Question 1

Auditing standards permit both statistical and nonstatistical methods of audit sampling.

Accepted Answer

Auditing standards do permit both statistical and nonstatistical methods of audit sampling, and auditors should choose the most appropriate method based on the nature and objectives of the audit procedure. Statistical methods involve randomly selecting items from a population using statistical techniques to determine the sample size and evaluate the results. Nonstatistical methods involve judgmental selection of items based on the auditor's professional judgment and knowledge of the entity's operations.

Question 2

An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the entity's internal control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and:
A)evaluate the results as if the sample size had been 19.
B)treat the missing check as a deviation for the purpose of evaluating the sample.
C)treat the missing check in the same manner as the majority of the other 19 checks (i.e., countersigned or not).
D)choose another check to replace the missing check in the sample.

Accepted Answer

Treat the missing check as a deviation for the purpose of evaluating the sample is a conservative approach that ensures the auditor remains cautious about the effectiveness of the internal control system. It acknowledges the potential risk that the missing check could represent a failure in the control process.

Question 3

Audit sampling is commonly used to gather confirmation audit evidence.

Accepted Answer

Audit sampling is a commonly used technique in which a sample of transactions or data is selected to be examined in order to gather confirmation audit evidence. It is used to provide reasonable assurance that the financial statements are free from material misstatements.

Question 4

Audit sampling is commonly used to gather scanning audit evidence.

Accepted Answer

Audit sampling is used to gather audit evidence through testing a representative sample of a population, not specifically for scanning purposes.

Question 5

Confidence level is the complement of sampling risk.

Accepted Answer

Confidence level is defined as the degree of certainty that a population parameter falls within a given interval. It is influenced by the sample size and variability. Sampling risk, on the other hand, is the risk of obtaining an inaccurate sample result. It is the chance that the sample does not represent the population. Confidence level and sampling risk are related, but they are not complements.

Question 6

Harvey Jones, CPA, uses statistical sampling to test control procedures. What is a benefit of using statistical sampling?
A)It provides a means of mathematically measuring the sampling risk that result from examining only a part of the data.
B)It eliminates the use of judgment required of Jones because the AICPA has established numerical criteria for this type of testing.
C)It increases Jones' knowledge of the entity's prescribed procedures and their limitations.
D)It is required by generally accepted auditing standards.

Accepted Answer

Using statistical sampling allows Harvey Jones to estimate the sampling risk associated with examining a sample of data rather than examining the entire population. This provides a means of mathematically measuring the likelihood that the sample does not represent the entire population. Therefore, option A is the best choice. Option B is incorrect because there is still some element of judgment involved in selecting the appropriate sample size and evaluating the results. Option C may be a potential benefit of auditing in general, but it does not relate specifically to the use of statistical sampling. Option D is incorrect because while statistical sampling may be recommended by auditing standards, it is not necessarily required for all engagements.

Question 7

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:
A)does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.
B)contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes.
C)contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a whole.
D)does not support the tolerable misstatement for some or all of management's assertions.

Accepted Answer

If the sample selected to test controls does not support the planned assessed level of control risk, it may lead the auditor to assess control risk too high. This would mean that the auditor did not rely on the true operating effectiveness of internal control and increased substantive testing unnecessarily.

Question 8

An underlying feature of random-based selection of items is that each:
A)stratum of the accounting population be given equal representation in the sample.
B)item in the accounting population be randomly ordered.
C)item in the accounting population should have an opportunity to be selected.
D)item must be systematically selected using replacement.

Accepted Answer

Random-based selection ensures that every item in the accounting population has an equal chance of being selected, ensuring representativeness of the sample, which is crucial for reliable results. Therefore, option C, which states that every item should have an opportunity to be selected, is the correct choice. Options A and B are incorrect as they do not fully capture the essence of random-based selection, and option D is incorrect as systematic selection using replacement is not a feature of random-based selection, but rather of non-random-based selection methods.

Question 9

A Type I error is the risk of incorrect acceptance.

Accepted Answer

A Type I error is the risk of incorrect rejection of a true null hypothesis, also known as a "false positive."

Question 10

Attribute sampling is used to estimate the proportion of a population that possesses a specified characteristic.

Accepted Answer

Attribute sampling is a statistical technique used to estimate the proportion of a population that possesses a specific attribute or characteristic. It involves selecting a sample from the population and examining each element for the attribute of interest. Based on the results of the sample, statistical inferences are made about the proportion of the population that possesses the attribute.

Question 11

Confidence level and sampling risk are related to sample size.

Accepted Answer

Confidence level and sampling risk are directly related to sample size. As the sample size increases, the confidence level increases and the sampling risk decreases. This is because a larger sample size provides more representative data and reduces the likelihood of errors or biases in the sample. On the other hand, a smaller sample size can result in larger sampling risk and a lower confidence level in the conclusions drawn from the sample data.

Question 12

The risk of incorrect acceptance relates to the:
A)effectiveness of the audit.
B)efficiency of the audit.
C)preliminary estimates of materiality levels.
D)tolerable misstatement.

Accepted Answer

The risk of incorrect acceptance relates to the effectiveness of the audit because it refers to the risk that the auditor concludes that a material misstatement does not exist when, in fact, it does. This can lead to the auditor issuing an incorrect opinion on the financial statements, directly affecting the audit's effectiveness in detecting material misstatements.

Question 13

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was:
A)the only deviation discovered in the sample.
B)identical to a deviation discovered during the prior year's audit.
C)caused by an employee's oversight.
D)initially concealed by a forged document.

Accepted Answer

If a deviation was initially concealed by a forged document, this would indicate a deliberate attempt to conceal the deviation and could indicate potential fraud. Therefore, the auditor would give broader consideration to the implications of such a deviation. The other choices do not necessarily indicate a higher level of risk or potential fraud.

Question 14

A Type II error is the risk of incorrect acceptance.

Accepted Answer

A Type II error occurs when a false null hypothesis is incorrectly accepted, meaning the test fails to detect an effect that is present.

Question 15

Jones, CPA, believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, Jones should use
A)discovery sampling.
B)attributes sampling.
C)stratified sampling.
D)variables sampling.

Accepted Answer

Jones should use attributes sampling since it is the appropriate method to use when the auditor is interested in a binary outcome (an error is present or not), as in the case of billing errors. Additionally, by using attribute sampling, Jones can determine whether the error rate exceeds the tolerable deviation rate of 5%. Discovery sampling is used when the auditor has a suspicion of fraud. Stratified sampling is used when the auditor wants to control for variables, and variables sampling is used when the auditor wants to estimate the monetary value of a population.

Question 16

With a nonstatistical sampling application, the auditor relies on professional judgment rather than the laws of probability to reach a conclusion about the audit test.

Accepted Answer

A nonstatistical sampling application is based on professional judgment and does not involve statistical techniques. The auditor uses his or her judgment to select sample items that are believed to be representative of the population being tested. The results of the sample are evaluated based on the auditor's professional judgment to reach a conclusion about the audit test.

Question 17

The larger the sample, the lower the confidence level and the lower the sampling risk.

Accepted Answer

The statement is false. As the sample size increases, the confidence level increases, and the sampling risk decreases. This is because a larger sample size reduces the likelihood of random error, making the results more representative of the population.

Question 18

For which of the following audit tests would an auditor most likely use attributes sampling?
A)Making an independent estimate of the amount of LIFO inventory.
B)Examining invoices in support of the valuation of fixed asset additions.
C)Selecting accounts receivable balances for confirmation.
D)Inspecting employee time cards for proper approval by supervisors.

Accepted Answer

Attributes sampling is used to test the presence or absence of certain characteristics, such as proper approval on employee time cards.

Question 19

The tolerable deviation rate for a test of controls is generally:
A)lower than the expected rate of deviations in the related accounting records.
B)higher than the expected rate of deviations in the related accounting records.
C)identical to the expected rate of deviations in the related accounting records.
D)unrelated to the expected rate of deviations in the related accounting records.

Accepted Answer

The tolerable deviation rate is the maximum rate of deviation from a prescribed control procedure that the auditor is willing to accept without modifying their planned assessed level of control risk. Since the auditor's tolerance for risk is higher than the expected rate of deviations in the related accounting records, the answer is (B) higher.

Question 20

Which of the following best illustrates the concept of sampling risk?
A)A randomly chosen sample may not be representative of the population as a whole (regarding the characteristic being tested).
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.

Accepted Answer

Sampling risk relates to the risk that a randomly chosen sample may not be representative of the population being tested, which may lead to improper conclusions about the population. Option B relates to risk associated with the audit procedures, option C relates to detection risk, and option D relates to non-sampling risk.

Quiz 8: Audit Sampling: An Overview and Application to Tests of Controls

Auditing standards permit both statistical and nonstatistical methods of audit sampling.

An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the entity's internal control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and:

Audit sampling is commonly used to gather confirmation audit evidence.

Audit sampling is commonly used to gather scanning audit evidence.

Confidence level is the complement of sampling risk.

Harvey Jones, CPA, uses statistical sampling to test control procedures. What is a benefit of using statistical sampling?

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:

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

A Type I error is the risk of incorrect acceptance.

Attribute sampling is used to estimate the proportion of a population that possesses a specified characteristic.

Confidence level and sampling risk are related to sample size.

The risk of incorrect acceptance relates to the:

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was:

A Type II error is the risk of incorrect acceptance.

Jones, CPA, believes the industry-wide deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, Jones should use

With a nonstatistical sampling application, the auditor relies on professional judgment rather than the laws of probability to reach a conclusion about the audit test.

The larger the sample, the lower the confidence level and the lower the sampling risk.

For which of the following audit tests would an auditor most likely use attributes sampling?

The tolerable deviation rate for a test of controls is generally:

Which of the following best illustrates the concept of sampling risk?