Chapter 17

Multiple-Choice Questions
1. easy c Sampling used for tests of details provides results in terms of: a. exception rates. b. percentages. c. dollars. d. expectation rates. oth sampling and nonsampling ris!s are associated "ith: a. b. c. d. '. easy a $ests of controls. %es &o %es &o Substantive tests of transactions. %es &o &o %es

2. #asy d

$olerable misstatements for overstatements and understatements: a. may be different amounts. b. must be different amounts. c. must be set at the same amount. d. must be expressed in percentages. Monetary-unit sampling is most commonly used "hen: a. several exceptions are expected. b. a dollar result is desired. c. the population data are maintained on manual files. d. the auditor is searching for understatements only. Monetary-unit sampling is not particularly effective at detecting: a. overstatements. b. understatements. c. errors in current assets. d. errors in noncurrent assets. $ests for rates of occurrence are appropriately used in all but "hich of the follo"ing situations+ $esting of internal controls %es &o %es &o Substantive testing of transactions %es %es %es &o Substantive testing of details of balances %es %es &o %es

(. easy d

). easy b

*. #asy c

a. b. c. d. ,. easy b

-hich of the follo"ing is not a type of statistical method that provides results in dollar terms+ a. .ariables sampling. b. /ttributes sampling. c. Monetary-unit sampling. d. Sampling "ith probability proportional to si0e. -hich of the follo"ing is not a term relevant to sampling for tests of details+ a. /cceptable ris! of incorrect re2ection

1. easy

Arens/Elder/Beasley

b. c. d.

/nalysis of misstatements #stimate misstatements in the population 3efine the exception conditions

Arens/Elder/Beasley

4. easy a

-hen auditors sample for tests of details of balances5 the ob2ective is to determine "hether the: a. account balance being audited is fairly stated. b. transactions being audited are free of misstatements. c. controls being tested are operating effectively. d. transactions and account balances being audited are fairly stated. $he auditor must consider the possibility that the true population misstatement is greater than the amount of misstatement that is tolerable "hen the auditor is performing: a. b. c. d. &onstatistical sampling. %es &o %es &o Monetary-unit sampling. %es &o &o %es

16. easy d

11. #asy d

-hat is the purpose of applying stratified sampling to a population+ $o avoid items that may contain misstatements %es &o %es &o $o emphasi0e certain items and deemphasi0e others %es &o &o %es

a. b. c. d. 12. medium a

7f an auditor desires a greater level of assurance in auditing a balance5 the acceptable ris! of incorrect acceptance: a. is reduced. b. is increased. c. is not changed. d. may be reduced or increased depending upon other circumstances. -hich of the follo"ing is not a li!ely item on "hich to apply stratification techni8ues+ a. aging of accounts receivable b. dollar value of accounts receivable c. customer names of account receivables d. number of sales per customer in a period 7n estimating the population misstatement5 the first step in pro2ecting from the sample to the population is to: a. ma!e a point estimate. b. revise the upper error bound. c. calculate the precision interval. d. determine the population mean. $olerable misstatement is used to: a. b. c. d. 3etermine sample si0e. %es &o &o %es Select the sample. %es %es &o &o #valuate results. &o &o %es %es

1'. medium c

1(. medium a

1). Medium cc

1*. medium a

$he relationship bet"een re8uired sample si0e and the acceptable ris! of incorrect acceptance is: a. inverse. b. direct.

Arens/Elder/Beasley

c. d. 1,. medium a

proportional. indeterminate.

$he final step in the evaluation of the audit results is the decision to: a. accept the population as fairly stated or to re8uire further action. b. determine sampling error and calculate the estimated total population error. c. pro2ect the point estimate. d. determine the error in each sample. $he most commonly used method of statistical sampling for tests of details of balances is: a. attributes sampling. b. systematic sampling. c. discovery sampling. d. monetary-unit sampling. -hich of the follo"ing does not have to be considered in determining the initial sample si0e of a test of details+ a. tolerable misstatement b. acceptable ris! of incorrect re2ection c. estimate of misstatements in the population d. acceptable audit ris! 7f an auditor concludes that internal controls are li!ely to be effective5 the preliminary assessment of control ris! can be reduced5 leading to a9n: ;;;;;; the acceptable ris! of incorrect acceptance. a. reduction in b. increase in c. elimination of d. increase or decrease -hen using monetary-unit sampling5 the recorded dollar population is a definition of all the items in the: a. population. b. population "hich the auditor has included in the sample. c. population "hich contain errors. d. sample "hich contain errors. 7f acceptable audit ris! is increased5 /<7/ should be: a. increased. b. reduced. c. unaffected. d. modified. /s the acceptable ris! of incorrect acceptance is reduced5 the re8uired sample si0e ;;;;;;;;;. a. increases b. decreases c. is unaffected d. increases or decreases $he acceptable ris! of incorrect acceptance is most related to: a. audit efficiency. b. audit results. c. audit effectiveness. d. audit estimation. 7n monetary-unit sampling5 the relationship bet"een tolerable misstatement si0e and re8uired sample si0e is:

11. medium d

14. medium b

26. medium b

21. medium a

22. medium a

2'. medium a

2(. medium c

2). medium

Arens/Elder/Beasley

a. b. c. d.

direct. inverse. varied. indeterminable.

2*. medium c

$he ris! the auditor is "illing to ta!e of accepting a balance as correct "hen the true misstatement in the balance under audit is greater than the tolerable misstatement is: a. the upper bound. b. the tolerable ris!. c. the acceptable ris! of incorrect acceptance. d. the lo"er bound. /s the amount of misstatements expected in the population approaches tolerable misstatement5 the planned sample si0e "ill: a. decrease. b. increase. c. vary based on characteristics of the population. d. be unaffected. -hich of the follo"ing is the auditor least li!ely to consider "hen estimating misstatements in the population+ a. =rior experience "ith the client. b. <esults of current year tests of controls. c. <esults of analytical procedures already performed. d. /cceptable audit ris!. /n accounts receivable population contains a total of four customers. $he accounts5 the amounts5 and the cumulative total are sho"n belo". Monetary-unit sampling is to be used. /ccount <ecorded Cumulative &ame /mount $otal lue > '), > '), ro"n 211 *'1 ?ray *6 *41 ?reen ),( 152,2 ased on the information above5 the population si0e is: a. (. b. ),(. c. 152,2. d. >25*1(. /n auditor using nonstatistical sampling cannot formally measure sampling error and therefore must sub2ectively consider the possibility that the true population misstatement exceeds a tolerable amount. -hich of the follo"ing factors should be considered by the auditor in ma!ing this assessment+ $he dollar difference bet"een the point estimate and tolerable misstatement. %es &o %es &o $he extent to "hich items in the population have been audited 166 percent. %es &o &o %es

2,. medium b

21. medium d

24. medium c

'6. medium a

a. b. c. d. '1. medium b

-hen using systematic selection procedures "ith monetary-unit sampling of accounts receivable5 the interval is determined by: a. consulting a random number table. b. dividing the population si0e by the desired sample si0e. c. dividing the sample si0e by the account "ith the largest dollar value.

Arens/Elder/Beasley

d. '2. medium b

dividing the population si0e by the account receivable "ith the largest dollar value.

7n a probability proportional to si0e 9==S: sample5 all population physical audit units "ith an amount e8ual to or greater than the amount of the interval "ill automatically be included in the sample if the auditor uses: a. random selection. b. systematic selection. c. bloc! selection. d. stratified selection. Monetary unit sampling is also referred to as all of the follo"ing except: a. attribute sampling. b. dollar unit sampling. c. cumulative monetary amount sampling. d. sampling "ith probability proportional to si0e. $he appropriate assumption to ma!e regarding the overall percent of error in those population items containing an error is: a. determined using random number tables. b. set after a 8uantitative analysis of client@s internal control system. c. based on the auditor@s personal 2udgment in the circumstances. d. based on statistical analysis using confidence limits. -hen errors are found5 a common assumption in practice is to assume: a. a 166A assumption for all errors. b. that the population errors are larger than the sample errors. c. that the population errors are smaller than the sample errors. d. that the actual sample errors are representative of the population errors. -hich of the follo"ing does not need to be considered "hen the auditor generali0es from the sample to the population+ /cceptable ris! of incorrect acceptance. %es &o %es &o /cceptable ris! of incorrect re2ection. %es &o &o %es

''. medium a

'(. medium c

'). medium d

'*. medium b

a. b. c. d. ',. medium d

'1. medium b

$he auditor must deal "ith layers of the computed upper deviation rate from the attributes table because there are different error assumptions for each error. /ssume a sample of 166 had found one error5 and the computed upper deviation rate is sho"n in the follo"ing table: &umber Bpper =recision of #rrors Cimit from $able 6 .62' 1 .6'1 $he precision limit for the layer "ith one error is: a. 2.'A. b. '.1A c. *.1A. d. 1.)A. -hich balance-related audit ob2ective cannot be assessed using monetary unit sampling+ a. /ccuracy. b. Completeness. c. #xistence. d. /ll of the above can be assessed using monetary unit sampling.

Arens/Elder/Beasley

'4. medium b

$he confidence limits in variables sampling are similar to the monetary-unit sampling@s: a. point estimate. b. misstatement bounds. c. standard deviation. d. standard error of the mean. $he method used to measure the estimated total error amount in a population "hen there is both a recorded value and an audited value for each item in the sample is: a. difference estimation. b. mean-per-unit estimation. c. ratio estimation. d. monetary-unit sampling. $he variables sampling method "hich generally results in smaller sample si0es than any other method is: a. ratio estimation. b. difference estimation. c. monetary-unit sampling. d. mean-per-unit estimation. $he auditor is concerned "ith the audited value rather than the error amount of each item in the sample "hen using: a. difference estimation. b. mean-per-unit estimation. c. ratio estimation. d. monetary-unit sampling. ==S samples can be obtained in an efficient manner using all but "hich of the follo"ing+ a. Dand selection by the auditor. b. Computer soft"are. c. <andom number tables. d. Systematic sampling techni8ues. -hich of the follo"ing items is not needed to apply MBS+ a. b. c. d. / point estimate for misstatements. &o %es &o %es / sample si0e. %es &o %es &o /n estimated error rate. &o %es %es &o

(6. medium a

(1. medium b

(2. medium b

('. medium a

((. medium a

(). medium a

-hile performing a substantive test of details during an audit5 the auditor determined that the sample results supported the conclusion that the recorded account balance "as materially misstated. 7t "as5 in fact5 not materially misstated. $his situation illustrates the ris! of: a. incorrect re2ection. b. incorrect acceptance. c. assessing control ris! too lo". d. assessing control ris! too high.

Arens/Elder/Beasley

(*. challenging b

-hile performing a substantive test of details during an audit5 the auditor determined that the sample results supported the conclusion that the recorded account balance "as materially misstated. -hich of the follo"ing is not li!ely to be an acceptable reaction to this discovery+ a. =erform expanded audit tests in the relevant areas b. 7ncrease detection ris! in the relevant areas c. 7ncrease the sample si0e d. $a!e no action until tests of other audit areas are completed -hen selecting a stratified sample5 the sample si0e is: a. determined for the unstratified population and then apportioned to each stratum. b. determined for each stratum and selected from that stratum. c. determined for each stratum and selected randomly from the entire unstratified population. d. al"ays larger than if unstratified sampling had been used. /n auditor using nonstatistical sampling cannot: determine a point estimate for the population. %es &o %es &o mathematically measure the precision of the point estimate. %es &o &o %es

(,. challenging b

(1. Challenging c

a. b. c. d. (4. challenging d

7n monetary-unit sampling5 the values of the estimated li!ely maximum misstatements are referred to as the: a. point estimates. b. precision intervals. c. confidence intervals. d. misstatement bounds. -hen using monetary-unit sampling5 evaluating the li!elihood of unrecorded items in the population is: a. unnecessary. b. impossible. c. possible but difficult. d. an automatic outcome of the process. /cceptable ris! of incorrect re2ection affects auditors@ action only "hen they conclude that a population is: a. fairly stated. b. acceptable. c. not fairly stated. d. acceptable after certain ad2ustments. $he statistical methods used to evaluate monetary-unit samples: a. neither exclude nor include units t"ice. b. permit the inclusion of a unit in the sample more than once. c. do not permit a unit to be included in the sample more than once. d. ignore the possibility that a unit may be included in a sample more than once. -hich of the follo"ing is not a problem "ith monetary-unit selection+ a. =opulation items "ith a 0ero recorded balance. b. =opulation items that should have a 0ero balance but do not.

)6. challenging b

)1. challenging c

)2. challenging b

)'. challenging b

Arens/Elder/Beasley

c. d. )(. challenging b

/ccounts "ith negative balances. /ccounts "ith small recorded balances that are significantly understated.

$here are many !inds of statistical estimates that an auditor may find useful5 but basically every accounting estimate is either of a 8uantity or of an error rate. $he statistical terms that roughly correspond to E8uantitiesF and Eerror rate5F respectively5 are: a. attributes and variables. b. variables and attributes. c. constants and attributes. d. constants and variables. 7f the auditor believes that there "ill be more than 2ust a fe" exceptions discovered5 and desires an accurate estimate of the dollar value of the exceptions5 he or she "ill use: a. attributes sampling. b. monetary-unit sampling. c. bloc! sampling. d. variables sampling. -hile acceptable ris! of incorrect acceptance is al"ays important5 the ris! of incorrect re2ection is important only "hen there is a ;;;;;;; cost to increasing the sample si0e. a. high b. lo" c. moderate d. marginal -hich of the follo"ing is not a disadvantage of monetary-unit-sampling+ a. 7t may be difficult to select samples from large population "ithout computer assistance. b. $he total misstatement bounds resulting "hen misstatements are found may be too lo" to be useful to the auditor. c. $he total misstatement bounds resulting "hen misstatements are found may be too high to be useful to the auditor. d. #ach of the above is a disadvantage. Calculating the sample si0e using monetary-unit-sampling depends on "hich of the follo"ing factors+ assumptions of the average percent of misstatement for population items that contain misstatements %es &o %es &o recorded population value %es &o &o %es

)). challenging d

)*. challenging a

),. challenging b

)1. challenging a

a. b. c. d. )4. challenging d

Stratified sampling is applicable to difference5 mean-per-unit5 and ratio estimation5 but it is most commonly used "ith: a. ratio estimation. b. discovery sampling. c. difference estimation. d. mean-per-unit estimation. /n important statistic to consider "hen using a statistical sampling audit plan is the population variability. $he population variability is measured by the: a. sample mean. b. standard deviation. c. standard error of the sample mean. d. estimated population total minus the actual population.

*6. challenging b

Arens/Elder/Beasley

*1. challenging d

-hich of the follo"ing sampling plans "ould be designed to estimate a numerical measurement of a population5 such as a dollar value+ a. &umerical sampling. b. 3iscovery sampling. c. Sampling for attributes. d. Sampling for variables. Bsing statistical sampling to assist in verifying the year-end accounts payable balance5 an auditor has accumulated the follo"ing data: alance &umber of oo! determined by accounts balance the auditor =opulation: (5166 >)56665666 + Sample: 266 > 2)65666 >'665666 Bsing the ratio estimation techni8ue5 the auditor@s estimate of year-end accounts payable balance "ould be: a. >)56)65666. b. >)512)5666. c. >*56665666. d. >*51)65666. Bse of the ratio estimation sampling techni8ue to estimated dollar amounts is inappropriate "hen: a. the total boo! value is !no"n and corresponds to the sum of all the individual boo! values. b. a boo! value for each sample item is un!no"n. c. there are some observed differences bet"een audited values and boo! values. d. the audited values are nearly proportional to the boo! values. $he ma2or reason that the difference and ratio estimation methods "ould be expected to produce audit efficiency is that the: a. beta ris! may be completely ignored. b. variability of the populations of differences or ratios is less than that of the populations of boo! values or audited values. c. number of members of the populations of differences or ratios is smaller than the number of members of the population of boo! values. d. calculations re8uired in using difference or ratio estimation are less arduous and fe"er than those re8uired "hen using direct estimation. $he follo"ing information applies to the 8uestions belo": /n audit partner is developing an office-training program to familiari0e his professional staff "ith statistical decision models applicable to the audit of dollar-value balances. De "ishes to demonstrate the relationship of sample si0es to population si0e and variability and the auditor@s specifications as to precision and confidence level. $he partner prepared the follo"ing table to sho" comparative population characteristics and audit specifications of t"o populations. /udit specifications of Characteristics of a sample from population 1 population 1 relative relative to a sample to population 2 from population 2 Specified Specified confidence Si0e .ariability precision level Case 1 #8ual #8ual #8ual Digher Case 2 #8ual Carger $ighter #8ual Case ' Carger #8ual $ighter Co"er Case ( Smaller Smaller #8ual Co"er Case ) Carger #8ual #8ual Digher

*2. challenging c

*'. challenging b

*(. challenging b

Arens/Elder/Beasley

*). challenging a

ased on the information presented above5 you are to indicate for the specified case from the table the re8uired sample si0e to be selected from population 1 relative to the sample from population 2. 7n case 15 the re8uired sample from population 1 is: a. larger than the re8uired sample si0e from population 2. b. e8ual to the re8uired sample si0e from population 2. c. smaller than the re8uired sample si0e from population 2. d. indeterminate relative to the re8uired sample si0e from population 2. ased on the information presented above5 you are to indicate for the specified case from the table the re8uired sample si0e to be selected from population 1 relative to the sample from population 2. 7n case 25 the re8uired sample from population 1 is: a. larger than the re8uired sample si0e from population 2. b. e8ual to the re8uired sample si0e from population 2. c. smaller than the re8uired sample si0e from population 2. d. indeterminate relative to the re8uired sample si0e from population 2. ased on the information presented above5 you are to indicate for the specified case from the table the re8uired sample si0e to be selected from population 1 relative to the sample from population 2. 7n case '5 the re8uired sample from population 1 is: a. larger than the re8uired sample si0e from population 2. b. e8ual to the re8uired sample si0e from population 2. c. smaller than the re8uired sample si0e from population 2. d. indeterminate relative to the re8uired sample si0e from population 2. ased on the information presented above5 you are to indicate for the specified case from the table the re8uired sample si0e to be selected from population 1 relative to the sample from population 2. 7n case (5 the re8uired sample from population 1 is: a. larger than the re8uired sample si0e from population 2. b. e8ual to the re8uired sample si0e from population 2. c. smaller than the re8uired sample si0e from population 2. d. indeterminate relative to the re8uired sample si0e from population 2. ased on the information presented above5 you are to indicate for the specified case from the table the re8uired sample si0e to be selected from population 1 relative to the sample from population 2. 7n case )5 the re8uired sample from population 1 is: a. larger than the re8uired sample si0e from population 2. b. e8ual to the re8uired sample si0e from population 2. c. smaller than the re8uired sample si0e from population 2. d. indeterminate relative to the re8uired sample si0e from population 2. -hy do auditors find MBS appealing+ a. MBS increases the li!elihood of selecting a balance of high and lo" dollar items. b. MBS is easy to use in the audit environment. c. MBS provides a nonstatistical5 rather than a statistical5 conclusion. d. -hen misstatements are found5 MBS rarely produces bounds in excess of materiality. -hat is the primary ob2ective of using stratified sampling in auditing+ a. $o increase the confidence level at "hich a decision "ill be reached from the results of the sample selected. b. $o determine the occurrence rate for a given characteristic in the population being studied. c. $o decrease the effect of variance in the total population. d. $o determine the precision range of the sample selected. 7n the application of statistical techni8ues to the estimation of dollar amounts5 a preliminary sample is usually ta!en primarily for the purpose of estimating the population: a. mode. b. range.

**. challenging a

*,. challenging d

*1. challenging c

*4. challenging a

,6. challenging b

,1. challenging c

,2. medium d

Arens/Elder/Beasley

c. d.

median. variability.

#ssay Questions
,'. easy #xplain the decision rule used in monetary-unit sampling to determine "hether the population is acceptable. /ns"er: $he auditor "ill accept the conclusion that the population 9boo! value: is not misstated by a material amount if both the lo"er misstatement bound and the upper misstatement bound fall bet"een the understatement and overstatement tolerable misstatement amounts. ,(. easy -hat are the three primary types of sampling methods used for calculating dollar misstatements in auditing+ /ns"er: &onstatistical sampling5 monetary unit sampling5 and variables sampling. ,). easy #xplain "hy monetary-unit sampling5 or probability proportional to si0e sampling5 is not useful for detecting understatements. /ns"er: Monetary-unit sampling is a techni8ue that assigns physical units to an item in the population based on the dollar value of the item. Carger dollar items are more li!ely to be chosen for the sample than smaller items. So5 if a client has understated an item there is less li!elihood that the item "ill be selected. Conse8uently5 auditors do not commonly use monetary-unit sampling "hen they are concerned "ith potential understatements. $here are 1( steps to audit sampling for details of balances5 divided into three sections: plan the sample5 select the sample and perform the audit procedures5 and evaluate the results. 3iscuss each of the steps included in the Eevaluate the resultsF section for nonstatistical sampling. /ns"er: $he steps included in the Eevaluate the resultsF section are: 1. Generalize from the sample to the population. $his involves 91: pro2ecting misstatements found in the sample to the population and 92: allo"ing for sampling ris!. 2. Analyze the misstatements. $he auditor should evaluate the nature and cause of each misstatement found in the sample. '. Decide the acceptability of the population . 7f the pro2ected misstatement 9point estimate:5 combined "ith the allo"ance for sampling ris!5 is less than tolerable misstatement5 the auditor "ill accept the population as fairly stated. ,,. medium $here are four steps to generali0e from the sample to the population using difference estimation sampling. 7dentify each of these four steps. /ns"er: $he four steps to generali0e from the sample to the population using difference estimation sampling are: 1. Compute the point estimate of the total misstatement. 2. Compute an estimate of the population standard deviation. '. Compute the precision interval. (. Compute the confidence limits.

,*. medium

Arens/Elder/Beasley

,1. medium

$he most important difference among tests of controls5 substantive tests of transactions5 and tests of details of balances lies in "hat the auditor "ants to measure. #xplain "hat each type of test attempts to measure. /ns"er: $ests of controls focus on testing the effectiveness of internal controls. 7n substantive tests of transactions5 the auditor is concerned about both the effectiveness of internal controls and the monetary correctness of transactions in the accounting system. 7n tests of details of balances5 the concern is determining "hether the dollar amount of an account balance is materially misstated.

,4. medium

3iscuss the advantages and disadvantages of monetary-unit sampling over other sampling methods. /ns"er: /dvantages of monetary-unit sampling: 7t automatically increases the li!elihood of selecting high dollar items from the population being audited. 7t fre8uently reduces the cost of doing the audit testing because several sample items are tested at once. 7t is appealing to auditors because of its ease of application. 7t provides a statistical conclusion rather than a nonstatistical one5 "hich aids auditors in ma!ing better and more defensible conclusions. 3isadvantages of monetary-unit sampling: $he total misstatement bounds resulting "hen exceptions are found may be too high to be useful to the auditor. 7t is cumbersome to select probability proportional to si0e samples from large populations "ithout computer assistance.

16. medium

#xplain the decision rule used "ith difference estimation sampling to determine "hether the population is acceptable. /ns"er: $he auditor "ill decide to accept the population as fairly stated "hen the t"o-sided confidence interval for the misstatements is completely "ithin the plus and minus tolerable misstatements. Gther"ise5 the auditor "ill conclude that the boo! value is misstated by a material amount.

11. medium

Do" might auditors include negative balances "hen using monetary-unit sampling to evaluate a population+ /ns"er: $here are t"o basic alternatives to testing negative balances "hen using MBS. Hirst5 the auditor may choose to ignore negative balances for MBS selection and test those amounts by some other means. Second5 the auditor could treat the negative balances as positive and add them to the number of monetary units being tested.

12. challenging

Consider the steps in sampling for tests of details and for tests of controls. #xplain the differences in applying sampling to these t"o types of tests. /ns"er:

Arens/Elder/Beasley

$he differences are as follo"s: $ests of 3etails 1. 3efine a misstatement 2. Specify tolerable misstatement '. Specify /<7/ (. #stimate misstatements in the population ). /naly0e misstatements 1'. challenging

$ests of Controls 1. 3efine attributes and exception conditions 2. Specify tolerable exception rate '. Specify /</C< (. #stimate #=#< ). /naly0e exceptions

#xplain /<7/ and /<7< "ithin the context of variables sampling. /ns"er: /fter an audit test is performed and statistical results are calculated5 the auditor must conclude either that the population is not materially misstated or that it is materially misstated. /<7/ is the statistical ris! that the auditor has accepted a population that is actually materially misstated. $his is a serious concern to auditors because there are potential legal implications in concluding that an account balance is fairly stated "hen it is misstated by a material amount. /<7< is the statistical ris! that the auditor has concluded that a population is materially misstated "hen it is not. $he only time that /<7< affects the auditor@s actions is "hen an auditor concludes that a population is not fairly stated. /<7< is important only "hen there is a high cost to increasing the sample si0e or performing other tests. 7dentify each of the seven factors that influence sample si0e for nonstatistical tests of details of balances5 and state "hether each factor is directly or inversely related to sample si0e. /ns"er: Hactors that influence sample si0e for nonstatistical tests are: Control risk. Control ris! is directly related to sample si0eI as control ris! increases5 sample si0e also increases. Risk for other substantive tests related to the same assertion . 3irectly related to sample si0eI as these ris!s increase5 sample si0e also increases. Acceptable audit risk. 7nversely related to sample si0eI as //< increases5 sample si0e decreases. Tolerable misstatement. 7nversely relatedI as tolerable misstatement increases5 sample si0e decreases. Inherent risk. 3irectly relatedI as inherent ris! increases5 sample si0e also increases. E pected size and fre!uency of misstatements . 3irectly relatedI as the si0e and fre8uency of expected misstatements increase5 sample si0e also increases. "umber of items in the population. 3irectly related5 but has only a minor effect on sample si0e.

1(. challenging

1). challenging

$here are 1( steps to audit sampling for details of balances5 divided into three sections: plan the sample5 select the sample and perform the audit procedures5 and evaluate the results. 3iscuss each of the steps included in the Eplan the sampleF section for nonstatistical sampling. /ns"er: $he steps comprising the Eplan the sampleF section are: 1. #tate the ob$ective of the audit test. Hor tests of details of balances5 the ob2ective is to determine "hether the account balance being audited is fairly stated. 2. Decide if audit samplin% applies. 7n certain situations5 the auditor may choose to test all large items and no small items. 7n those situations5 the auditor has not sampled. '. Define misstatement conditions. Misstatement conditions are any conditions that represent a monetary misstatement in a sample item. (. Define the population. $he recorded boo! value of the account being audited is the

Arens/Elder/Beasley

). *. ,. 1. 4.

population. Define the samplin% unit. Hor nonstatistical sampling in tests of details of balances5 the sampling unit is almost al"ays the item ma!ing up the account balance. #pecify tolerable misstatement. $his is the amount of materiality allocated to the account under audit. #pecify the acceptable risk of incorrect acceptance . $his is the ris! that the auditor is "illing to ta!e of accepting a balance as correct "hen the true misstatement in the balance is greater than tolerable misstatement. Estimate misstatements in the population. Determine the initial sample size. 7n nonstatistical sampling5 this is determined 2udgmentally considering the previous eight factors.

1*. challenging

-hen using nonstatistical sampling5 the auditor must sub2ectively consider "hether the true population misstatement exceeds a tolerable amount. $his is done by considering five factors. Gne factor is the difference bet"een the point estimate and tolerable misstatement. State the other four factors the auditor must consider. /ns"er: Gther factors the auditor must consider are: $he extent to "hich items in the population have been audited 166A. -hether misstatements tend to be offsetting or in only one direction. $he amounts of individual misstatements. Sample si0e.

1,. challenging

3iscuss each of the six possible courses of action the auditor can ta!e "hen he or she has concluded that the population is misstated by more than a tolerable amount. /ns"er: $he six possible courses of action the auditor can ta!e "hen he or she has concluded that the population is misstated by more than a tolerable amount are: Take no action until tests of other audit areas are completed . 7f offsetting misstatements are found in other parts of the audit5 the auditor may conclude that the population is acceptable. &erform e panded audit tests in specific areas. Increase the sample size. /s sample si0e increases5 sampling error is reduced if the rate of misstatements in the expanded sample5 their dollar amount5 and their direction are similar to those in the original sample. $his may result in the population being acceptable. Ad$ust the account balance. 7n some circumstances5 if the client corrects the misstatements discovered by the auditor5 the boo! value of the account may become acceptable. Re!uest the client to correct the entire population. Refuse to %ive an un!ualified opinion . 7f none of the prior courses of action results in an acceptable population5 the auditor "ill have to issue either a 8ualified or an adverse opinion.

11. challenging

$here are seven steps to calculate ad2usted misstatement bounds "hen both overstatement and understatement errors are discovered in monetary-unit sampling. Step one is E3etermine misstatement for each sample item5 !eeping overstatements and understatements separate.F 3iscuss each of the remaining six steps.

Arens/Elder/Beasley

/ns"er: $he remaining six steps are: Calculate misstatement per dollar unit in each sample item 9misstatementJrecorded value:. Cayer misstatements per dollar unit from highest to lo"est. 3etermine upper precision limit from attributes sampling table5 and calculate the percent misstatement bound for each misstatement 9layer:. Calculate initial upper and lo"er misstatement bounds for each layer and total. Calculate point estimate for overstatements and understatements. Calculate ad2usted upper and lo"er misstatement bounds.

14. challenging

$he nine steps in planning the sample are almost identical for nonstatistical sampling and difference estimation. Do"ever5 there are three important differences. 3iscuss each of the three differences. /ns"er: $he three differences in the steps in planning the sample for nonstatistical sampling and difference estimation are: -hen using difference estimation5 in addition to acceptable ris! of incorrect acceptance5 the auditor specifies acceptable ris! of incorrect re2ection. -hen using difference estimation5 the auditor ma!es an advance estimate of the population standard deviation. -hen using difference estimation5 the sample si0e is calculated using a formula.

Gther Gb2ective /ns"er Hormat Questions

46. medium Match six of the terms 9a-l: "ith the definitions provided belo" 91-*:: a. b. c. d. e. f. g. h. i. 2. !. l. 2 l b e /cceptable ris! of incorrect acceptance /cceptable ris! of incorrect re2ection 3ifference estimation Misstatement bounds Monetary-unit sampling Mean-per-unit estimation =oint estimate =robability proportional to si0e sample selection <atio estimation Statistical inferences Stratified sampling .ariable sampling 1. 2. '. (. Conclusions dra"n from sample results based on !no"ledge of sampling distributions. Sampling techni8ues for tests of details that use the statistical inference processes. $he ris! that the auditor is "illing to ta!e of concluding a balance is materially misstated "hen it is5 in fact5 fairly stated. / statistical sampling method that provides upper and lo"er misstatement bounds expressed in monetary amounts.

Arens/Elder/Beasley

).

/ method of variables sampling in "hich the auditor estimates the population misstatement by multiplying the average misstatement in the sample by the total number of population items and also calculates sampling ris!. $he ris! that the auditor is "illing to ta!e of accepting a balance as correct "hen the true misstatement in the balance is greater than tolerable misstatement.

*.

Arens/Elder/Beasley

41. easy b 42. easy b 4'. easy b 4(. easy b 4). easy b 4*. easy a 4,. easy b 41. medium a 44. medium a 166. medium b 161. medium a

$he primary factor affecting the auditor@s acceptable ris! of incorrect acceptance is assessed inherent ris!. a. $rue b. Halse 7n evaluating results for tests of details5 auditors must evaluate exceptions identified. a. $rue b. Halse $he t"o primary types of sampling methods used for calculating dollar misstatements are attributable sampling and monetary unit sampling. a. $rue b. Halse /cceptable ris! of incorrect acceptance is indirectly affected by acceptable audit ris!. a. $rue b. Halse 7n monetary-unit sampling5 the li!elihood of high dollar items from the population being included in the sample is lo"er than the li!elihood for small dollar items. a. $rue b. Halse /cceptable ris! of incorrect re2ection is the statistical ris! that the auditor has concluded that a population is materially misstated "hen it is not. a. $rue b. Halse -hen auditors apply MBS to a sample5 the sample is selected using random sampling techni8ues. a. $rue b. Halse $olerable misstatement is inversely related to sample si0e. a. $rue b. Halse /cceptable ris! of incorrect acceptance 9/<7/: and sample si0e are inversely relatedI that is5 as /<7/ increases5 sample si0e decreases. a. $rue b. Halse #stimated misstatement in the population and sample si0e are inversely relatedI that is5 as estimated misstatement increases5 sample si0e decreases. a. $rue b. Halse $he purpose of stratification is to permit auditors to emphasi0e certain aspects of a population and deemphasi0e others. a. $rue b. Halse

Arens/Elder/Beasley

162. medium a 16'. medium a 16(. medium a 16). medium a 16*. medium b 16,. medium a 161. medium a 164. medium a 116. medium a

/n auditor using nonstatistical sampling cannot formally measure sampling error. a. $rue b. Halse /ttributes sampling tables can be used to evaluate results of tests of details "ith /</C< being replaced "ith /<7/. a. $rue b. Halse -hen using nonstatistical sampling5 the larger the sample si0e5 the greater the auditor@s confidence that the point estimate is close to the true population value. a. $rue b. Halse <e8uired sample si0e increases as the auditor@s tolerable misstatement for an account balance or class of transactions decreases. a. $rue b. Halse $he use of monetary-unit sampling is most appropriate "hen the auditor expects to find many errors and "hen a monetary result is desired. a. $rue b. Halse 3ifference estimation fre8uently results in smaller sample si0es than any other variables sampling method. a. $rue b. Halse Gverstatement and understatement amounts are dealt "ith separately and then combined "hen generali0ing from the sample to the population "hen applying MBS. a. $rue b. Halse $he sample si0e is inversely related to the computed precision interval in difference estimationI that is5 as sample si0e increases5 the computed precision interval decreases. a. $rue b. Halse 7n difference estimation sampling5 the confidence limits are calculated by combining the point estimate of the total misstatements and the computed precision interval at the desired confidence level. a. $rue b. Halse $he primary factor affecting the auditor@s decision about /<7/ is assessed inherent ris!. a. $rue b. Halse $he purpose of stratified sampling is to achieve a greater confidence level 9lo"er ris! of incorrect acceptance: for a given sample si0e. a. $rue b. Halse

111. medium b 112. challenging b

Arens/Elder/Beasley

11'. challenging a

/cceptable ris! of assessing control ris! too lo" 9/</C<: and acceptable ris! of incorrect acceptance 9/<7/: are inversely relatedI that is5 a decrease in /</C< is accompanied by an increase in /<7/. a. $rue b. Halse /cceptable audit ris! 9//<: and acceptable ris! of incorrect acceptance 9/<7/: are inversely relatedI that is5 as //< increases5 /<7/ decreases. a. $rue b. Halse /ccounts "ith 0ero or negative year-end balances have no chance of being included in a standard probability proportional to si0e 9==S: sample. a. $rue b. Halse $he statistical results "hen MBS is used are called exception bounds. a. $rue b. Halse /cceptable ris! of incorrect acceptance 9/<7/: is directly related to the computed precision interval in difference estimationI that is5 as /<7/ increases5 the computed precision interval decreases. a. $rue b. Halse $he population standard deviation of the misstatements from the sample is inversely related to the computed precision interval in difference estimationI that is5 as the standard deviation increases5 the computed precision interval decreases. a. $rue b. Halse

11(. challenging b 11). challenging a 11*. challenging b 11,. challenging b

111. challenging b

Arens/Elder/Beasley