Deck 15: Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Question 1

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

Answer 1

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.

Question 2

Discuss what is meant by "sampling risk" and "nonsampling risk".

Answer 2

Sampling risk occurs when the sample is not representative of the population; that is, the characteristics of interest in the sample are not the same as those in the population.
Nonsampling risk occurs when audit tests do not uncover existing exceptions in the sample.

Question 3

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

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

Answer 3

B

Question 4

One way to control sampling risk is to increase sample size.

Question 5

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 attributes sampling rather than variables sampling.
D) controls which ensure that the sample drawn is random and representative.

Question 6

An auditor can increase the likelihood that a sample is representative by using care in:

A)
B)
C)
D)

Question 7

When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use:

A) audit sampling.
B) representative sampling.
C) poor judgment.
D) estimation sampling.

Question 8

Discuss what is meant by "nonsampling risk."

Question 9

Which of the following statements best expresses the impact that the performance of audit procedures has on statistical vs. nonstatistical sampling?

A) Audit procedures on the sample item 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) Audit procedures on the sample item will not vary as a result of using either statistical or nonstatistical sampling.

Question 10

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

A) Sampling risk
B) Nonsampling risk
C) Audit risk
D) Detection risk

Question 11

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

A) Sampling risk
B) Nonsampling risk
C) Audit risk
D) Detection risk

Question 12

Which one of the choices below is most correct regarding a cause of sampling risk?

A) ineffective use of audit procedures
B) testing less than the entire population
C) use of extensive tests of controls
D) the possibility that a properly-selected sample still may not be representative

Question 13

Sampling risk results from the auditor's failure to recognize exceptions in transaction data.

Question 14

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 representative.

Question 15

Which of the following statements is most correct?

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.

Question 16

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

Question 17

To determine if a sample is truly representative of the population, an auditor would be required to:

A) conduct multiple samples of the same population.
B) never use sampling because of the expense involved.
C) audit the entire population.
D) use systematic sample selection.

Question 18

Sampling risk may be controlled by:

A)
B)
C)
D)

Question 19

Briefly explain why auditors utilize audit sampling.

Question 20

Even when nonsampling risk is zero, there is always a possibility that a sample is not representative of the population.

Question 21

Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its ability to:

A) quantify sampling risk.
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.

Question 22

Which of the following is not true for nonstatistical sampling?

A) applies mathematical rules that allows auditors to quantify sampling risk
B) auditors select items for the sample that they believe would provide them the most information
C) reach conclusion about the population on a judgmental sample
D) often called judgmental sampling

Question 23

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

Question 24

Which of the following statements is most correct with respect to the evaluation of non-probabilistic sample results?

A) It is acceptable to make non-probabilistic evaluations only when probabilistic sample selection is used.
B) It is acceptable to make non-probabilistic evaluations only if the auditor cannot quantify sampling risk.
C) It is never acceptable to evaluate a non-probabilistic sample using statistical methods.
D) All of the above are correct.

Question 25

The use of haphazard sample selection is encouraged under professional auditing standards.

Question 26

An advantage of using statistical sampling techniques is that such techniques:

A) mathematically measure risk.
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.

Question 27

Which of the following statement is most correct with concerning the quantification of sampling risk?

A) Sampling risk cannot be quantified.
B) Sampling risk can be quantified only when non-probabilistic selection techniques are used to select the sample.
C) Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample.
D) None of the above.

Question 28

Non-probabilistic selection methods are not based on mathematical probabilities; therefore:

A) the extent to which a sample is representative of the population may be difficult to determine.
B) they are discouraged by the AICPA.
C) they are not allowed by the Statements on Auditing Standards.
D) they are not as effective as statistical sampling.

Question 29

When auditors wish to evaluate a sample statistically, an acceptable selection method is:

A) systematic sample selection.
B) judgmental selection.
C) haphazard selection.
D) block sample selection.

Question 30

Which of the following statements is not correct regarding probabilistic and non-probabilistic sample selection?

A) In probabilistic selection, every population item has a known chance of being selected.
B) It is not acceptable to make non-probabilistic evaluations using probabilistic selection.
C) Probabilistic selection is required for all statistical sampling methods.
D) Both methods are acceptable and commonly used.

Question 31

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

Question 32

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

Question 33

The auditor may use which of the following criteria when using the directed sample selection technique?

A) Items most likely to contain misstatements.
B) Items containing selected population characteristics.
C) Large dollar coverage.
D) Any of the above.

Question 34

Which of the following statements regarding block sampling is least likely to be true?

A) Block sampling is the selection of several items in sequence.
B) It is acceptable to use block sampling for tests of transactions only if a reasonable number of blocks is used.
C) Only one block should be selected to increase the probability of a representative sample.
D) Once the first item in the block is selected, the remainder of the block is chosen automatically.

Question 35

When the auditor goes through a population and selects items using nonprobalistic selection methods, without regard to their size, source, or other distinguishing characteristics, it is called:

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

Question 36

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

Question 37

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

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.

Question 38

You are designing the audit plan for Mathews & Company. You are a strong proponent for statistical sampling over nonstatistical sampling. Make your case.

Question 39

It is virtually impossible to reduce sampling risk to zero.

Question 40

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.

Question 41

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

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.

Question 42

Directed sample selection, block sample selection, and haphazard sample selection are three types of probabilistic sample selection methods.

Question 43

A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a:

A) random sample.
B) statistical sample.
C) judgment sample.
D) representative sample.

Question 44

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

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

Question 45

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

Question 46

In performing a review of a client's cash disbursements, an auditor uses systematic sample selection with a random start. The primary disadvantage of this technique is population items:

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

Question 47

The advantage of systematic sample selection is that:

A) it is easy to use.
B) there is limited possibility of it being biased.
C) it is unnecessary to determine if the population is arranged randomly.
D) it automatically selects items material to the financial statements.

Question 48

The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the:

A) finite correction factor.
B) tolerable exception rate.
C) acceptable risk of assessing control risk too low.
D) estimated population exception rate.

Question 49

When a small preliminary sample is used to estimate the population exception rate, it (the preliminary sample) cannot be included in the ultimate sample.

Question 50

What is the key advantage and disadvantage associated with systematic sample selection? How must auditors address this disadvantage?

Question 51

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.

Question 52

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

Question 53

Correspondence is established between the random number table and the population by:

A) identifying each item in the population with a unique number.
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.

Question 54

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

Question 55

Which of the following occurrences would be least likely to warrant further audit attention for the auditor?

A) Deviations from client's established control procedures.
B) Deviations from client's budgeted values.
C) Monetary misstatements in populations of transaction data.
D) Monetary misstatements in populations of account balance details.

Question 56

The exception rate the auditor will permit in the population and still be willing to reduce 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 57

The auditor may estimate the "estimated population exception rate" by taking a small preliminary sample from the current year's data or by using the prior year's experience with the client.

Question 58

Which of the following statements is not correct?

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.

Question 59

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

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

Question 60

Which of the following methods of sample selection is appropriately used when selecting a random sample?

A)
B)
C)
D)

Question 61

Which of the following would have the least impact in determining sample size for tests of controls?

A) Expected population exception rate.
B) Risk of assessing control risk too low.
C) Tolerable exception rate.
D) Population size.

Question 62

When the computed upper exception rate is greater than the tolerable exception rate, it is necessary for the auditor to take specific action. Which of the following courses of action would be most difficult to justify?

A) Reduce the tolerable exception rate so as to accept the sample results.
B) Expand the sample size and perform more tests.
C) Revise the assessed control risk.
D) Write a letter to management which outlines the control deficiencies.

Question 63

Which of the following must be set prior to testing a sample?

A) Sample exception rate.
B) Achieved upper precision limit.
C) Computed exception rate.
D) Tolerable exception rate.

Question 64

The highest estimated exception rate in the population at a particular acceptable risk of assessing control risk too low is:

A) the upper exception rate.
B) estimated population exception rate.
C) the computed upper exception rate.
D) the tolerable exception rate.

Question 65

Before the population can be considered acceptable based on the acceptable risk of assessing control risk too low, the computed upper exception rate must be:

A) greater than or equal to the tolerable exception rate.
B) greater than the tolerable exception rate.
C) less than or equal to the tolerable exception rate.
D) less than the tolerable exception rate.

Question 66

You are determining the significance of the following: you set a 5% risk of assessing control risk to low and your computation of the upper deviation risk is 7%. What could you conclude?

A) There is a 95% chance the deviation rate is the population is less than 5%.
B) There is a 5% chance the deviation rate in the population is less than 7%.
C) There is a 95% chance the deviation rate in the population exceeds 95%.
D) There is a 5% chance the deviation rate in the population exceeds 7%.

Question 67

Which of the following is the exception rate that the auditor expects to find before testing?

A) Sample exception rate.
B) Estimated population exception rate.
C) Computed exception rate.
D) Tolerable exception rate.

Question 68

In testing controls, an overreliance on internal controls that reduces substantive tests and increases the likelihood of not detecting a material misstatement occurs because:
Deviation in the population was less than the sample.
B) true deviation in the population was greater than the sample.
C) auditor judgment was flawed.
D) it is inherent in the audit risk model.

Question 69

If an auditor judgmentally selects a sample of one hundred items from a population and finds two exceptions, the auditor:

A) can conclude that the sample exception rate is 2%.
B) can conclude that the population exception rate is 2%.
C) can calculate the highest exception rate expected in the population.
D) cannot make any conclusions about either the sample or the population.

Question 70

The exception rate that the auditor will permit in the population and still be willing to use the preliminary control risk assessment is called the:

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

Question 71

Which of the following represents the best description of the tolerable exception?

A) The highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively.
B) The highest exception rate the auditor expects to find in the population.
C) The number of exceptions found in the sample divided by the sample size.
D) The highest estimated exception rate in a population at a given ARACR.

Question 72

Which of the following is most correct when using audit sampling for exception rates?

A) auditor is concerned with the lowest rate
B) auditor is concerned with the highest rate
C) auditor is concerned with the average on previous audits
D) doesn't impact the auditors decision

Question 73

If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be:

A) increased in number.
B) reduced in number.
C) not performed.
D) unchanged from prior planned settings.

Question 74

Place the following steps in their proper order:
1) Analyze exceptions
2) Select the sample
3) Define attributes and exception conditions
4) State the objectives of the audit test
5) Specify the tolerable exception rate

A) 1, 3, 2, 4, 5.
B) 4, 3, 1, 2, 5.
C) 4, 3, 5, 2, 1.
D) 1, 2, 3, 4, 5.

Question 75

The relationship of acceptable risk of accessing control risk too low (ARACR) to sample size is:

A) variable (sometimes larger, sometimes smaller).
B) direct (larger ARACR = larger sample).
C) inverse (larger ARACR = smaller sample).
D) nonexistent.

Question 76

Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated?

A) Sample exception rate.
B) Estimated population exception rate.
C) Computed upper exception rate.
D) Exception.

Question 77

The sample exception rate equals:

A) the number of exceptions in the population divided by the sample size.
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.

Question 78

The relationship of tolerable exception rate (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 79

The auditor's best estimate of the population exception rate is the:

A) current year's sample exception rate.
B) tolerable exception rate.
C) prior year's sample exception rate.
D) computed upper exception rate.

Question 80

You are testing controls over accounts receivable and are determining if the appropriate credit authorization was made by an authorized person. Your sample size is 40 and your computed upper deviation rate is 5%. On the first 10 items sampled you have found 8 deviations. You would most likely:

A) continue with the other 30 items.
B) revisit the sample size calculations.
C) increase the tolerable deviation rate.
D) stop the test and re-set control risk for accounts receivable.