Risk Response Test Bank Docx Chapter 10

Chapter 10

Risk Response

Evaluating Audit Data Analytics and Audit Sampling for Substantive Tests

Question Type: True or False

The choice of using audit sampling vs. audit data analytics (ADA) is often a matter of what is most effective and efficient in determining whether an assertion is presented fairly, in all material respects.

A. True

B. False

The auditor is more likely to use audit sampling when internal controls are strong and reliable data does not exist to support audit data analytics (ADA).

A. True

B. False

The client's data is most reliable when internal controls are weak.

A. True

B. False

In some cases, it is feasible to audit the entire population.

A. True

B. False

Whenever the auditor draws a conclusion about the entire population based on a sample, there is some level of uncertainty about the auditor’s conclusion.

A. True

B. False

Control 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 and, as a consequence, the auditor arrives at an inappropriate conclusion.

A. True

B. False

Non-sampling risk is typically controlled by a firm’s quality control procedures and the review of audit work performed by a manager or partner on the audit team or an engagement quality control reviewer.

A. True

B. False

When conducting substantive tests, sampling risk is the risk that an auditor concludes that a material misstatement does not exist when it actually does, or an auditor concludes that a material misstatement exists when it actually does not.

A. True

B. False

In the non-statistical sampling method, the sample results are evaluated on the basis of the professional judgment and the auditor’s own experience.

A. True

B. False

Systematic selection involves the selection of a population for testing by dividing the number of items in a population by the sample size, resulting in the sampling interval (n).

A. True

B. False

Professional judgment is needed in applying both statistical and non-statistical sampling.

A. True

B. False

It is common to use audit sampling when performing substantive tests on a population of transactions or account balances, such as taking a sample of total sales or a sample of total receivable balances.

A. True

B. False

Audit sampling can be used for all substantive tests.

A. True

B. False

The tolerable misstatement is equal to or more than the materiality level set for the class of transactions or balances being tested.

A. True

B. False

The ultimate purpose of a test of controls is to obtain reasonable assurance that an assertion is presented fairly in all material respects.

A. True

B. False

The choice of statistical or non-statistical sampling affects the selection of procedures or the competence of evidence obtained about individual sample items.

A. True

B. False

Probability Proportionate to Size (PPS) sampling is an approach that uses firm structure theory to express a conclusion in dollar amounts.

A. True

B. False

The most common selection method used in Probability Proportionate to Size (PPS) sampling is systematic selection.

A. True

B. False

Probability Proportionate to Size (PPS) evaluation may understate the Allowance for Sampling Risk (ASR) when misstatements are found in the sample.

A. True

B. False

Applying audit procedures is different for statistical and for non-statistical sampling.

A. True

B. False

The auditor may use a classical variables sampling approach in substantive testing.

A. True

B. False

Question Type: Multiple choice

An auditor is most likely to use audit data analytics (ADA) when _______.

A. data is available that is relevant to an audit assertion of interest, whether as a risk assessment procedure or a substantive test

B. the available data is reliable and comes from a strong system of internal controls.

C. the available data is relatively clean and does not require significant work to make it usable.

D. All of these answer choices are correct

• • Data is available that is relevant to an audit assertion of interest, whether as a risk assessment procedure or a substantive test.
  • The available data is reliable and comes from a strong system of internal controls.
  • The available data is relatively clean and does not require significant work to make it usable.

An important audit planning question involves _______.

A. determining whether the auditor plans to use audit data analytics, or audit sampling, to evaluate an audit population

B. determining the estimated amount of audit fees the client will generate

C. deciding the audit opinion to be issued, and collecting evidence to support that opinion

D. contacting the client's creditors to determine pending litigation

The choice of using audit sampling vs. audit data analytics (ADA) _______.

A. is typically left up to senior management

B. is often a matter of what is most effective and efficient in determining whether an assertion is presented fairly, in all material respects

C. is often a matter of what is most effective and efficient in determining whether a control is presented fairly, in all material respects

D. should be determined by the client's legal counsel

The auditor is more likely to use audit sampling _______.

A. when internal controls are weak

B. when internal controls are strong

C. when the audit committee requests the auditor do so

D. if the client agrees to pay extra fees associated with this procedure

The use of audit sampling _______.

A. is prohibited by the AICPA

B. is mandatory for all publicly-traded companies

C. may be a function of the efficiency and effectiveness of the audit procedure

D. may be a function of the efficiency and effectiveness of the internal auditors

The choice of using audit sampling _______.

A. is a matter of determining which audit procedure will be most effective, and efficient in the circumstances

B. is a matter of determining which audit procedure will be most cost effective, and efficient in the circumstances

C. should be left to the internal auditors

D. should be confirmed with senior management, before any procedures are undertaken

When auditing a construction company, the auditor might use audit data analytics (ADA) to determine, _______.

A. the likelihood of receiving audit fees upon conclusion of the audit

B. the gross margin on each construction contract

C. the inherent riskiness of the client's industry

D. if appropriate receivables balance confirmations have been returned

The auditor is most likely to use _______ when the data available is relevant to an audit assertion of interest.

A. Audit data analytics

B. Audit sampling

C. Statistical sampling

D. Substantive testing

The choice of using audit sampling versus audit data analytics (ADA) is often a matter of _______.

A. determining which method management would prefer the auditor use

B. what is most effective and efficient in determining whether a control is presented fairly, in all material respects

C. what is most effective and efficient in determining whether an assertion is presented fairly, in all material respects

D. which method will be more cost efficient for the client

When creating an audit program and designing audit procedures, _______.

A. an auditor also decides how to select appropriate items for testing

B. an auditor also decides how to select appropriate items for removal from the test sample

C. the auditors should defer sample selection to the internal auditors

D. the auditors should consider use of the cheapest statistical selection methods possible, to lower the cost of the audit

In which of the following situations is the auditor most likely to use audit data analytics?

A. The available data is reliable and comes from a strong system of internal controls.

B. Internal controls are weak.

C. Certain audit procedures are required by professional standards.

D. The auditor needs to have data that is relevant to the audit test.

Which method would the auditor most likely use when the relevant data is clean or can be cleaned up easily?

A. Audit data analytics

B. Audit sampling

C. Statistical sampling

D. Substantive testing

When an audit procedure is tested on an entire group of transactions, _______.

A. sampling is not required

B. non-statistical sampling is required

C. statistical sampling is required

D. the sample should be discarded, and a new random sample drawn

The auditor’s conclusion based on the sample _______.

A. should always be applied to the sample only and not the population

B. should always be applied to the population only and not the sample

C. may be different than the conclusion drawn if the auditor had audited the entire population

D. will always be the same as the conclusion drawn if the auditor had audited the entire population

AS 2315 and AU-C 530 on Audit Sampling_______.

A. provide guidance on audit sampling

B. provide guidance on client acceptance

C. relate only to private companies

D. relate only to companies with subsidiaries

Audit sampling is when _______.

A. the auditor selects certain accounts to audit from the client's chart of accounts

B. an auditor selects the total population

C. an auditor selects less than 100% of a population

D. a client requests a sample of accounts be audited

A representative audit sample _______.

A. is likely to provide a reasonable basis for drawing a conclusion about an entire population

B. is unlikely to provide a reasonable basis for drawing a conclusion about an entire population

C. should be agreed upon by management and the auditor

D. should not involve the auditor

Audit sampling is defined as _______.

A. allowing engagement team members to rotate across different types of audits

B. the probability that the auditor will receive full compensation for all services rendered

C. The selection and evaluation of less than 100 percent of the population such that the auditor expects the items selected (the sample) to be representative of the population, and thus, likely to provide a reasonable basis for conclusions about the population

D. The selection and evaluation of 100 percent of the population such that the auditor expects the items selected (the sample) to be representative of the population, and thus, likely to provide a reasonable basis for conclusions about the population

The decision to audit an entire population is usually dependent upon _______.

A. the assertion and the evidence available to support the assertion

B. management's express written approval to do so

C. the associated controls and the evidence available to support them

D. the auditors budget plan for the audit

Sometimes an audit population may be sufficiently small so that_______.

A. the auditor can ignore the account in question

B. the auditor can audit every item in the population

C. the account in question can be outsourced to the internal audit function for auditing

D. expressed written assurance from senior management pertaining to the account is satisfactory

When sampling, the risk always exists _______.

A. that the auditor’s conclusion based on the sample may be different than the conclusion drawn if the auditor had audited the entire population.

B. that the auditor’s conclusion based on the sample may be the same as the conclusion drawn if the auditor had audited the entire population.

C. that audit fees may be lowered as a result of auditing a sample

D. that management may request a new sample

Which of the following refers to the selection and evaluation of less than 100 percent of a population of audit relevance such that the auditor expects the items selected to be representative of the population?

A. Audit sampling

B. Audit data analysis

C. Statistical analysis

D. Haphazard sampling

What is the resulting condition when an audit population is sufficiently small?

A. It is feasible to audit the entire population.

B. It is more efficient to select a sample of population.

C. Auditing the entire population may not give correct results.

D. Randomly selecting a sample representative of the entire population would help.

In which of the following circumstances must an auditor decide how best to select a sample that is representative of the entire population of items?

A. There are numerous transactions or items within an account balance.

B. An audit population is sufficiently small.

C. A client has a large balance of notes payable and the notes payable are with several banks.

D. There are few transactions or few items within an account balance.

The risk accepted by the auditor with respect to the sample not being representative of the population is known as _______.

A. control risk

B. inherent risk

C. sampling risk

D. audit risk

When a customer fails to reply to a confirmation and the auditor is unable to obtain other evidence about the existence of the receivable, _______.

A. the auditor must conclude that these balances are 100% misstatements and project the misstatements on the remaining portion of the population

B. the auditor must conclude that these balances are 50% misstatements and project the misstatements on the remaining portion of the population

C. the auditor must conclude that these balances are 100% misstatements and project the misstatements on the remaining portion of the sample

D. the auditor should notify management of the auditor's intention to withdraw from the engagement

Sampling risk is _______.

A. the same thing as audit risk

B. the risk that the sample chosen by the auditor is not representative of the population of transactions or items within an account balance and, as a consequence, the auditor arrives at an inappropriate conclusion

C. the risk that the sample chosen by the auditor is representative of the population of transactions or items within an account balance and, as a consequence, the auditor arrives at an inappropriate conclusion

D. inversely related to inherent risk

When conducting substantive tests, sampling risk is _______.

A. ignored, due to substantive tests providing a compensating control

B. considered to be the risk that the random sample selected will be representative of the population

C. the risk that an auditor concludes that a material misstatement does not exist when it actually does, or an auditor concludes that a material misstatement exists when it actually does not

D. the risk that an auditor concludes that a material misstatement does exist when it actually does, or an auditor concludes that a material misstatement exists when it actually does not

Risk of incorrect acceptance is defined as _______.

A. the risk that the auditor concludes that a material misstatement does not exist when it does exist

B. the risk that the auditor concludes that a material misstatement does exist when it does exist

C. the risk that an audit firm incorrectly accepts a client

D. the risk that an audit firm incorrectly issued an unmodified opinion

Risk of incorrect rejection is defined as _______.

A. the risk that the auditor concludes that a material misstatement does not exist when it does exist

B. the risk that the auditor concludes that a material misstatement exists when it does not exist

C. the risk that an auditor incorrectly rejects a client

D. the risk that management may reject the audit opinion issued by the auditor

Non-sampling risk is the risk that _______.

A. an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues

B. an auditor arrives at an inappropriate conclusion for a reason related to sampling issues

C. the auditor inadvertently does not include any sampling procedures in the audit

D. the audit firm does not send sample questionnaires to management related to certain note disclosures

Non-sampling risk is typically controlled by _______.

A. the internal audit function

B. a firm’s quality control procedures and the review of audit work performed by a manager or partner on the audit team or an engagement quality control reviewer.

C. a client's quality control procedures and the review of audit work performed by a manger or partner on the audit team or an engagement quality control reviewer.

D. an increased confidence level when performing statistical tests

What is risk of incorrect acceptance?

A. The risk that the auditor concludes that a material misstatement does not exist when it does exist.

B. The risk that the auditor concludes that a material misstatement exists when it does not exist.

C. The risk that the auditor concludes that a material misstatement does not exist when it actually does not.

D. The risk that the auditor concludes that a material misstatement exists when it actually does.

What is sampling risk?

A. The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure.

B. The risk that the auditor expresses an opinion on the financial statements based on other audits.

C. The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

D. The risk that the auditor concludes that a material misstatement exists when it does not.

With regard to statistical sampling, _______.

A. sample size is determined subjectively, or quantitatively, using appropriate statistics

B. sample size is determined objectively, or quantitatively, using appropriate statistics

C. this function should be outsourced by the auditor to a qualified professional

D. management should be heavily involved with sample selection

In non-statistical sampling, _______.

A. the auditor determines sample size

B. the auditor determines sample selection methods

C. the auditor evaluates the sample results on the basis of the professional judgment and the auditor’s own experience.

D. All of these choices are correct

According to AU-C 530, Audit Sampling, statistical sampling _______.

A. should only be conducted for public companies

B. is an approach to sampling that involves a random selection of sample items and the use of an appropriate statistical technique to determine sample size and evaluate sample results, including measurement of sampling risk

C. is an approach to sampling that involves a random selection of sample items and the use of an appropriate non-statistical technique to determine sample size and evaluate sample results, including measurement of sampling risk

D. should only be conducted for private companies

A statistical sample _______.

A. should be picked carefully to ensure certain clients are audited

B. should be selected by senior management

C. should be selected randomly so it is the auditor’s best estimate of a representative sample

D. should be selected randomly so it is management's best estimate of a representative sample

An advantage of statistical sampling _______.

A. is that it allows an auditor to measure control risk, that is, the risk that the sample chosen by the auditor is not representative

B. is that it allows an auditor to measure sampling risk, that is, the risk that the sample chosen by the auditor is not representative

C. is that it allows an auditor to measure inherent risk, that is, the risk that the sample chosen by the auditor is not representative

D. is that it is cheaper to perform, resulting in lower audit fees for the client

Non-statistical sampling _______.

A. involves any sample selection and evaluation method that does not have the characteristics of statistical sampling.

B. involves any sample selection and evaluation method that has the characteristics of non-statistical sampling.

C. may only be used for publicly traded companies with market capitalizations of less than a certain threshold

D. may only be used for publicly traded companies with market capitalizations above a certain threshold

In non-statistical sampling, _______.

A. the auditor determines samples size, sample selection methods, and evaluates the sample results on the basis of the professional judgment and the auditor’s own experience.

B. the auditor determines samples size, sample selection methods, and evaluates the sample results entirely on the basis of predetermined statistical parameters.

C. the auditor uses the internal audit function to gather samples

D. the auditor selects a sample of certain balance sheet accounts and exclusively audits them

Most audit firms use _______.

A. statistical sampling only

B. non-statistical sampling only

C. a combination of statistical and non-statistical sampling

D. neither statistical or non-statistical sampling

Using statistical sampling _______.

A. involves training in the use of the statistical technique and the professional judgments involved in planning and setting up the sample, as well as in evaluating sample results

B. involves training in the use of non-statistical techniques and the professional judgments involved in planning and setting up the sample, as well as in evaluating sample results

C. typically increases inherent risk

D. typically decreases inherent risk

The risk that the auditor concludes that a material misstatement exists when it does not is called _______.

A. risk of incorrect rejection

B. risk of incorrect acceptance

C. risk of incorrect statement

D. risk of incorrect valuation

Which of the following refers to an approach to sampling that involves a random selection of sample items and the use of an appropriate statistical technique to determine sample size and evaluate sample results?

A. Statistical sampling

B. Non-statistical sampling

C. Haphazard sampling

D. Audit data sampling

Which of the following is a characteristic of non-statistical sampling?

A. It allows selecting an appropriate sample.

B. It helps determine sample size objectively.

C. It allows selecting sample size quantitatively.

D. It allows a random selection of sample items.

In which of the following sampling techniques does the auditor not use a formal statistical technique to select the sample or to evaluate the sample results?

A. Non-statistical sampling

B. Statistical Sampling

C. Monetary-unit sampling

D. Block selection

An important aspect of selecting a sample _______.

A. involves determining the population and sampling unit

B. involves determining the sample and sampling unit

C. involves conferring with senior management with respect to their sampling preferences

D. involves being as subjective as possible

When performing a substantive test, _______.

A. the population consists of a transaction and the account balance to be tested

B. the population consists of the class of transactions or the account balance to be tested

C. the auditor should report all immaterial findings to management

D. the auditor should withdraw from the engagement if any material misstatements are located

High levels of assurance mean _______.

A. lower levels of sampling risk that the sample is not representative of the population

B. higher levels of sampling risk that the sample is not representative of the population

C. lower levels of non-sampling risk that the sample is not representative of the population

D. higher levels of non-sampling risk that the sample is not representative of the population

An important aspect of selecting a sample _______.

A. involves determining the population and population unit

B. involves determining the population and sampling unit

C. is ensuring certain accounts are selected for audit

D. is ensuring certain accounts are not selected for audit

When performing a substantive test, _______.

A. the population consists of the class of transactions or the account balance to be tested

B. the sample consists of the class of transactions or the account balance to be tested

C. the auditor should confirm acceptance by senior management of the test

D. the auditor should perform the test in conjunction with the internal audit function

Statistical sampling requires _______.

A. the auditor to ignore any sampling issues raised during the sampling process

B. a sample be selected randomly, and the results of the test be evaluated using management theory.

C. a sample be selected randomly, and the results of the test be evaluated using probability theory.

D. a sample be selected randomly, and the results of the test be evaluated using game theory.

Random selection requires that _______.

A. the person selecting the sample does not influence the choice of items selected

B. the person selecting the sample influences the choice of items selected

C. the auditors selecting the sample be randomized

D. management be allowed to select the sample

A popular way to select a sample is _______.

A. using random number generators

B. asking management to select the sample

C. asking the internal auditors to select a sample

D. to pick accounts with large balances, on the basis that inherent risk related to these accounts is higher

Stratification is _______.

A. a process of dividing a population into groups of sampling units with similar characteristics that are more heterogeneous

B. a process of dividing a population into groups of sampling units with similar characteristics that are more homogenous

C. unrelated to the work of an auditor

D. used only in non-statistical sampling techniques

In which selection method does the person selecting the sample NOT influence the choice of items selected?

A. Random selection

B. Systematical selection

C. Haphazard selection

D. Selection based on professional judgment

What is systematic selection?

A. The selection of a sample for testing by dividing the number of items in a population by the sample size, determining a sampling interval (n), and then selecting every nth item in the population.

B. The selection of a sample free from bias, where each item in a population has an equal chance of selection.

C. The selection of a sample without use of a methodical technique.

D. The selection of a sample based on professional judgment and evaluating the evidence obtained by sampling.

Which method of selection appears quite similar to random selection?

A. Haphazard selection

B. Systematic selection

C. Block selection

D. Selection based on professional judgment

It is common to use audit sampling _______.

A. if no other non-statistical tests are available or appropriate

B. when performing substantive tests on a population of transactions or account balances

C. when performing tests of controls on a population of transactions or account balances

D. if no other statistical tests are available or appropriate

Tolerable misstatement when performing a substantive test _______.

A. is the maximum dollar amount of misstatement that an auditor is willing to accept within the population tested and conclude that the population is presented fairly

B. is the minimum dollar amount of misstatement that an auditor is willing to accept within the population tested, and conclude that the population is presented fairly

C. does not apply if the auditor plans to issue an unmodified opinion

D. does not apply if the auditor plans to issue a modified opinion

The amount of expected misstatement in the population when performing a substantive test _______.

A. relates to the risk that the audit opinion is misstated

B. is the amount of misstatement the client expects in a transaction class or account balance

C. is the amount of misstatement the auditor expects in a transaction class or account balance

D. should be ignored if the misstatement is less than 20%

If the risk of material misstatement is low (e.g., the combined inherent risk and control risk assessments are low), _______.

A. then the auditor does not need as much assurance from substantive tests, and the auditor can reasonably accept a lower level of assurance from substantive tests and use smaller sample sizes for substantive testing

B. then the auditor needs more assurance from substantive tests, and the auditor can reasonably accept a higher level of assurance from substantive tests and use greater sample sizes for substantive testing

C. then the auditor would set audit risk at the highest possible level

D. then the auditor should consider lowering the engagement fees

The more procedures that are directed to the same audit assertion, _______.

A. the less procedures should be directed to other audit assertions

B. the less an auditor will need to rely on the evidence provided by one test alone and the smaller the sample size required

C. the more an auditor will need to rely on the evidence provided by one test alone and the smaller the sample size required

D. the less an auditor will need to rely on the evidence provided by one test alone and the greater the sample size required

If analytical procedures provide evidence that interest expense is presented fairly, _______.

A. the auditor can appropriately limit the assurance needed from tests of details of transactions and related sample sizes when testing interest expense

B. the auditor can appropriately increase the assurance needed from tests of details of transactions and related sample sizes when testing interest expense

C. then there is no need for the auditor to audit any related accounts, such as notes payable

D. then the auditor should direct management to pay the associated expense

What is tolerable misstatement?

A. The maximum dollar amount of misstatement that an auditor is willing to accept in a transaction class or an account balance.

B. The amount of misstatement the auditor expects in a transaction class or account balance.

C. The level of assurance that the sample is representative of the population.

D. A high level of assurance leading to a lower level of sampling risk.

The level of assurance that the sample is representative of the population is referred to as _______.

A. the desired level of assurance that tolerable misstatement is not exceeded by the actual misstatement in the population

B. tolerable misstatement

C. the amount of expected misstatement in the population

D. the amount of misstatement in the population

Smaller amounts of _______ in the population will result in smaller sample sizes.

A. expected misstatement

B. tolerable misstatement

C. misstatement

D. stratification of the population

A reciprocal population is _______.

A. a population that is overstated if the population of interest is understated (or vice versa)

B. a population that is understated if the population of interest is understated (or vice versa)

C. a metric that is typically found on the income statement

D. a population who have received varying audit opinions

The choice of statistical or non-statistical sampling _______.

A. affects the selection of procedures, or the competence of evidence obtained about individual sample items

B. does not affect the selection of procedures, or the competence of evidence obtained about individual sample items

C. does not affect the selection of procedures, or the competence of evidence obtained about individual population items

D. is best determined by management, who know the company best

The ultimate purpose of a substantive test is to _______.

A. ensure that all controls are functioning properly

B. obtain absolute assurance that an assertion is presented fairly in all material respects

C. obtain reasonable assurance that an assertion is presented fairly in all material respects

D. guarantee that no error or fraud exists in the financial statements

At the outset of substantive testing, the auditor needs to _______.

A. determine the population being tested

B. the assertion or assertions being tested

C. if the auditor is trying to estimate the total dollar value of the population, or the total amount of misstatement that might exist in the population

D. All of these answer choices are correct.

Important substantive procedures include _______.

A. tests of details of transactions and tests of details of balances

B. tests of details of transactions

C. tests of details of balances

D. neither tests of details of transactions and tests of details of balances

The population consists of _______.

A. all accounts in the client's chart of accounts

B. the class of transactions or the account balance to be tested

C. neither the class of transactions nor the account balance to be tested

D. account balances only

A reciprocal population is a population that is _______.

A. always understated

B. always overstated

C. overstated, if the population of interest is overstated (or vice versa)

D. overstated, if the population of interest is understated (or vice versa)

Which of the following defines a population from a sampling perspective?

A. It consists of a class of transactions, or the account balance to be tested.

B. It consists of a subset of the class.

C. It consists of a class that is overstated.

D. None of the answer choices are correct.

What is a sampling unit?

A. A subset of population

B. A class that is overstated

C. The class of transactions to be tested

D. The reciprocal population

A/An _______ is a population that is overstated if the population of interest is understated.

A. reciprocal population

B. adverse population

C. recurrent population

D. overstated population

Probability Proportionate to Size (PPS) sampling is _______.

A. an approach that uses attribute sampling theory to express a conclusion in dollar amounts

B. an approach that uses non-statistical sampling theory to express a conclusion in dollar amounts

C. rarely used in auditing, due to its prohibitive cost

D. required to be used in the auditing of publicly traded companies

The PPS (probability proportional to size) sampling technique is such that _______.

A. the probability that a particular sampling unit will be chosen in the sample is inversely proportionate to the monetary size of the item

B. the probability that a particular sampling unit will be chosen in the sample is proportionate to the monetary size of the item

C. clients with larger balances are less likely to be sampled and audited

D. only large firms can afford the extra cost associated with this procedure

Probability proportionate to size sampling _______.

A. should only be used in substantive testing of transactions

B. should only be used in substantive testing of balances

C. should not be used for substantive testing of transactions and balances

D. can be used for substantive testing of transactions and balances

When using PPS (probability proportionate to size) sampling, _______.

A. the population consists of the class of transactions or the account balance to be tested

B. the population consists a particular transaction or the account balance to be tested

C. the population consists of the class of transactions or multiple account balances to be tested

D. management should be allowed some latitude in selecting which accounts to be sampled

The sampling unit in PPS (probability proportionate to size) sampling _______.

A. is the account itself

B. is determined by the class of account

C. is an aggregated dollar amount

D. is the individual dollar amount

A Logical Sampling Unit is defined as _______.

A. the item snagged by the sampling plan for audit, such as an individual customer, or individual sales invoice. Tests of controls are performed on the logical sampling unit

B. the item snagged by the sampling plan for audit, such as an individual customer, or individual sales invoice. Auditing procedures are performed on the logical sampling unit

C. a department within the client’s firm, which will be audited by the external auditor

D. the item snagged by the sampling plan for audit, such as an aggregated group of customers, or sales invoices. Auditing procedures are performed on the logical sampling unit

What is the amount of estimated misstatement in the population called?

A. Basic precision

B. Projected misstatement

C. Logical sampling unit misstatement

D. Audit data sampling

The results of the sample are used to estimate the _______ in the population.

A. total projected misstatement

B. upper misstatement limit

C. lower misstatement limit

D. probability proportionate to size

What is statistical allowance for sampling risk?

A. A measure of the uncertainty associated with not sampling the entire population

B. A projection of misstatement in the population based on the findings in the sample

C. A statistical estimate of the maximum misstatement in the population based on the sample

D. The amount of estimated misstatement in the population

The common steps in any transaction stream are _______.

A. authorization

B. executing the transaction

C. recording the transaction, and transfer of consideration

D. All of these answer choices are correct.

The major advantages of non-statistical sampling include _______.

A. decreased complexity

B. lower training costs

C. it is less time consuming

D. All of these answer choices are correct.

• • Decreased complexity,
  • Lower training cost, and
  • It may be less time consuming.

The major disadvantages of non-statistical sampling include _______.

A. sampling risk cannot be quantified

B. sufficiency of evidence cannot be measured

C. inefficiency

D. All of these answer choices are correct.

• • Cannot quantify sampling risk.
  • Cannot measure the sufficiency of evidence, and
  • May not get the most efficient sample.

The process of selecting a sample _______.

A. should be biased, and the auditor should attempt to obtain a representative sample of the items in the balance or transaction class being sampled

B. should be unbiased, and the auditor should attempt to obtain a representative sample of the items in the balance or transaction class being sampled

C. should be unbiased, and the auditor should attempt to obtain a certain sample of the items in the balance or transaction class being sampled

D. should be determined in conjunction with the client's internal auditors

The auditor can _______.

A. never be certain that a representative sample has been achieved

B. always be certain that a representative sample has been achieved

C. request management check the sample for evidence of bias

D. request the internal auditor check the sample for evidence of bias

The concept of sampling risk _______.

A. is closely tied to the concept of non-statistical sampling risk

B. is a measure of whether the sample is unrepresentative or not

C. is a measure of whether the sample is representative or not

D. is rarely of concern to the auditor

An allowance for sampling risk is _______.

A. an evaluation of the certainty associated with not sampling the entire population

B. an evaluation of the uncertainty associated with not sampling the entire sample

C. an evaluation of the uncertainty associated with not sampling the entire population

D. an evaluation of the certainty associated with not sampling the entire sample

Lower training cost is a major advantage of _______.

A. non-statistical sampling

B. statistical sampling

C. random sampling

D. systematic sampling

In _______ the auditor estimates the audited value of the population (or each strata) based on a ratio of the audited value of the sample divided by the book value of the sample.

A. ratio method

B. difference method

C. statistical method

D. populate method

Which of the following may not get the most efficient sample?

A. Non-statistical Sampling

B. Statistical sampling

C. Stratified sample

D. Advance statistical method

Classical variables sampling is best described as:

1. A sampling method that uses normal distribution theory to select a sample and evaluate the characteristics of a population based on the results of a sample drawn from the population.
2. A non-statistical sampling technique
3. A procedure conducted by the internal auditors only
4. A sampling technique only applied to receivables

The concept of stratification relates to _______.

1. only targeting certain accounts for audit procedures to be applied to
2. the idea of categorizing a sample based on certain sample characteristics
3. liability accounts only
4. equity accounts only

The sampling plan for classical variables sampling _______.

1. involves the same steps required in PPS (probability proportional to size) sampling
2. should be identical for all clients within the same industry
3. is an example of a non-statistical sampling technique
4. should be determined by client management

.

Mean per Unit (MPU) Estimation involves _______.

1. sampling involving determining an audit value for each item in the sample
2. complicated statistical regression techniques
3. complicated non-statistical regression techniques
4. procedures completed by the client’s legal counsel

Generally speaking, the larger the population, _______.

1. the smaller the sample size
2. the larger the sample size
3. the less expensive the audit should be
4. the more help will be required from the internal audit function

Classical variables sampling uses _______.

1. normal distribution theory
2. probability proportional to size theory
3. non-statistical theories
4. hypergeometric distribution theory

Three techniques that are typically used in classical variables sampling are _______.

1. mean-per-unit
2. difference
3. ratio
4. All of these answer choices are correct.

An auditor can reduce the impact of variability by using _______.

1. indemnification
2. stratification
3. a variety of statistical techniques
4. a variety of non-statistical techniques

The planned allowance for sampling risk is also related to _______.

1. the desired level of assurance from the sample
2. the desired level of assurance from the population
3. a decrease in inherent risk
4. an increase in audit risk

AICPA FC: Reporting, Learning objective: LO10.10, Solution: The planned allowance for sampling risk is also related to the desired level of assurance from the sample.

Smaller populations with fewer number of units _______.

1. should result in a larger sample size
2. should result in a smaller sample size
3. have no bearing on sample size
4. should result in a smaller population size

If an auditor desires more precise estimates, _______.

1. the larger the sample size should be
2. the smaller the sample size should be
3. this judgment would have no bearing on sample size
4. he or she should request them from management

AICPA FC: Reporting, Learning objective: LO10.10, Solution: If the auditor desires more precise estimates, the sample size should be larger.

The smaller the amount of misstatement that the auditor can tolerate, _______.

1. the smaller the sample size
2. the larger the sample size
3. the larger the population size
4. the lower inherent risk becomes

It is critical to have accurate knowledge of the number of units in the population because _______.

1. this factor enters into the calculation of sample size only
2. this factor enters into the calculation of both the sample size and sample results.
3. this factor enters into the calculation of the sample results only
4. this factor enters into neither the calculation of the sample size or the sample results.

Stratification is often advantageous because _______.

1. the combined sample size often will be significantly less than a single sample size based on a non-stratified population
2. the combined sample size often will be significantly more than a single sample size based on a non-stratified population
3. it is a cheaper approach and will usually result in lower audit fees for the client
4. it is usually more expensive and will result in higher audit fees for the client

The risk of incorrect acceptance has _______.

1. a proportional effect on sample size
2. inverse effect on sample size —the lower the specified risk, the larger the sample size
3. direct effect on sample size —the lower the specified risk, the lower the sample size
4. no effect on sample size

Evaluating sample results involves making _______.

1. a quantitative assessment only in order to reach an overall conclusion
2. a qualitative assessment only in order to reach an overall conclusion
3. both a quantitative and a qualitative assessment of the results in order to reach an overall conclusion
4. neither a quantitative or qualitative assessment in order to reach an overall conclusion

When either the auditor’s quantitative (statistical) or qualitative assessments of sample results support the conclusion that the population is materially misstated, _______.

1. professional judgment should be used in deciding on an appropriate course of action
2. the auditor should immediately withdraw from the engagement
3. the auditor should consider notifying the audit committee and SEC
4. the auditor should proceed to issue an unqualified (clean) audit opinion

In Mean per Unit (MPU) estimation, the sample size required to achieve specified statistical objectives _______.

1. is related directly to the variability of the values of the population items
2. is not related to the variability of the values of the population items
3. should be determined by specialists employed by the auditors
4. should be determined by senior management and communicated to the auditor

The optimal number of strata depends on _______.

1. a determination by senior management
2. the pattern of variation in the population values and the additional costs associated with designing, executing, and evaluating each stratified sample
3. the pattern of variation only
4. the additional costs associated with designing, executing, and evaluating each stratified sample only

Question Type: Text Entry

The auditor would most likely use ________ when the audit population is large, and the auditor’s tests are supported by reliable and relevant data in electronic form.

ADA | audit data analytics | audit data analytics (ADA)

When an audit procedure is tested on an entire group of transactions, _______ is not required.

sampling

_______ is the risk that the sample chosen by the auditor is not representative of the population of transactions or items within an account balance and, as a consequence, the auditor arrives at an inappropriate conclusion.

Sampling risk

_______ is an approach to sampling that involves a random selection of sample items and the use of an appropriate statistical technique to determine sample size and evaluate sample results, including measurement of sampling risk.

Statistical Sampling | statistical sampling

_______ involves any sample selection and evaluation method that does not have the characteristics of statistical sampling.

Non-statistical Sampling | non-statistical sampling

The _______ method includes both an estimate of the audited value of the population (or the amount of misstatements in the population) and an estimate of a statistical confidence interval, or allowance for sampling risk associated with the estimate.

statistical sampling

_______ can be used prior to random selection to improve audit efficiency.

Stratification

_______ of the population is a way to group the population into more homogenous subgroups, which will result in more efficient sampling and reduce the size of the sample required.

Stratification

Determining a sample size is one step in planning and executing a _______ sample.

statistical

With respect to sample size, _______ risk of incorrect acceptance is equivalent to having a higher desired level of assurance from the sample.

lower | Lower

_______ is generally easier to use than classical variables sampling because the auditor can calculate sample sizes and evaluate sample results by hand or with the assistance of tables.

PPS Sampling / Probability Proportionate to Size sampling

In _______ the auditor estimates the audited value of the population by adding the projected difference between audited value and book value of each strata to the book value of that strata.

difference method

Question Type: Drop down

In the given table, match the entities related to audit data analysis and sampling on the left with their explanations on the right.

A. Audit data analytics

|| It is likely to be used when the audit population is large, and the auditor’s tests are supported by reliable and relevant data.

B. Audit sampling

|| It is likely to be used when evidence to support the audit test is not available in electronic form.

C. Audit data

||It is required by the auditor to do audit sampling test.

D. Internal control

||When it is not effective, the client data may not be reliable.

Audit sampling is likely to be used when evidence to support the audit test is not available in electronic form.

Audit data analytics is likely to be used when the audit population is large, and the auditor’s tests are supported by reliable and relevant data.

Audit data is required by the auditor to do audit sampling test.

When internal controls are weak, client data may not be reliable.

In the given table, match the details of sampling on the left with their explanations on the right.

A. Sampling is not required when

||An audit procedure is tested on an entire group of transactions.

B. Audit sampling

||An auditor selects less than 100% of a population and the sample is likely to provide a reasonable basis for drawing a conclusion about an entire population.

C. Sample

||It is a representative of the population.

D. Whenever the auditor draws a conclusion about the entire population based on a sample

||There is some level of uncertainty about the auditor’s conclusion.

Sampling is not required when an audit procedure is tested on an entire group of transactions.

Audit sampling: an auditor selects less than 100% of a population and the sample is likely to provide a reasonable basis for drawing a conclusion about an entire population.

Sample is a representative of the population.

Whenever the auditor draws a conclusion about the entire population based on a sample, there is some level of uncertainty about the auditor’s conclusion.

In the given table, match the terms related to sampling on the left with their details on the right.

A. Risk of incorrect acceptance

||It is the risk in which the auditor concludes that there is no material misstatement when in fact there is a material misstatement.

B. Risk of incorrect rejection

||It is the risk in which the auditor concludes that a material misstatement exists when it does not exist.

C. Sampling risk

||It is the risk that the sample chosen by the auditor is not representative of the population of transactions or items within an account balance and, as a consequence, the auditor arrives at an inappropriate conclusion.

D. Non-sampling risk

||It is typically controlled by a firm’s quality control procedures.

The risk of incorrect rejection is the risk in which the auditor concludes that a material misstatement exists when it does not exist.

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 and, as a consequence, the auditor arrives at an inappropriate conclusion.

Non-sampling risk is typically controlled by a firm’s quality control procedures.

In the given table, match the concepts related to sampling on the left with their details on the right.

A. Non-statistical sampling

||It requires less staff training.

B. Statistical sampling

||It involves modest cost and time involved in setting up, selecting, and evaluating the sample.

C. Sampling risk

||It involves risk of incorrect acceptance and incorrect rejection.

D. Non-sampling risk

||It is involved when an auditor spends most of his or her time testing assertions where the risk of material misstatement is modest.

Non-statistical sampling requires less staff training.

Statistical sampling involves modest cost and time involved in setting up, selecting, and evaluating the sample.

Sampling risk includes the risks of incorrect acceptance and incorrect rejection.

Non-sampling risk is involved when an auditor spends most of his or her time testing assertions where the risk of material misstatement is modest.

In the given table, match the concepts given on the left of the table with their definitions on the right-hand side of table.

A. Stratification

||A process of dividing population into groups of sampling units with similar characteristics.

B. Random selection

||Selecting a sample that is free from bias and each item in a population has an equal chance of selection.

C. Haphazard selection

||The selection of a sample without use of a methodical technique.

D. Systematic selection

||The selection of a sample for testing by dividing the number of items in a population by the sample size, determining a sampling interval (n), and then selecting every nth item in the population.

Stratification is a process of dividing a population into groups of sampling units with similar characteristics.

Random selection involves selecting a sample that is free from bias and each item in a population has an equal chance of selection.

Haphazard selection is the selection of a sample without use of a methodical technique.

Systematic selection is the selection of a sample for testing by dividing the number of items in a population by the sample size, determining a sampling interval (n), and then selecting every nth item in the population.

In the given table, match the factors influencing the sample size on the left with their details on the right.

A. Stratification of the population

||It is an effective way to reduce sample size for substantive tests.

B. Tolerable misstatement

||It is the maximum dollar amount of misstatement that an auditor is willing to accept in a transaction class.

C. Desired level of assurance

||If it is not obtained from other substantive tests, the auditor needs larger samples.

D. The amount of expected misstatement

|| The misstatement amount that the auditor expects to find in certain class of transactions

Stratification of the population is an effective way to reduce sample size for substantive tests.

Tolerable misstatement is the maximum dollar amount of misstatement that an auditor is willing to accept in a transaction class.

If the desired level of assurance is not obtained from other substantive tests, the auditor needs larger samples.

The amount of expected misstatement occurs when control risk is high.

In the given table, match the steps in planning and evaluating the sample on the left with their details on the right.

A. Audit objective

||It encompasses obtaining a reasonable assurance that an assertion is presented fairly in all material respects.

B. Procedure to meet objectives

||It includes tests of details of transactions and tests of details of balances.

C. Population

||It consists of the class of transactions or the account balance to be tested.

D. Sampling unit

||It consists of a subset of the population, which forms the basis for sampling.

The audit objective is to obtain reasonable assurance that an assertion is presented fairly in all material respects.

Procedures to meet objectives include tests of details of transactions and tests of details of balances.

A population consists of the class of transactions or the account balance to be tested.

A sampling unit consists of a subset of the population, which forms the basis for sampling.

In the given table, match the concepts on the left of the table with their details on the right.

A. Population

||It consists of the class of transactions or the account balance to be tested.

B. Probability Proportionate to Size (PPS) Sampling

||It uses attribute sampling theory to express a conclusion in dollar amounts.

C. Limitation of PPS sampling

||It includes the exclusion of zero and negative balances from the population.

D. Disadvantage of PPS sampling

||It includes special considerations required in the evaluation of the sample.

Population consists of the class of transactions or the account balance to be tested.

Probability Proportionate to Size (PPS) sampling uses attribute sampling theory to express a conclusion in dollar amounts.

Limitation of PPS sampling includes the exclusion of zero and negative balances from the population.

Disadvantage of PPS sampling includes special considerations required in the evaluation of the sample.

In the given table, match the concepts on the left of the table with the details on the right.

A. Non-statistical Sampling

||It relies on the auditor’s judgment to determine sample size, select the sample and project sample results on the population.

B. Allowance for sampling risk

||It involves evaluation of the uncertainty associated with not sampling the entire population.

C. Sampling risk

||It is a measure of whether the sample is representative or not.

D. Selection of a sample

||It should be unbiased.

Non-statistical sampling relies on the auditor’s judgment to determine sample size, select the sample and project sample results on the population.

Allowance for sampling risk involves evaluation of the uncertainty associated with not sampling the entire population.

Sampling risk is a measure of whether the sample is representative or not.

Selection of a sample should be unbiased.

Question Type: Multiple choice multi select

Which of the following are situations where the auditor is likely to use audit sampling?

A. Relevant data is not reliable and internal controls over the reliability of data are weak.

B. Relevant data may be in different formats and is not easy to use.

C. Relevant data is reliable and internal controls over the reliability of data are strong.

D. Relevant data is clean or can be cleaned up easily.

In which of the following cases is audit sampling is not required?

A. An audit procedure is tested on an entire group of transactions.

B. Auditing is done on 100% of items within an account balance.

C. There are numerous transactions or items within an account balance.

D. The audit population is very large.

What are the consequences of sampling risk?

A. The risk that the audit will be ineffective.

B. The risk that the audit will be inefficient.

C. The risk that the audit will be incomplete.

D. The risk that the audit will be inconclusive.

Which of the following are the characteristics of non-statistical sampling?

A. It allows selecting the sample without using a formal statistical technique.

B. It allows determining samples size entirely on the basis of the professional judgment.

C. It helps measure sampling risk.

D. It helps evaluate the sample results mathematically.

Which of the following are the characteristics of random sampling?

A. It requires that the person selecting the sample does not influence the choice of items selected.

B. It is free from bias.

C. Each item within the population has an equal chance of being selected for testing.

D. It involves the selection of a sample for testing by dividing the number of items in a population by the sample size.

Which of the following are factors that influence the sample size when testing transactions and balances?

A. Stratification of the population

B. The amount of expected misstatement in the population

C. Tolerable misstatement

D. Demographics

Which of the following steps are involved in planning and executing a non-statistical sample?

A. Judgmentally select a representative sample

B. Apply audit procedures

C. Randomly select a representative sample

D. Determine sample size statistically

The Probability Proportionate to Size (PPS) sampling approach is primarily applicable in testing transactions of which of the following tests?

A. Receivables when unapplied credits to customer accounts are insignificant

B. Investment securities

C. Inventory price tests when few differences are anticipated

D. Asset payables if misstatements are found

• 1. Receivables when unapplied credits to customer accounts are insignificant
  2. Investment securities
  3. Inventory price tests when few differences are anticipated

Which of the following are the factors that influence sample size in a substantive test?

A. The desired level of assurance that tolerable misstatement is not exceeded by the actual misstatement in the population

B. Tolerable misstatement

C. Stratification of the population into more homogenous subgroups

D. The amount of expected level of assurance of misstatement

• The desired level of assurance that tolerable misstatement is not exceeded by the actual misstatement in the population
• Tolerable misstatement
• Stratification of the population into more homogenous subgroups

Question Type: Drag and Drop

An underlying requirement of _______ is that the client’s data be reliable.

A. [[ ADA ]] | Audit sampling | Random sampling | Block selection

The auditor uses _______ when certain audit procedures are required by professional standards.

A. [[ audit sampling ]] | modified sampling | audit data analytics | statistical sampling

The risk of _______ represents a situation where the auditor has conducted substantive procedures on a sample and concluded that there is a material misstatement in an assertion, when in fact there is no material misstatement.

A. incorrect acceptance |[ incorrect rejection ]| non-sampling | incorrect valuation

When an auditor uses his/her judgment alone to select a sample for testing, it is called the _______ method of sampling.

A. [[non-statistical]] | statistical | haphazard | substantive

_______ requires a sample be selected randomly and the results of the test be evaluated using probability theory.

A. [[ Statistical sampling ]] | Non-statistical sampling | Haphazard sampling | Systematic sampling

Higher levels of _______ result in larger sample size.

A. [[ desired assurance ]] | tolerable misstatement | expected misstatement | stratification

_______will be most effective when the auditor wants particular evidence to support a conclusion about fair presentation of an account.

A. [[ Audit sampling ]] | Audit data analytics | Non-statistical sampling | Block selection

Probability Proportionate to Size (PPS) sampling is not suitable in _______.

A. testing liabilities] | testing assets | [cases when there are zero and negative balances]| overstating accounts payable

The auditor’s best opportunity to obtain a representative sample is to select a ________.

A. [[random sample]] | systematic sample | haphazard sample | judgmental sample

Question Type: Short Answer

Hannah McGregor is auditing the accounts receivable for GDI Printing, Inc. She plans to use sampling to select accounts for confirmations. Explain the effect each of the following factors will have on the sample size:

• • Hannah has determined that she needs a higher level of assurance that tolerable misstatement is not exceeded by the actual misstatement in the population.
  • Hannah has determined that the tolerable misstatement should be smaller.
  • Hannah is expecting small amounts of misstatement in the population.
  • Higher levels of assurance should result in larger sample size.
  • If the auditor can only tolerate small amounts of misstatement and conclude that the account balance is presented fairly, the auditor will need larger sample sizes.
  • Smaller amounts of expected misstatements in the population will result in smaller sample sizes.
  • The auditor might audit the existence of accounts receivable by sending confirmations.
  • The auditor might audit the existence of inventory by physically inspecting inventory.
  • The auditor might focus audit procedures related to the existence of property, plant and equipment (PP&E) on starting with a beginning audited balance and then audit changes to PP&E.
  • The auditor might test the additions to PP&E by vouching to the documentation underlying the transaction.
  1. It is generally easier to use PPS than classical variables sampling because the auditor can calculate sample sizes and evaluate sample results by hand or with the assistance of tables.
  2. The size of a PPS sample is not based on any measure of the estimated variation of audit values.
  3. PPS sampling automatically results in a stratified sample because items are selected in proportion to their dollar values.
  4. PPS systematic sample selection automatically identifies any item that is individually significant if its value exceeds an upper monetary cutoff.
  5. If the auditor expects no misstatements, PPS sampling will usually result in a smaller sample size than under classical variables sampling.
  6. A PPS sample can be designed more easily, and sample selection may begin before the complete population is available.

In an accounts receivable sample with a sampling interval of $5,000, an auditor identifies a recorded amount of $10,000 which has an audited amount of $8,000. If this was the only error that the auditor discovered, what would the projected misstatement for this sample be?

$2,000

An account balance is $300,000 and there are 25 items in the account, six of which have balances that equal or exceed $15,000. To ensure that all accounts with balances of at least $15,000 are selected, what would the sampling interval be?

$ 15,000

Joe Cool, CPA is reviewing a sample of his client's accounts payable. Joe finds evidence that the account may be materially misstated. What are Joe's options?

Joe Cool's options are:

(1) increase the sample size

(2) perform additional substantive procedures

(3) adjust the account

(4) issue a qualified or adverse opinion if management refuses to adjust the account