that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest. The auditor is using what type of sampling?

A) attribute sampling
B) discovery sampling
C) monetary unit sampling
D) variable estimation sampling

Question 47

The exception rate the auditor will permit in the population and still be willing to use the assessed level of control risk is called the

A) tolerable exception rate.
B) estimated population exception rate.
C) acceptable risk of overreliance.
D) sample exception rate.

Question 48

As part of the audit of sales, the auditor has used attribute sampling to select a sample of sales invoices. The auditor has examined the duplicate sales invoice to determine whether it was approved for credit. Which of the following would be termed the "exception?" The

A) sales invoice number.
B) approval initials.
C) name of the person who approves credit.
D) absence of an authorization.

Question 49

If all other factors specified in a sampling plan remain constant, changing the estimated population exception rate (EPER) from 2% to 4% would cause the required sample size to

A) increase.
B) remain the same.
C) decrease.
D) become indeterminate.

Question 50

As part of the audit of sales, the auditor has used attribute sampling to select a sample of sales invoices. The auditor has examined the duplicate sales invoice to determine whether it was approved for credit. The client has a December year end. In October, the auditor conducted the interim audit and drew a sample of 40 items that covered the period from January to September. In order to be able to generalize to the sales population, the auditor should also

A) select sample items from the rest of the year.
B) increase the sample size in proportion to the total population size.
C) use statistical methods to calculate sampling risk.
D) use statistical methods to calculate non-sampling risk.

Question 51

The occurrence rate or exception rate for attribute sampling is defined as the

A) exception rate that the auditor will permit in the population and still be willing to use the assessed control risk.
B) risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is greater than materiality.
C) exception rate that the auditor expects to find in the population before testing begins.
D) ratio of the items containing a specific attribute to the total number of population items.

Question 52

As part of the audit of sales, the auditor has used attribute sampling to select a sample of sales invoices. The auditor has examined the duplicate sales invoice to determine whether it was approved for credit. Which of the following would be termed the "attribute?" The

A) sales invoice number.
B) approval initials.
C) name of the person who approves credit.
D) absence of an authorization.

Question 53

An auditor who uses statistical sampling for attributes in testing internal controls should increase the assessed level of control risk when the

A) sample rate of exceptions is less than the expected rate of exception used in planning the sample.
B) tolerable exception rate less the allowance for sampling risk exceeds the sample rate of deviation.
C) sample rate of exceptions plus the allowance for sampling risk exceeds the tolerable exception rate.
D) sample rate of exceptions plus the allowance for sampling risk equals the tolerable exception rate.

Question 54

A public accountant examining inventory may appropriately apply sampling for attributes in order to estimate the

A) average price of inventory items.
B) percentage of slow-moving inventory items.
C) dollar value of inventory.
D) physical quantity of inventory items.

Question 55

An increase in the sample size has the effect of decreasing the sampling error if the

A) actual sample exception rate increases.
B) actual sample exception rate does not increase.
C) number of exceptions in the sample does not increase.
D) number of exceptions in the sample increases.

Question 56

In attribute sampling, an advance estimate of the expected 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.

Question 57

You have just been given the approval to conduct statistical sampling for the audit of capital assets acquisitions. Previously, this work was completed using a judgmental sample.
Required:
Explain the key areas where decisions need to be made when conducting audit work using a statistical sample.

Question 58

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

A) Review sales transactions for large and unreasonable amounts.
B) Observe whether the duties of the accounts receivable clerk are separate from handling cash.
C) Examine a sample of duplicate sales invoices for credit approval by the credit manager.
D) Review the aged schedule of accounts receivable to determine if amounts receivable from officers are included.

Question 59

There are 14 steps to audit sampling, divided into four sections: plan the sample, select the sample, perform the audit procedures, and evaluate the results. Discuss each of the steps that comprise the "plan the sample" section for attribute sampling.

Question 60

If an auditor would like to estimate how many sales invoices have errors (such as no required order number showing or authorization for customers exceeding their credit limit), the auditor would likely use

A) random sampling with replacement.
B) sampling for attributes.
C) sampling for variables.
D) stratified random sampling.

Question 61

You are working on the testing of internal controls over price changes in the inventory system. You completed the controls testing to determine whether all price changes were approved by the senior accountant, by reference to master file change forms. In order to place reliance on this control, your audit supervisor has decided that the error rate in the population should be less than 1%. When you calculated your sample size, you used a confidence level of 90% and predicted an error rate of less than one percent. Based on these decisions, you examined 150 inventory price master file change forms. In your testing you uncovered two deviations. Based on these results, you calculate that the actual error rate in the population could be as high as 2.33%.
Required:

A) What actions are available to you regarding your planned reliance on the master file change controls?
B) What are the advantages and disadvantages of each action?
C) How would you decide which action to take?

Question 62

During the audit of the fixed asset section, the auditor decided to inspect source documents supporting all fixed asset additions exceeding $3000. This type of audit procedure is called a

A) census of the strata over $3000.
B) analytical review.
C) attribute sample.
D) monetary unit sample.

Question 63

The acceptable risk of incorrect acceptance (ARIA) has a significant effect on sample size. The relationship of ARIA to sample size is

A) direct (larger ARIA = larger sample).
B) inverse (larger ARIA = smaller sample).
C) variable (sometimes larger, sometimes smaller).
D) not determinable.

Question 64

An auditor used sampling that has the statistical simplicity of attribute sampling yet provides a statistical result expressed in dollars. The auditor is using what type of sampling?

A) attribute sampling
B) discovery sampling
C) monetary unit sampling
D) variable estimation sampling

Question 65

You are analyzing the exceptions that arose after your control testing of credit limit approvals. There were four exceptions where credit had not been approved. One was for a customer that was subsequently placed on C.O.D. (cash on delivery), and three occurred while the business was in the middle of its busy season, processing three times more transactions than most other times of the year. The company's busy season normally lasts about two months.
Required:

A) What is an anomaly?
B) Are any of the exceptions that you found anomalous? Why or why not?
C) Provide an example of a credit approval testing exception that would be anomalous.

Question 66

To ensure that all the population items will be properly subjected to the sample selection process, the auditor should

A) use a random number generator for sample selection.
B) use monetary unit sample selection methods.
C) document the range of document numbers in use by the client.
D) test the population for completeness.

Question 67

After the auditor has completed all the procedures, it is important that the auditor document the work performed and review the evidence to assess the conclusion reached. This is a highly subjective process that relies heavily on

A) the auditor's professional judgment.
B) the generally accepted accounting principles.
C) the generally accepted auditing standards.
D) the Rules of Professional Conduct.