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TBCH08
TBCH08
MULTIPLE CHOICE
a 1. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too
high relate to the
a. Efficiency of the audit.
b. Effectiveness of the audit.
c. Selection of the sample.
d. Audit quality controls. (AICPA ADAPTED)
a 2. If the achieved allowance for sampling risk of a statistical sample at a given reliability level is
greater than the desired range, this is an indication that the
a. Standard deviation was larger than expected.
b. Standard deviation was less than expected.
c. Population was larger than expected.
d. Population was smaller than expected. (AICPA ADAPTED)
c 3. An auditor initially planned to use unrestricted random sampling with replacement when testing
accounts receivable. Later, the auditor decided to use unrestricted random sampling without
replacement. As a result only of this decision, the sample size should
a. Increase.
b. Remain the same.
c. Decrease.
d. Be recalculated using a binomial distribution. (AICPA ADAPTED)
b 4. In which of the following cases would the auditor be most likely to conclude that all of the items
in an account under consideration should be examined rather than tested on a sample basis?
a. Large Low
b. Small High
c. Large High
d. Small Low (AICPA ADAPTED)
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c 6. In comparison with probability-proportional-to-size (PPS) sampling, which of the following is an
advantage of classical variables sampling in auditing?
a. If no errors are expected, classical variables sampling usually results in a smaller sample size than
PPS sampling.
b. A classical variables sample can be designed more easily and sample selection can begin before
the complete population is available.
c. If there are many individual differences between recorded and audited amounts in the population,
classical variables sampling may result in a smaller sample size.
d. Classical variables sampling automatically results in a stratified sample because items are
selected in proportion to their dollar amounts.
d 7. In a variables sampling plan, an auditor must generally consider each of the following except
a. Variation within the population.
b. Acceptable risk of incorrect acceptance.
c. Tolerable error.
d. Population size.
c 8. In assessing the risk of incorrect acceptance, an auditor should consider each of the following
except
a. Audit risk.
b. The risk that internal control structure fails to detect material errors that occur.
c. Tolerable error.
d. The risk that analytical procedures and other tests fail to detect material errors that occur and that
are not detected by internal control.
a 9. An auditor is evaluating the results of a variables sampling plan. Which of the following is not
relevant to the auditor's judgment about the sample?
a. Management's explanations for why errors in the sample occurred.
b. Projecting the sample error to the population.
c. Considering the effects of sampling risk.
d. Qualitative information that lends insight into errors found.
b 10. Several conditions must be met before an auditor applies either difference or ratio estimation.
Which of the following is not one of these conditions?
a. Each population item must have a recorded book value.
b. The auditor must not expect understatement errors.
c. Total population book value must be known and must correspond to the sum of all individual
population items.
d. Expected differences between audited and recorded book values must not be too rare.
a 11. An auditor is applying a difference estimation sampling plan. Assuming the risk of incorrect
rejection is .10, and the risk of incorrect acceptance is .05, what is the ratio of desired allowance
for sampling risk to tolerable error?
a. .500.
b. .605.
c. .561.
d. Not determinable from the facts given.
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b 12. An auditor is applying a difference estimation sampling plan. Assuming a .10 acceptable risk of
incorrect rejection, .05 acceptable risk of incorrect acceptance, and $100,000 tolerable error, what
is the auditor's desired allowance for sampling risk?
a. $ 25,000.
b. $ 50,000.
c. $100,000.
d. Not determinable from the facts given.
b 13. An auditor is applying a difference estimation sampling plan. Recorded book value is $1,000,000,
and the auditor estimates a $75,000 understatement difference. In this case, the auditor's estimated
population value is
a. $925,000.
b. $1,075,000.
c. $1,000,000.
d. Not determinable from the facts given.
a 14. An auditor is applying mean-per-unit estimation. Assuming estimated audited value is $950,000,
the achieved allowance for sampling risk is $75,000, and recorded book value is $925,000, what
is the auditor's conclusion?
a. Recorded book value is not likely misstated by a material amount.
b. Recorded book value is misstated by a material amount.
c. Recorded book value is not likely misstated by a material amount, assuming the client records an
adjusting journal entry equal to the allowance for sampling risk.
d. There is insufficient evidence to reach a conclusion.
a 15. In comparison with classical variables sampling, which of the following is an advantage of
probability-proportional-to-size (PPS) sampling?
a. PPS sampling automatically results in a stratified sample.
b. PPS sampling results in a smaller sample size if many differences are expected between audited
and recorded amounts.
c. PPS sampling is particularly appropriate when understatement errors are expected.
d. PPS sampling is less likely to overstate the allowance for sampling risk when errors are found in
the sample.
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c 18. Probability-proportional-to-size (PPS) sampling is most appropriate when
a. The auditor anticipates understatement errors.
b. The auditor anticipates overstatement errors.
c. The auditor expects no errors.
d. The auditor has assessed control risk at the maximum.
a 21. Which of the following sampling methods could be designed to estimate the dollar value of an
audit population?
a. Sampling for variables.
b. Sampling for attributes.
c. Discovery sampling.
d. Probability-proportional-to-size sampling. (AICPA ADAPTED)
a 23. If all other factors specified in a variables sampling plan remain constant, increasing the
acceptable risk of incorrect acceptance would cause the required sample size to
a. Decrease.
b. Remain the same.
c. Increase.
d. Become indeterminate. (AICPA ADAPTED)
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d 24. An accounts receivable aging schedule was prepared on 300 pages with each page containing the
aging data for 50 accounts. The pages were numbered from 1 to 300 and the accounts listed on
each were numbered from 1 to 50. An auditor selected accounts receivable for confirmation using
a table of numbers as illustrated:
Select Column from Table of Numbers Separate 5 Digits: First 3 Digits, Last 2 Digits
02011 020 - 11 x
85393 853 - 93 *
97265 972 - 65 *
61680 616 - 80 *
16656 166 - 56 *
42751 427 - 51 *
69994 699 - 94 *
07942 079 - 42 y
10231 102 - 31 z
53988 539 - 88 *
a. Block sampling.
b. Systematic sampling.
c. Haphazard sampling.
d. Random-number sampling. (AICPA ADAPTED)
c 25. In which sampling method is the probability of selecting an item proportional to the size of the
value of the item (i.e., a $1,000 item is 10 times more likely to be selected than a $100 item)?
a. Difference estimation.
b. Mean-per-unit estimation.
c. Probability-proportional-to-size sampling.
d. Nonstatistical sampling for variables. (AICPA ADAPTED)
c 26. Assume you are auditing a retail department store and want to estimate the dollar amount
of errors on sales invoices using probability-proportional-to-size sampling. Which of the
following is true?
a. The risks of incorrect acceptance and incorrect rejection are greater than for a classical
variables sampling plan.
b. Tolerable error is ignored.
c. An invoice with a large balance has a greater chance of being selected than one with a smaller
balance.
d. The estimate will be unreliable if the error rate is small.
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SHORT ANSWER
1. Define the risk of incorrect rejection and the risk of incorrect acceptance and explain the
difference between both risks.
Answer:
The risk of incorrect rejection is the risk that an audit sample will support concluding that a
recorded account balance is materially misstated when, unknown to the auditor, the account is
fairly stated. The risk of incorrect acceptance, in contrast, is the risk that an auditor's sample
supports concluding that a recorded account balance is fairly stated when, unknown to the
auditor, the account is materially misstated.
Answer:
An audit population consists of all the items constituting an account balance or class of
transactions and should be defined by the auditor's characteristics of interest, since sample results
can be generalized only to the population from which a sample is selected. In contrast, the
sampling unit is any of the individual elements constituting a population.
Answer:
A nonstatistical sampling plan would be used when:
There is no apparent need to quantify sampling risk.
The cost of designing individual samples to meet statistical sampling requirements
exceeds the benefits.
The cost to select sampling units randomly exceeds the expected benefits.
Answer:
1. Determine the variation within the population.
2. Determine the acceptable risk of incorrect rejection.
3. Determine the acceptable risk of incorrect acceptance.
4. Determine the tolerable error.
Answer:
An auditor summarizes and evaluates sample results by:
Projecting sample error to the population,
Considering sampling risk,
Considering qualitative information, and
Reaching an overall conclusion.
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PROBLEMS
1. AR
? = IC X AP
An auditor, when considering the level of audit risk, considers the formula noted above.
Explain the different components of the formula and the final product that will be derived by the
use of this formula.
Answer:
AR = Audit risk: the acceptable risk that an auditor may unknowingly fail to modify his or her
opinion on materially misstated financial statements.
IC = the risk that the internal controls fail to prevent or detect material errors.
AP = the risk that analytical procedures and other tests fail to detect material errors that occur and
are not detected by the internal controls.
The final product arrived at through the use of this formula would be TD — the acceptable risk of
incorrect acceptance.
Answer:
n = $75,000 – $35,000 x 4
$4,000
Sample Size = n
Sample Size = 40
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