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Substance Testing by Konrath
Substance Testing by Konrath
MULTIPLE CHOICE:
ANSWER: D
ANSWER: C
ANSWER: B
4. Precision is defined as the range (plus or minus) within which the true answer most likely
falls. Reliability, also referred to as the confidence level, is the likelihood that the
sample range contains the true value. Of the following statements concerning precision
and reliability, which one is not true?
a. Precision is set by the auditor and is a function of materiality and risk.
b. The narrower the range of precision, the smaller the sample size.
c. An increase in control risk, other parameters remaining unchanged, causes a
narrowing of the precision range.
d. Overall audit risk is the complement of reliability.
ANSWER: B
160
Chapter 10 Statistical Sampling for Substantive Testing 161
5. 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 error +- 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.
ANSWER: B
ANSWER: C
ANSWER: C
ANSWER: A
9. Management has asked the internal auditing staff to evaluate the efficiency of the
accounts payable system, particularly whether it would be economically feasible to reduce
the number of discounts lost through slow payment. The audit staff decides
162 Chapter 10 Statistical Sampling for Substantive
Testing
that it needs to determine the amount currently being lost and can do so
by taking a sample from payments made in the last six months, examining each, and
recording the amount, if any, of the discount lost. This information
can be used to project the total amount of discounts lost for the period. This proposed
plan is an example of
a. Attribute sampling. b. Acceptance sampling.
c. Variables sampling. d. Discovery sampling.
ANSWER: C
ANSWER: A
ANSWER: D
ANSWER: A
ANSWER: C
Chapter 10 Statistical Sampling for Substantive Testing 163
14. In a variables sampling application, which of the following will result when the
confidence level is changed from 90% to 95%?
a. Standard error of the mean will not be affected. b. Non-sampling error
will decrease. c. Sample size will increase. d.
Point estimate of the arithmetic mean will increase.
ANSWER: C
ANSWER: C
ANSWER: C
17. Which of the following best illustrates the concept of sampling risk?
a. A randomly chosen sample may not be representative of the
population as a whole on the characteristic of interest.
b. An auditor may select audit procedures that are not appropriate to
achieve the specific objective. c. An auditor may fail to recognize errors in the
documents examined for the chosen sample. d.
The documents related to the chosen sample may not be available for
inspection.
ANSWER: A
18. Using the following results from a variables sample, compute the achieved
precision:
164 Chapter 10 Statistical Sampling for Substantive
Testing
ANSWER: B
19. Which of the following sampling plans would be designed to estimate a numerical
measurement of a population, such as a dollar value?
a. Discovery sampling. b. Numerical sampling.
c. Sampling for variables. d. Sampling for
attributes.
ANSWER: C
ANSWER: B
21. Which of the following statements is correct concerning the auditor's use of
statistical sampling?
a. An auditor needs to estimate the dollar amount of the standard
deviation of the population to use classical variables sampling.
b. An assumption of PPS sampling is that the underlying accounting
population is normally distributed. c. A classical variables sample needs to be
designed with special considerations to include negative balances
in the sample. d. The selection of zero balances
usually does not require special sample design considerations when using PPS
sampling.
ANSWER: A
22. Which of the following statements concerning alpha and beta risk is true?
a. As alpha risk increases, beta risk decreases.
b. As inherent risk and/or control risk increase, beta risk should also increase.
c. As inherent risk and/or control risk increase, beta risk should decrease.
Chapter 10 Statistical Sampling for Substantive Testing 165
d. As a "rule of thumb," the auditor generally sets beta risk equal to or less than
10%, inasmuch as it is the basis for the audit opinion.
ANSWER: C
ANSWER: A
ANSWER: C
25. A number of factors influences the sample size for a substantive test of
details of an account balance. All other factors being equal, which of the following
would lead to a larger sample size?
a. Lowering of assessed level of control risk. b. Lowering of assessed
inherent risk through use of analytical review procedures.
c. Smaller expected frequency of errors. d. Smaller measure of
tolerable error.
ANSWER: D
26. For variables sampling purposes, changes in certain parameters affect sample size
positively while changes in others have a negative effect. In this regard, which of the
following statements is true?
a. An increase in beta risk reduces sample size.
b. Population size affects sample size inversely, i.e., as population size increases,
sample size decreases.
c. An increase in alpha risk increases sample size.
d. As materiality (M) increases, sample size increases.
ANSWER: A
27. A population that is physically separated into two or more groups based on the
sample variation being less than that
for the entire population is called a
a. Systematic sample. b. Judgment sample.
c. Simple random sample. d. Stratified sample.
166 Chapter 10 Statistical Sampling for Substantive
Testing
ANSWER: D
ANSWER: B
ANSWER: B
ANSWER: D
ANSWER: D
32. An auditor wishes to use stratified sampling to estimate the book value of a large
accounts receivable file. The auditor has a complete listing of the file in account number
order. The listing is several pages long and includes the account balance of each
customer. Several customers have very large account balances while most balances are
small. Which of the following would be the most appropriate means of
classifying members of this population into strata?
a. Account balance. b. Account number.
c. Alphabetically by name. d. Numerically by pages
of the listing.
ANSWER: A
33. Auditors who prefer statistical to non-statistical sampling believe that the principal
advantage of statistical sampling flows from its unique ability to
a. Define the precision required to provide adequate satisfaction.
b. Provide a mathematical measurement of risk.
c. Establish conclusive audit evidence with decreased audit effort.
d. Promote a more legally defensible procedural approach.
ANSWER: B
ANSWER: C
35. An auditor selects a preliminary sample of 100 items out of a population of 1,000 items.
The sample statistics generate an arithmetic mean of $60, a standard deviation of $6,
and a standard error of the mean of $.60. If the sample was adequate for the
auditor's purposes and the auditor's desired precision was plus or minus $1,000, the
minimum acceptable dollar value of the population would be
a. $61,000. b. $60,000.
c. $59,000. d. $58,800.
ANSWER: C
ANSWER: C
ANSWER: B
ANSWER: A
ANSWER: D
40. What effect does an increase in the standard deviation have on the required sample size
of mean-per-unit estimation and probability proportional to size sampling? Assume
no change in any of the other characteristics of the population and no change in desired
precision and confidence.
Mean-per-unit Estimation PPS
ANSWER: C
ANSWER: B
ANSWER: D
43. A bank auditor is interested in estimating the average account balance of its
depositors based on a sample. This substantive test is an example of
a. Attribute sampling. b. Discovery sampling.
c. Acceptance sampling. d. Variables sampling.
ANSWER: D
COMPLETION:
45. Detection risk, defined as the risk that material errors or fraud that are not prevented or
detected by the client's system of internal control, will not be discovered by the auditor,
is referred to as by statisticians.
ANSWER: ALPHA
47. Standard deviation is defined as the degree of variation of individual values about the
population mean. The more narrowly dispersed the values in the population, the
(larger or smaller) the standard deviation.
ANSWER: SMALLER
48. In applying probability proportional to size sampling, the auditor rejects a book value as
being materially overstated when upper error limit is (greater or less) than the
tolerable error.
ANSWER: GREATER
49. For PPS sampling purposes, the allowance for sampling risk is the sum of basic precision
plus the .
50. The incremental allowance for precision need be calculated only when errors are found
in logical units that are (larger or smaller) than the _______________
.
51. As contrasted with classical variables sampling, probability proportional to size sampling
has the advantage of automatically the population such that logical units equal
to or greater than the _____________
_________ have a 100% chance of being included in the sample.
52. Probability proportional to size sampling has its greatest applicability to situations in
which the auditor suspects a few material errors of .
ANSWER: OVERSTATEMENT
Chapter 10 Statistical Sampling for Substantive Testing 171
53. In evaluating sampling results for mean per unit sampling purposes, achieved precision
(A') must be equal to or ______ (greater or less) than desired precision (A).
Otherwise, the actual beta risk is higher than specified in the sampling plan, and further
sampling would be necessary to reduce the risk to an acceptable level.
ANSWER: LESS
MATCHING:
A. Projected error
B. Achieved precision
C. Basic precision
D. Desired precision
E. Finite correction factor
F. Range of acceptability
H. Sampling risk
I. Standard deviation
J. Upper error limit
K. Reliability
L. Sampling interval
M. Precision
N. Logical sampling unit
____1. The risk that the auditor’s conclusions regarding a population are incorrect.
____3. The range within which the true answer most likely falls.
____4. The likelihood that the sample range contains the true
value.
____6. The calculated range within which the true answer most
likely falls.
SOLUTION:
1. H
2. I
3. M
4. K
5. E
6. B
7. F
8. N
9. L
10. A
PROBLEM/ESSAY:
55. An auditor wishes to randomly select a sample of customers' accounts receivable for
confirmation purposes. The population consists of 4,000 accounts with a book value of
$6,000,000. The preliminary estimate of standard deviation (computer calculated from book
value) is $25. The auditor considers $40,000 to be a material misstatement of accounts
receivable. The auditor has assessed inherent risk at 60% and control risk at 70%, and has set
alpha risk and overall audit risk at 10%.
ALPHA/2
OR BETA Z VALUE
1.00% 2.33
2.00 2.06
2.50 1.96
5.00 1.65
10.00 1.29
20.0 .85
24.0 .71
Chapter 10 Statistical Sampling for Substantive Testing 173
SOLUTION:
a. 35
b. $4,800,000
c. $24,539
d. Downward adjustment of $1,184,4539
OVERSTATEMENT
ERRORS RELIABILITY FACTOR EXPANSION FACTOR
0 3.00 1.60
1 4.75
2 6.30
3 7.76
A $20,000 0
E $800,000 $400,000
S $220,000 0
SOLUTION:
a. 618
b. $22,653
c. $642,653
d. Allowance for sampling risk = $84,949 ($67,959 + $16,990)
Upper error limit = $727,602 ($642,653 + $84,949)