Question 1

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.

Accepted Answer

Population size has least impact on determining sample size for tests of controls because it affects the precision of the estimate only to a small extent. The other factors listed (expected population exception rate, risk of assessing control risk too low, and tolerable exception rate) have a greater impact on the determination of the appropriate sample size.

Question 2

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.

Accepted Answer

It would be difficult to justify reducing the tolerable exception rate in order to accept the sample results because this would increase the risk of material misstatement going undetected. The auditor's goal is to provide reasonable assurance that the financial statements are free from material misstatement, and reducing the tolerable exception rate would lower this level of assurance. The other options (B, C, and D) all involve increasing the auditor's testing or communication with management, which would provide more information to support the auditor's opinion.

Question 3

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.

Accepted Answer

The tolerable exception rate must be set prior to testing a sample as it is the maximum exception rate that is acceptable to the auditor. The sample exception rate, achieved upper precision limit, and computed exception rate are determined during the testing process.

Question 4

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.

Accepted Answer

The computed upper exception rate is the highest estimated exception rate in the population at an acceptable risk of assessing control risk too low. This rate is calculated using the sample exception rate, tolerable exception rate, and sample size. The other options (A, B, and D) are not the appropriate rates to use for assessing control risk.

Question 5

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.

Accepted Answer

The computed upper exception rate represents the estimated maximum exception rate based on the sample sample size and sample exception rate. Therefore, in order for the population to be considered acceptable based on the acceptable risk of assessing control risk too low, the computed upper exception rate must be less than or equal to the tolerable exception rate, which is the maximum exception rate the auditor is willing to accept.

Question 6

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%.

Accepted Answer

Setting a 5% risk means that we are confident in our conclusion with a 95% confidence level. Since the upper deviation risk is 7%, there is a 5% chance that the actual deviation rate in the population is higher than 7%. Thus, we can conclude that there is a 5% chance the deviation rate in the population exceeds 7%.

Question 7

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.

Accepted Answer

The estimated population exception rate is the rate that the auditor expects to find before testing based on their understanding of the client's internal controls and prior audit experience. The sample exception rate and computed exception rate are calculated during testing, while the tolerable exception rate is the maximum rate of exceptions that the auditor is willing to accept.

Question 8

In testing controls, an overreliance on internal controls that reduces substantive tests and increases the likelihood of not detecting a material misstatement occurs because:
A) 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.

Accepted Answer

An overreliance on internal controls means that the auditor has placed too much trust on the controls and has reduced the extent of substantive tests required. If the true deviation in the population is greater than the sample, the auditor may not detect a material misstatement because they have relied too heavily on controls that may not be effective in preventing or detecting errors or fraud. This increases the risk of issuing an unqualified opinion when misstatements exist, which is a risk inherent in the audit process. Therefore, B is the correct answer.

Question 9

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.

Accepted Answer

The answer of If an auditor judgmentally selects a sample...

Question 10

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.

Accepted Answer

The tolerable exception rate is the maximum rate of deviations from controls that the auditor is willing to accept in the population and still conclude that the controls are operating effectively. This means that if the exception rate exceeds the tolerable rate, additional audit procedures must be performed. Therefore, D is the correct answer. The acceptable exception rate and estimated population exception rate are not related to the preliminary control risk assessment, and the sample exception rate is the actual exception rate found in the sample, which may or may not indicate a problem with the population.

Question 11

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.

Accepted Answer

The tolerable exception represents the highest exception rate that the auditor can allow and still conclude that the control being tested is operating effectively. It is the benchmark against which the actual exception rate from the sample is compared to determine if the control is effective or not. Therefore, option A is the best description of the tolerable exception. Option B is incorrect because it refers to the expected exception rate, not the tolerable exception rate. Option C represents the sample exception rate, which is used to estimate the population exception rate, but it is not the same as the tolerable exception rate. Option D refers to the highest estimated exception rate in a population at a given ARACR, which is related but not equivalent to the tolerable exception rate.

Question 12

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

Accepted Answer

The auditor is primarily concerned with the highest rate when using audit sampling for exception rates. This is because the highest rate represents the greatest risk of material misstatement and is therefore the most important to identify and address. The auditor may also be interested in the overall pattern of exception rates, but the highest rate should be the main focus.

Question 13

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.

Accepted Answer

When an auditor decides to assess control risk at a lower level than previously (in this case, moving from maximum to moderate), it implies that the auditor has gained or expects to gain a higher level of confidence in the effectiveness of the company's internal controls. To justify this lower assessment of control risk, the auditor would need to perform more tests of controls to obtain evidence that the controls are operating effectively.

Question 14

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.

Accepted Answer

The correct sequence for conducting an audit test starts with stating the objectives (4), then defining attributes and exception conditions (3), specifying the tolerable exception rate (5), selecting the sample (2), and finally analyzing exceptions (1). This logical progression ensures a structured approach to auditing, from planning through execution and analysis.

Question 15

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.

Accepted Answer

The relationship between ARACR and sample size is inverse, meaning that as ARACR increases (i.e. more risk is acceptable), the required sample size decreases. This is because a higher ARACR means that the auditor is willing to accept a greater level of risk that material misstatements may not be detected, and therefore the auditor can reduce their sample size.

Question 16

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.

Accepted Answer

The answer of Which of the following is not a...

Question 17

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.

Accepted Answer

The sample exception rate is calculated by dividing the number of exceptions in the sample by the sample size. This gives us an estimate of the proportion of exceptions in the population based on the sample. Option A is incorrect because it divides the number of exceptions in the population by the sample size, which does not give us the sample exception rate. Option B is incorrect because it multiplies the number of items in the population by the number of exceptions in the sample, which is not a valid formula for calculating the sample exception rate. Option D is incorrect because it divides the number of exceptions in the population by the population size, which is not relevant to the calculation of the sample exception rate.

Question 18

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.

Accepted Answer

The larger the tolerable exception rate (TER), the smaller the sample size needed to detect exceptions with a certain level of precision. Therefore, the relationship is inverse, meaning that as the TER increases, the sample size decreases.

Question 19

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.

Accepted Answer

The auditor's best estimate of the population exception rate is typically the current year's sample exception rate, as it is based on the actual findings from the current audit sample.

Question 20

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.

Accepted Answer

The high number of deviations in the initial sample suggests a significant control issue, warranting a reassessment of control risk.

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

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

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?

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

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

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:

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?

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

In testing controls, an overreliance on internal controls that reduces substantive tests and increases the likelihood of not detecting a material misstatement occurs because:

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

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:

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

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

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:

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

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

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

The sample exception rate equals:

The relationship of tolerable exception rate (TER) to sample size is:

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

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: