Multiple choice questions - Inherent risk,

Sampling plans, and more

17. The most common objective of PPS
sampling plans is to:
a.determine the rate of deviation from a
control procedure.
b.estimate the true dollar value in an
unrecorded account.
c.establish that the rate of deviation from
a control procedure does not exceed the
established tolerable rate.
d.independently estimate the value of a
class of transactions.
e.obtain evidence that a recorded account
balance is not materially misstated.
18.Which of the following statements is
true about the determination whether to
use statistical attribute sampling or
nonstatistical sampling?
a.Statistical attribute sampling is usually
the best way to select exception reports
to test the effectiveness of the manual
follow-up procedure.
b.For controls that function infrequently,
such as controls over management
discretion in financial reporting that
occur only quarterly, nonstatistical
sampling is probably the most efficient
way to determine how often the auditor
wants to test the effectiveness of the
control.
c.Nonstatistical sampling is most
effective for larger populations.
d.Statistical sampling has become the
norm for tests of controls.
e.Statistical sampling should always be
used in tests of general controls, such as
inspecting logs that document program
changes, were the auditor wants to
review the entire population but uses
sampling to choose specific items to
investigate a sample of the individual
items.
19.Which of the following is not an
example of a significant inherent risk?
a.Management override of internal
controls.
b.The impact of technological
developments.
c.Inadequate accounting skills.
d.Management turnover.
e.Contentious accounting issues.
20. The risk that a material misstatement
that could occur in an assertion will not
be prevented or detected on a timely
basis by the entity's internal controls is
a. control risk.
b. analytical procedures risk.
c. tests of details risk.
d. Inherent risk.
e. audit risk.
Answer Summary
Solution answers Multiple Choice
questions on Inherent Risk, PPS
Sampling, etc
Answer Preview

 A CPA auditing inventory may appropriately apply

attributes sampling to estimate the
A
average price of inventory items
.
B
percentage of lsow-moving inventory items
.
C
dollar value of inventory
.
D
physical quantity of inventory items
.
In an audit of financial statements, a CPA wil
generally find stratified sampling techniques to be
most applicable to
A recomputing net wage and salary payments
. to employees
B tracing hours woked from the payroll
. summary back to the individual time cards
C confirming accounts recivable for residential
. customers at a large electric utility
D review supporting documentation for
. additions to plant and equipment

...trols that function infrequently, such as controls

over management discretion in financial reporting
that occur only quarterly, nonstatistical sampling is
probably the most efficient way to determine how
often the auditor wants to test the effectiven...
The risk that the auditor will not detect a material
misstatement is
A. control risk
B. inherent risk
C. expected misstatement
D. noThe objective of the audit plan is
A. to conduct the audit in accordance with GAAS
B. reduce the risk of material misstatements to an
acceptably low level
C. prepare an unqualified report
D. Both A & Bne of the above

17. The correct sequence of steps in planning an attribute

sampling application is
A. randomly select sample items, perform audit
procedures, perform error analysis
B. determine the tolerable deviation rate, consider
the effect of population size, randomly select the
 sample items
C. determine the test objective, define the control
deviation conditions, define the population
D. define the sampling unit, define the period
covered by the test, randomly select the sample
items
ampling Methods
1. The internal auditor suspects that the invoices
from a small number of vendors contain serious
errors and therefore limits the sample to those
vendors only. A major disadvantage of selecting
such a directed sample of items to examine is the
a. Difficulty in obtaining sample items
b. Inability to quantify the sampling error related to
the total population of vendor invoices
c. Absence of a normal distribution
d. Tendency to sample a greater number of units

2. When sampling is used, sufficiency of audit

evidence is achieved when
a. Each item in the population has a chance of being
selected
b. The standard deviation in the sample is less than
or equal to the corresponding statistic for the
population
c. The evidence gathered is directly related to the
assertion the auditor is attempting to verify
d. There is reasonable assurance that the items
selected are representative of the sampled population

3. In order to quantify the risk that sample evidence

leads to erroneous conclusions about the sampled
population,
a. Each item in the sampled population must have an
equal chance of being selected
b. Each item in the sampled population must have a
chance of being selected that is proportional to its
book value
c. Each item in the sampled population must have an
equal or known probability of being selected
d. The precise number of items in the population
must be known

4. Each time an internal auditor draws a conclusion

based on evidence from a sample, an additional risk,
sampling risk, is introduced. An example of
sampling risk is
a. Projecting the results of sampling beyond the
population tested
b. Using an improper audit procedure with a sample
c. Incorrectly applying an audit procedure to sample
data
d. Drawing an erroneous conclusion from sample
data

5. Several risks are inherent in the evaluation of

audit evidence that has been obtained through the
use of statistical sampling. an example of a beta or
Type II error related to sampling risk is the failure to
a. Properly define the population to be sampled
b. Draw a random sample from the population
c. Reject the statistical hypothesis that a book value
is not materially misstated when the true book value
is materially misstated
d. Accept the statistical hypothesis that a book value
is not materially misstated when the true book value
is not materially misstated

6. A confidence level of 90% means that

a. The expected error rate is equal to 10%
b. The point estimate obtained is within 10% of the
true population value
c. There are 90 chances out of 100 that the sample
results will not vary from the true characteristics of
the population by more than a specified amount
d. A larger sample size is required than if the desired
confidence level were equal to 95%

7. In statistical sampling, setting the appropriate

confidence level and desired sample precision are
decisions made by the auditor that will affect sample
size for a substantive test. Which of the following
should not be a factor in the choice of desired
precision?
a. The sampling risk
b. The size of an account balance misstatement
considered material
c. The audit resources available for execution of the
sampling plan
d. The objectives of the audit test being conducted

8. An auditor's statistical sample drawn from a

population of invoices indicates a mean value of
$150 and sampling precision of +/- $30 at a 95%
confidence level. Which of the following statements
correctly interprets these sample data?
a. In repeated sampling, the point estimate of the
true population mean will be $150 about 95% of the
time
b. The probability is 95% that the true population
mean is $150
c. In repeated sampling, intervals with precision +/-
$30 around the sample mean will always contain the
true population mean
d. The probability is 95% that the range $120 to
$180 contains the true population mean

9. An auditor draws a random sample of 225 items

from a population of 10,000 and calculates the
sample standard deviation at $386. Sampling
precision is calculated as +/- $50.40 with a
confidence level of 95%. If a sample of 900 items
had been drawn and if the same sample standard
deviation of $386 had been calculated, the sample
precision would have been approximately
a. $200
b. $100
c. $25
d. $13

10. The accounting department reports the accounts

payable balance as $175,000. You are willing to
accept that balance if it is within $15,000 of the
actual balance. Using a variables sampling plan, you
compute a 95% confidence interval of $173,000 to
$190,000. You would therefore
a. Find it impossible to determine the acceptability
of the balance
b. Accept the balance but with a lower level of
confidence
c. Take a larger sample before totally rejecting the
balance and requiring adjustments
d. Accept the $175,000 balance because the
confidence interval is within the materiality limits
11. The measure of variability of a statistical sample
that serves as an estimate of the population
variability is the
a. Basic precision
b. Range
c. Standard deviation
d. Confidence interval

12. The variability of a population, as measured by

the standard deviation, is the
a. Extent to which the individual values of the items
in the population are spread about the mean
b. Degree of asymmetry of a distribution
c. Tendency of the means of large samples (at least
30 items) to be normally distributed
d. Measure of the closeness of a sample estimate to a
corresponding population characteristic

13. The auditor can change the standard error of the

mean for a statistical sample by
a. Stratifying the population
b. Increasing the size of the sample
c. Decreasing the size of the sample
d. All of the above

14. An auditor draws a random sample of invoices

and computes the mean invoice amount. The auditor
then computes the standard error of the mean. This
information can be used to
a. Measure the variability of a specific item within
the sample
b. Determine the standard deviation of the sample
c. Measure the variability that exists among all
possible invoice samples of the same size
d. Perform difference estimation and avoid a large
sample

15. In conducting a substantive test of an account

balance, an auditor hypothesizes that no material
misstatement exists. The risk that sample results will
support the hypothesis when a material misstatement
actually does exist is the risk of
a. Incorrect rejection
b. Alpha error
c. Incorrect acceptance
d. Type I error

16. In appraising the results of a statistical sample,

the finite population correction factor
a. Can be greater than one
b. Has less effect as the sample becomes a larger
proportion of the population
c. Is needed when sampling is performed with
replacement
d. Is applied to reduce the size of the sample

17. An internal auditor of a manufacturing company

analyzes cost variances incurred in the
manufacturing process to determine their statistical
significance. Which of the following techniques is
most likely to be used for this purpose?
a. Markov chains
b. Monte Carlo method
c. Application of probability theory
d. Sensitivity analysis
18. In the audit of a health insureance claims
processing department, a sample is taken to test for
the presence of fictitious payees, though none are
suspected. The most appropriate sampling plan is
a. Attiribute sampling
b. Discovery sampling
c. Variables sampling
d. Stop or go sampling

19. An auditor for the state highway and safety

department needs to estimate the average highway
weight of tractor trailer trucks using the state's
highway system. Which estimation method must be
used?
a. Mean per unit
b. Difference
c. Ratio
d. Probability proportional to size

20. When would difference estimation of ratio

estimation methods be inappropriate?
a. If differences between the book values and audit
values of a population are rare
b. If the average difference between the audit value
and book value of a population is small
c. If differences between the book value and audit
value of a population are numerous
d. If the average difference between the audit value
and book value of a population is large

21. An internal auditor is preparing to sample

accounts receivable for overstatement. A statistical
sampling method that automatically provides
stratification when using systematic selection is
a. Attribute sampling
b. Ratio-estimation sampling
c. Dollar-unit sampling
d. Mean-per-unit sampling

22. Which of the following best describes an

inherent limitation of the probability proportional to
size sampling method?
a. It can only be used for substantive testing of asset
accounts
b. It is complicated and always requires the use of a
computer system to perform the calculations
c. Misstatement rates must be large and the
misstatements must be overstatements
d. Misstatement rates must be small and the
misstatements must be overstatements
23. An internal auditor plans to test the accuracy of
recorded quantities on hand in an inventory file
against the actual quantities on hand. Under which
of the following conditions would the auditor be
least likely to use a stop or go sampling plan?
a. The population to be sampled is very large
b. The auditor expects the population to contain a
high rate of deviations
c. The auditor plans to draw a relatively small
sample size
d. The auditor plans to determine an upper precision
limit for the estimated percentage of deviations
contained in the population

24. A statistical sampling technique that will

minimize sample size whenever a low rate of
noncompliance is expected is
a. Ratio estimation sampling
b. Difference estimation sampling
c. Stratified mean per unit sampling
d. Stop or go sampling

25. An auditor planning an attribute sample from a

large number of invoice items intends to estimate the
actual rate of deviations. Which factor below is the
most important for the auditor to consider?
a. Audit objective
b. Population size
c. Desired confidence level
d. Population variance

26. When planning an attribute sampling application,

the difference between the expected deviation rate
and the maximum tolerable rate is the planned
a. Precision
b. Reliability
c. Dispersion
d. Skewness

27. A test of 200 invoices randomly selected by the

auditor revealed that 35 had not been approved for
payment. At the 95% confidence level, what
precision can be assigned?
a. 6.9%
b. 5.3%
c. 9.1%
d. 3.5%

28. Very small random samples (fewer than 30)

should normally be avoided when using a variables
sampling plan because
a. The estimated standard deviation of the population
will increase disproportionately
b. The skew of the distribution of sample means
cannot be determined
c. The estimated population mean value will increase
disproportionately
d. The size of the sampling risk will increase
disproportionately

29. In applying variables sampling, an auditor

attempts to
a. Estimate a qualitative charactristic of interest
b. Determine various rates of occurrence for
specified attributes
c. Discover at least one instance of a critical
deviation
d. Predict a monetary population value within a
range of precision

30. An internal auditor is using variables estimation

as the statistical sampling technique to estimate the
monetary value of a large inventory of parts. Given a
sample standard deviation of $400, a sample size of
400, and a 95% two-tail confidence interval, what
precision can the auditor assign to the estimate of the
mean dollar value of a part?
a. +/- $39
b. +/- $2
c +/- $52
d. +/- $20

31. In an application of mean per unit sampling, the

following information has been obtained:
reported book value: $600,000
point estimate (estimated total value): $591,000
allowance for sampling risk (precision): +/- 22,000
tolerable misstatement: +/- 45,000

The appropriate conclusion would be that the

reported book value is
a. Acceptable only if the risk of incorrect rejection is
at least twice the risk of incorrect acceptance
b. Acceptable
c. Not acceptable
d. Acceptable only if the risk of incorrect acceptance
is at least twice the risk of incorrect rejection.

32. A statistical sample from an inventory containing

a total of 10,000 items produced a sample mean
equal to $25 and a standard error of the mean equal
to $1. What is the interval estimate of the total value
of the inventory at the 95.5% confidence level
(C=2.0)?
a. $230,000 to $270,000
b. $240,000 to $260,000
c. $240,450 to $259, 550
d. $250,000 to $270,000

33. An auditor's finding was stated as follows:

"Twenty of one hundred randomly selected items
tested revealed that $200 of cash discounts on
purchases were lost." This variables sampling
finding is deficient because the
a. Recommendation specifies no action
b. Sampling methodology is not defined
c. Amount is not material
d. Probable effect on the entire population is not
provided

34. Sample selection using dollar unit sampling for

inventory valuation will most likely result in
selectgion of a sample with characteristics roughly
equivalent to one provided by
a. Mean per unit or direct extenstion unstratified
sampling plans
b. Variables sampling plans with substantial
stratification by dollar amount
c. Selection of inventory records using a random
starting point for the record selection
d. Difference or ratio estimation plans applied on an
unstratified basis

35. When an internal auditor uses dollar unit

statistical sampling to examine the total value of
invoices, each invoice
a. Has an equal probability of being selected
b. Can be represented by no more than one dollar
unit
c. Has an unknown probability of being selected
d. Has a probability proportional to its dollar value
of being selected

36. Which of the following would be an improper

technique when using dollar unit statistical sampling
in an audit of accounts receivable?
a. Combining negative and positive dollar error item
amounts in the appraisal of a sample
b. Using a sampling technique in which the same
account balance could be selected more than once
c. Selecting a random starting point and then
sampling every nth dollar unit (systematic sampling)
d. Defining the sampling unit in the population as an
individual dollar value and not as an individual
account balance

37. The use of probability proportional to size

sampling is inefficient if
a. Bank accounts are being audited
b. Statistical inferences are to be made
c. Each account is of equal importance
d. The number of sampling units is large