Ch.6 Audit Sampling and Risk Phase Exam Prep - Auditing Canada 4e | Test Bank with Answers by Robyn Moroney. DOCX document preview.
CHAPTER 6
SAMPLING AND OVERVIEW OF THE RISK RESPONSE PHASE OF THE AUDIT
CHAPTER LEARNING OBJECTIVES
1. Explain how audit sampling is used in an audit.
When creating an audit plan and designing audit procedures, an auditor also decides how to select appropriate items for testing. When there are numerous transactions or items within an account balance available for testing, an auditor must decide how best to select a sample that is representative of the entire population of items available for testing.
2. Understand the difference between sampling and non-sampling risk.
Sampling risk is the risk that the sample chosen by the auditor is not representative of the population of transactions or items within an account balance available for testing and, as a consequence, the auditor arrives at an inappropriate conclusion. Non-sampling risk is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues, such as using an inappropriate audit procedure.
3. Differentiate between statistical and non-statistical sampling.
Statistical sampling involves random selection and probability theory to evaluate the results. Non-statistical sampling is any sample selection method that does not have these characteristics.
4. Describe sampling methods and the factors to be considered when choosing a sample.
Sampling methods include random selection, systematic selection, haphazard selection, block selection, and judgemental selection. Before selecting a sample, an auditor will set parameters pertaining to control and detection risk, planning materiality, population, tolerable error rate, and the required level of confidence. Once these parameters are set, an auditor may select a sample using a statistical or non-statistical sampling technique.
5. Determine the factors that influence the sample size when testing controls.
When testing controls, the factors that influence the sample size include the extent to which the risk of material misstatement is reduced by the operating effectiveness of controls, the rate of deviation from the prescribed control activity that the auditor is willing to accept, the rate of deviation from the prescribed control activity that the auditor expects to find in the population, the auditor’s required confidence level, and the number of sampling units in the population.
6. Determine the factors that influence the sample size when doing substantive testing and consider techniques used to perform substantive tests.
When conducting substantive testing of transactions and balances, the factors that influence the sample size include the auditor’s assessment of the risk of material misstatement, the use of other substantive procedures directed at the same assertion, the auditor’s required confidence level, the tolerable error, the amount of error the auditor expects to find in the population, the stratification of the population, and the number of sampling units in the population.
Two main techniques are applied when the auditor is performing substantive tests and deciding how much of a balance to test. These are (1) key item testing, and (2) representative sampling.
7. Outline how to evaluate the results of tests conducted on a sample.
When testing controls, the auditor will compare the rate of deviation with the tolerable rate of deviation and determine whether they believe that the control tested is effective in preventing and/or detecting a material misstatement. When testing transactions and balances, the error in the sample will be projected onto the population and then compared to the tolerable error rate. The auditor will then determine whether the class of transactions or account balance being tested appears to be materially misstated.
8. Understand the difference between tests of controls and substantive tests.
The purpose of tests of controls is to assess the effectiveness of a client’s system of internal controls throughout the accounting period being audited. The purpose of substantive testing is to gather direct evidence that the financial statements are free from material misstatement.
9. Explain the factors that impact the nature, timing, and extent of audit testing.
The nature of audit testing refers to the purpose of the test and the procedure used. The timing of audit testing refers to the stage of the audit when procedures are performed and the date, such as within or outside the accounting period, that audit evidence relates to. The extent of audit testing refers to the amount of audit evidence gathered when testing controls and conducting detailed substantive procedures.
TRUE-FALSE STATEMENTS
1. Sampling is required when an audit procedure is tested on an entire group of transactions or
all items within an account balance.
Difficulty: Easy
Learning Objective: Explain how audit sampling is used in an audit.
Section Reference: 6.1 Audit sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
2. Sampling risk is the risk that the sample chosen by the auditor is not representative of the
population available for testing.
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
3. The risk that the auditor concludes that a material misstatement exists when it does not is
likely to result in an increase in audit effort when it is not required.
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
4. Non-statistical sampling involves random selection and probability theory to evaluate the
results.
Difficulty: Easy
Learning Objective: Differentiate between statistical and non-statistical sampling.
Section Reference: 6.3 Statistical and non-statistical sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
5. Stratification is when an auditor selects a sample for testing by dividing the number of
population items by the sample size, resulting in the sampling interval.
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
6. Block selection involves the selection of items that are grouped together within the population
of items available.
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
7. Tolerable error is the minimum error an auditor is willing to accept within the population
tested.
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
8. Stratification of the population will result in less efficient sampling and increase the sample
size required.
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
9. An increase in the number of sampling units in the population will result in a decrease in the
sample size.
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when testing controls.
Section Reference: 6.5 Factors that influence the sample size—testing controls
CPA Competency: Audit and Assurance
AACSB: Analytic
10. When auditors conclude that an internal control is effective, they will rely on the control to
prevent and detect a material misstatement and reduce their detailed substantive procedures.
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when substantive testing and consider techniques used to perform substantive tests.
Section Reference: 6.6 Factors that influence the sample size—substantive testing
CPA Competency: Audit and Assurance
AACSB: Analytic
11. When conducting substantive testing, an increase in the auditor's assessment of the risk of
material misstatement will result in an increase in the size of the sample.
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when substantive testing and consider techniques used to perform substantive tests.
Section Reference: 6.6 Factors that influence the sample size—substantive testing
CPA Competency: Audit and Assurance
AACSB: Analytic
12. Projected error refers to the extrapolation of the errors detected when testing a sample to
the population from which the sample was drawn.
Difficulty: Easy
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.7 Evaluating sample test results
CPA Competency: Audit and Assurance
AACSB: Analytic
13. An audit plan includes the audit procedures to be used when testing controls and when
conducting detailed substantive audit procedures.
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
14. Tests of controls are audit procedures designed to evaluate the operating effectiveness in detecting detect material misstatements at the assertion level.
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
15. The timing of audit testing refers to the stage of the audit when procedures are performed
and the date that audit evidence relates to.
Difficulty: Medium
Learning Objective: Explain the factors that impact the nature, timing, and extent of audit testing.
Section Reference: 6.9 Nature, timing, and extent of audit testing
CPA Competency: Audit and Assurance
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
16. Sampling is not required when
a) it is the first year that the auditor has done the audit for a client.
b) the auditor is conducting tests of controls.
c) an audit procedure is conducted on an entire group of transactions.
d) the client requests the auditor not to collect samples of certain transactions.
Difficulty: Easy
Learning Objective: Explain how audit sampling is used in an audit.
Section Reference: 6.1 Audit sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
17. Christian Hardy was explaining to his junior staff the implications of sampling risk when
conducting substantive testing. He made the following two statements:
- “If we conclude that a material misstatement does not exist when it does, then we have an increased control risk.”
- “If we conclude that a material misstatement exists when it does not we have an inefficient audit.”
Which statements, if any, were true?
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) or (ii)
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
18. Non-sampling risk arises when an auditor
a) does not use sampling.
b) uses an inappropriate audit procedure.
c) tests all of the items in a population.
d) spends too much time testing the accounts most at risk of material misstatement.
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
19. Sampling risk for tests of controls is when
a) audit risk is reduced.
b) an auditor concludes that the audit client’s internal control system is effective when it is not.
c) an auditor concludes that material misstatements exist when they do not.
d) audit risk is increased.
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
20. Non-sampling risk is the risk that
a) an auditor selects an appropriate method to select a sample.
b) an auditor reaches an inappropriate conclusion for any reason not related to sampling risk.
c) the sample chosen is not representative of the whole population.
d) none of the above
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
21. The risk that an auditor concludes that a material misstatement does not exist when it does will result in a(n)
a) increased risk that the audit will not be effective.
b) increased risk that the audit will be inefficient.
c) increase in the auditor’s assessment of the risk of material misstatement.
d) decreased reliance on internal controls.
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
22. When testing controls, non-sampling risk is the risk that an auditor
a) designs tests that are ineffective.
b) does not select a sample.
c) both a and b
d) none of the above
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
23. When testing controls, sampling risk is the risk that the auditor
a) concludes that their client's internal controls are ineffective when they are effective.
b) concludes that their client's internal controls are effective when they are ineffective.
c) both a and b
d) none of the above
Difficulty: Easy
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
24. Which of the following statements regarding statistical sampling is correct?
a) It is easier to use than non-statistical sampling.
b) It involves haphazard selection.
c) It is generally used for low-risk accounts.
d) It involves random selection.
Difficulty: Easy
Learning Objective: Differentiate between statistical and non-statistical sampling.
Section Reference: 6.3 Statistical and non-statistical sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
25. Which of the following is not an advantage of non-statistical sampling?
a) It allows an auditor to select a sample that they believe is appropriate.
b) It allows an auditor to measure sampling risk.
c) It is lower cost than statistical sampling.
d) It requires less staff training.
Difficulty: Easy
Learning Objective: Differentiate between statistical and non-statistical sampling.
Section Reference: 6.3 Statistical and non-statistical sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
26. Which of the following statements about statistical sampling is incorrect?
a) Statistical sampling involves the use of random selection.
b) Statistical sampling uses probability theory to evaluate results.
c) Statistical sampling allows for the measurement of sampling risk.
d) Statistical sampling is simple to use.
Difficulty: Easy
Learning Objective: Differentiate between statistical and non-statistical sampling.
Section Reference: 6.3 Statistical and non-statistical sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
27. Which of the following best describes the concept of key item testing?
a) the selection of items that are grouped together within the population of items available
b) the proportion of items tested that did not conform to the client’s prescribed control procedure
c) focus is on selecting the largest transactions within a balance to obtain coverage of the total
d) the selection of items that an auditor believes should be included in the sample for testing
Difficulty: Easy
Learning Objective: Differentiate between statistical and non-statistical sampling.
Section Reference: 6.3 Statistical and non-statistical sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
28. Olivier Beauchemain did not perform a true sample when he went to his client to examine
sales invoices. He did not use any specific method for choosing the invoices. He let his eye
catch the items he thought might make up his sample. What technique did he use?
a) random selection
b) block selection
c) haphazard selection
d) stratified sample selection
Difficulty: Medium
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
29. George Melkonian wanted to determine whether his auditing class knew how different
factors influence sample size. He made two statements:
(i) “An increase in the expected rate of deviation of the population to be tested will decrease sample size.”
(ii) “An increase in the tolerable rate of deviation will decrease sample size.”
George asked his class to indicate which of the statements, if any, were false.
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) nor (ii)
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
30. Random selection involves
a) dividing a population into groups of sampling units with similar characteristics.
b) the selection of a sample without the use of a methodical technique.
c) the selection of a sample that is free from bias and where each item in a population has an equal chance of selection.
d) the selection of items that an auditor believes should be included in their sample for testing.
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
31. Which sampling method involves the selection of items that are grouped together within the
population of items available?
a) systematic selection
b) haphazard selection
c) random selection
d) block selection
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
32. When testing controls, the tolerable error is
a) the tolerable rate of deviation that an auditor will accept before concluding that a control is effective.
b) the minimum rate of deviation that an auditor will accept.
c) the tolerable rate of deviation that an auditor will accept before concluding that a control is ineffective.
d) the maximum amount of error in an account balance that an auditor will accept before concluding that an account is materially misstated.
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
33. Which of the following statements is incorrect?
a) When detection risk is set as high, an auditor will require a high level of confidence that the transactions and accounts are not materially misstated.
b) An auditor may decide to stratify the population before selecting a sample from it.
c) An auditor will use professional judgement to determine the tolerable error and required level of confidence.
d) An auditor will use professional judgement when considering what would be considered an error within the population tested.
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
34. Before selecting a sample, an auditor will use professional judgement to
a) set the required level of confidence.
b) set the tolerable error rate.
c) select an appropriate population for testing.
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
35. Which of the following is a factor that influences the sample size when testing controls?
a) an increase in the auditor's assessment of the risk of material misstatement
b) an increase in the tolerable rate of deviation
c) stratification of the population when appropriate
d) an increase in tolerable misstatement
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when testing controls.
Section Reference: 6.5 Factors that influence the sample size—testing controls
CPA Competency: Audit and Assurance
AACSB: Analytic
36. When testing controls, a decrease in the sample size will occur when there is
a) an increase in the tolerable rate of deviation.
b) a decrease in the tolerable rate of deviation.
c) an increase in the extent to which the auditor's risk assessment takes into account relevant controls.
d) an increase in the number of sampling units in the population.
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when testing controls.
Section Reference: 6.5 Factors that influence the sample size—testing controls
CPA Competency: Audit and Assurance
AACSB: Analytic
37. What impact will there be on sample size when there is an increase in the number of
sampling units in the population?
a) increase
b) decrease
c) negligible
d) may increase or decrease depending on the total dollar value
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when testing controls.
Section Reference: 6.5 Factors that influence the sample size—testing controls
CPA Competency: Audit and Assurance
AACSB: Analytic
38. Which of the following factors decreases sample size in tests of controls?
a) an increase in the expected deviation rate in the population
b) an increase in the extent to which an auditor’s risk assessment takes into account internal controls
c) an increase in the number of sampling units in the population
d) an increase in the tolerable deviation rate
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when testing controls.
Section Reference: 6.5 Factors that influence the sample size—testing controls
CPA Competency: Audit and Assurance
AACSB: Analytic
39. When conducting substantive testing, which of the following is not a factor that influences
the sample size?
a) an increase in the tolerable rate of deviation
b) an increase in the auditor's assessment of the risk of material misstatement
c) stratification of the population when appropriate
d) an increase in tolerable misstatement
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when substantive testing and consider techniques used to perform substantive tests.
Section Reference: 6.6 Factors that influence the sample size—substantive testing
CPA Competency: Audit and Assurance
AACSB: Analytic
40. What impact will there be on sample size for substantive testing when there is an increase in the tolerable misstatement?
a) decrease
b) negligible
c) increase
d) no impact as the level of tolerable misstatement refers to the sample size for testing controls
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when substantive testing and consider techniques used to perform substantive tests.
Section Reference: 6.6 Factors that influence the sample size—substantive testing
CPA Competency: Audit and Assurance
AACSB: Analytic
41. An account is at a higher risk of misstatement when it requires
a) complex calculations.
b) estimation.
c) both a and b
d) simple valuation techniques.
Difficulty: Easy
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.7 Evaluating sample test results
CPA Competency: Audit and Assurance
AACSB: Analytic
42. When evaluating sample test results, which of the following statements is incorrect?
a) If an auditor discovers errors when testing transactions or account balances, they will need to project the error to the population being tested.
b) An auditor will not consider whether the population was stratified before being sampled.
c) If an error is considered to be unique, it will be removed before projecting remaining errors to the population.
d) If the rate of deviation exceeds the tolerable rate, the auditor will extend their testing.
Difficulty: Easy
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.7 Evaluating sample test results
CPA Competency: Audit and Assurance
AACSB: Analytic
43. If the total projected error in an account balance was $3,248 and the tolerable error was set
at $10,000, the auditor would
a) conclude that the errors uncovered are material.
b) decide that further audit work was required.
c) conclude that the errors detected are not material.
d) conduct other tests aimed at the assertion being tested.
Difficulty: Medium
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.7 Evaluating sample test results
CPA Competency: Audit and Assurance
AACSB: Analytic
44. Where an auditor concludes that the audit client’s systems of internal controls are ineffective, he/she will
a) conclude that the client’s system of internal controls can be relied upon to detect potential material misstatements.
b) conclude that the client’s system of internal controls cannot be relied upon to detect potential material misstatements.
c) reduce the amount of reliance to be placed on substantive tests.
d) project the misstatements to the entire population.
Difficulty: Easy
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.7 Evaluating sample test results
CPA Competency: Audit and Assurance
AACSB: Analytic
45. When errors are discovered upon testing transactions or account balances, the auditor will
a) project the error to the entire population, if possible.
b) assess if the errors constitute an isolated event.
c) consider the impact of the errors.
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.7 Evaluating sample test results
CPA Competency: Audit and Assurance
AACSB: Analytic
46. Gisele James, the senior on the audit of Magna International, was explaining how audit
strategy and audit plans have an impact on tests of controls and substantive procedures. She
made two statements:
- Audit strategy details the audit procedures to be used when testing controls and when conducting detailed substantive audit procedures.
- The audit plan provides the basis for developing an audit strategy.
Which statements were true, if any?
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) or (ii)
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
47. Henrietta Lombardi assessed control risk to be low. What is the appropriate audit strategy to adopt?
a) substantive audit approach
b) control testing strategy
c) combined audit strategy
d) substantive year-end testing
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
48. Anthony DiPietro was testing the controls of Blue Coast Wholesale Fish Market. When testing controls, which one of the following evidence-gathering procedures is used?
a) vouching of transactions for proper valuation
b) confirmations of accounts receivable
c) tracing of transactions to source documents to ensure existence
d) inquiry of client personnel
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
49. Michael Fernandez has decided to perform substantive procedures at a major retailer.
Which one of the following is not a substantive procedure?
a) re-performing control procedures to test their effectiveness
b) inspecting documents to verify the dates of the transactions
c) bank confirmations regarding interest rates on borrowings by client
d) recalculating an interest expense using confirmed interest rates
Difficulty: Medium
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
50. Kenneth Beach wanted to ensure that all the transactions at his client were recorded.
For which assertion was he conducting these detailed substantive procedures?
a) occurrence
b) completeness
c) cut-off
d) accuracy
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
51. Jasmeet Kaur, who was representing her CPA firm at a conference, made the following
statement about assertions: When our auditors conduct substantive procedures, we search for
evidence that recorded accounts exist and that all accounts that should have been recorded, indeed have been recorded. Which assertions was she talking about?
a) rights and obligations
b) accuracy, valuation, and allocation
c) occurrence and completeness
d) presentation and completeness
Difficulty: Medium
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
52. Corey Hill used analytical procedures at his client, Ultimate Vacations. Which one of
these is not an analytical procedure?
a) Send confirmations to major customers.
b) Estimate revenue for Ultimate Vacations by multiplying trips sold by average price of vacation packages.
c) Discuss unusual fluctuations with client personnel.
d) Compare wages month by month for this year and last year.
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
53. David Killbear has been involved in testing controls at Highbridge Falls. Which of these
control tests would be deemed ineffective?
a) reading a client’s policy manual
b) entering invalid passwords to see whether access is denied
c) inspecting documents for proper authorization
d) observing an employee performing a bank deposit
Difficulty: Medium
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
54. Olivia Peralta was training a team of new auditors and delivered some interesting rules of
thumb about control risk and detection risk:
- “The required level of confidence is a function of control risk when testing controls and detection risk when conducting substantive tests.”
- “When detection risk is determined to be low, an auditor will require a low level of confidence that the transactions and accounts are not materially misstated.”
Which of the above two statements are true?
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) nor (ii)
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
55. Control risk is the risk that:
a) an auditor expresses an inappropriate audit opinion when a financial statement is materially misstated.
b) an auditor's substantive procedures will not detect material misstatements.
c) a client's system of internal controls will not prevent or detect a material misstatement.
d) the client’s transactions are at a high risk of material misstatement
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
56. Tests of controls are conducted to establish that
a) controls operate consistently throughout the period.
b) there are no material misstatements in the financial statements.
c) controls operate effectively.
d) both a and c
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
57. When conducting detailed substantive procedures, auditors search for evidence that
a) the client's internal control system is operating effectively.
b) all transactions have been recorded in the correct accounts.
c) no fraud has occurred during the year.
d) they have remained independent of their clients.
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
58. Substantive audit procedures do not include
a) detailed tests of balances.
b) analytical procedures.
c) detailed tests of transactions.
d) tests of controls.
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
59. When control risk is high, the audit strategy is to
a) do little or no tests of controls and increase reliance on substantive testing of transactions and account balances.
b) assume the client's management is dishonest and immediately report them to the Canada Revenue Agency (CRA).
c) increase reliance on tests of controls and reduce reliance on substantive testing of transactions and account balances.
d) refuse to continue with the remainder of the audit due to the high risk of fraud.
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
60. Tests of controls are conducted to
a) make an assessment of detection risk.
b) assess if controls are operating effectively and efficiently throughout the year.
c) determine how the internal controls operate.
d) gain knowledge of the methods and procedures the entity uses to record transactions.
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
61. Which assertion does the objective that transactions and events have been recorded in the correct accounting period relate to?
a) cut-off
b) completeness
c) accuracy
d) classification
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
62. Which audit objective does the recalculation of the wages payable amount address?
a) rights and obligations
b) completeness
c) accuracy, valuation, and allocation
d) classification
Difficulty: Medium
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
63. Which audit assertion does the audit procedure of obtaining a confirmation from selected accounts receivable of amounts owed to the audit client relate to?
a) existence
b) classification
c) accuracy
d) completeness
Difficulty: Medium
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
64. Substantive procedures or tests can be described as
a) procedures to detect all errors in the accounts.
b) audit procedures to detect material misstatements at the assertion level.
c) procedures to assess audit risk.
d) audit procedures to evaluate the operating effectiveness of internal controls.
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
65. For high-risk accounts, the timing of most audit procedures will be
a) whenever the client says it is most convenient for them to be conducted.
b) at, or after, year-end.
c) before year end.
d) during the interim audit testing stage.
Difficulty: Easy
Learning Objective: Explain the factors that impact the nature, timing, and extent of audit testing.
Section Reference: 6.9 Nature, timing, and extent of audit testing
CPA Competency: Audit and Assurance
AACSB: Analytic
SHORT ANSWER QUESTIONS
66. Explain sampling risk as it relates to both tests of controls and substantive procedures.
Difficulty: Medium
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
CPA Competency: Audit and Assurance
AACSB: Analytic
67. Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Helen Holt was explaining to her group partner that the completeness assertion implies that transactions and events that have been recorded have occurred and pertain to the entity.
b) Keith Lake was explaining to Ben Fitz how sampling risk works for the audit team: “Sampling risk is the risk that as auditors we will arrive at a conclusion that has nothing to do with sampling issues.”
c) Larry Baneiro was vehemently arguing about the benefits of using non-statistical versus statistical sampling methods for a client in the excavation business. Here is what he had to say about non-statistical sampling: “Non-statistical sampling is easier to use than statistical sampling, it requires less staff training, it has lower cost, and it allows an auditor to make a sample choice that they believe is appropriate.”
d) Georgia Walters has started her sample selection of sales transactions for a gemstone conglomerate. She believes that she can improve audit efficiency by stratifying the sample.
Difficulty: Medium
Learning Objective: Understand the difference between sampling and non-sampling risk.
Learning Objective: Differentiate between statistical and non-statistical sampling.
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.2 Sampling and non-sampling risk
Section Reference: 6.3 Statistical and non-statistical sampling
Section Reference: 6.4 Sampling techniques and factors affecting sampling
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
68. Describe the major types of sampling techniques available to auditors.
Difficulty: Medium
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
69. Identify and explain the factors that influence the sample size for tests of controls.
Difficulty: Medium
Learning Objective: Determine the factors that influence the sample size when testing controls.
Section Reference: 6.5 Factors that influence the sample size—testing controls
CPA Competency: Audit and Assurance
AACSB: Analytic
70. Explain how auditors evaluate the results of tests of controls conducted on a sample.
Difficulty: Medium
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.7 Evaluating sample test results
CPA Competency: Audit and Assurance
AACSB: Analytic
71. Explain the differences between the main objectives of tests of controls and substantive procedures.
Difficulty: Medium
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
CPA Competency: Audit and Assurance
AACSB: Analytic
72. CGA-CANADA AUDITING 1 EXAMINATION Dec 2001 — Question 2
Explain the differences between attribute sampling and sampling for substantive testing purposes, in terms of the auditor’s purpose, the definition of exceptions, and the relevance of materiality to the techniques.
Attribute Sampling | Substantive Testing Sampling | |
Auditor purpose | It confirms whether or not control objectives are met in order to assess control risk, but provides no direct evidence about financial statements | It provides direct substantive evidence for financial statement assertions |
Definition of exceptions | An error is the failure to apply a control procedure. It is a “yes or no” determination that results in an exception rate. | An error is where a transaction is recorded in the wrong amount or to the wrong account. It can be quantified in monetary terms. It is often described with reference to materiality. |
Materiality | Materiality is not relevant. It is the tolerable deviation rate that is used to evaluate results. | The aggregate and projected monetary errors must be considered in light of materiality (as both quantitatively and qualitatively defined). They may be quantified as a “tolerable misstatement.” |
Difficulty: Medium
Learning Objective: Determine the factors that influence the sample size when substantive testing and consider techniques used to perform substantive tests.
Section Reference: 6.6 Factors that influence the sample size—substantive testing
CPA Competency: Audit and Assurance
AACSB: Analytic
ESSAY QUESTIONS
73. A range of sampling techniques are available to auditors. Evaluate the advantages and disadvantages of the major techniques.
Difficulty: Medium
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.3 Statistical and non-statistical sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
74. The most common statistical sample selection method according to the study by Hall et al (2002) is dollar-unit sampling. Explain in detail how this method operates and evaluate the advantages and disadvantages of using it.
Difficulty: Medium
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Section Reference: 6.3 Statistical and non-statistical sampling
CPA Competency: Audit and Assurance
AACSB: Analytic
75. An auditor uses professional judgement when determining the nature, timing, and extent of audit procedures to use for each audit. Explain why the nature, timing, and extent of audit testing are crucial factors in every audit.
Difficulty: Medium
Learning Objective: Explain the factors that impact the nature, timing, and extent of audit testing.
Section Reference: 6.9 Nature, timing, and extent of audit testing
CPA Competency: Audit and Assurance
AACSB: Analytic
CASE QUESTION
76. Joe Jones walked out of the Old Rock Bakery operation and chewed on a Cheese Danish. He had chosen random selection to test for proper authorization of purchasing transactions. He had just completed the initial audit testing of the purchasing transactions and had evaluated the results. His conclusion was that the deviation rate of 12 exceptions in a sample of 80 transactions was relatively high.
In addition, Joe was preparing to start the audit of another client, Rohr Industries, an airplane component manufacturer. He had discussed sampling methodology with his audit team and it had been determined that the Rohr Industries systems did not lend themselves easily to statistical sampling techniques. The audit team would have to employ non-statistical sampling.
Required:
a) What is the procedure that Joe Jones would follow when his initial testing showed a relatively high deviation rate for the Old Rock Bakery transactions?
b) What is non-statistical sampling?
c) Describe the non-statistical sampling methods that were open to Joe and his team for the Rohr Industries audit.
d) Which of Joe’s two clients’ systems would lend themselves to stratification?
Difficulty: Medium
Learning Objective: Differentiate between statistical and non-statistical sampling.
Learning Objective: Describe sampling methods and the factors to be considered when choosing a sample.
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.3 Statistical and non-statistical sampling
Section Reference: 6.4 Sampling techniques and factors affecting sampling
Section Reference: 6.7 Evaluating sample test results
CPA Competency: Audit and Assurance
AACSB: Analytic
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