Flashcards in SAMPLING Deck (60)

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1

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In a random sample of 1,000 records, a CPA determines that the rate of occurrence of errors is 3%. He can state that the error rate in the population is

Not less than 3%.

Not more than 4%.

Probably about 3%.

Not less than 2%.

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Probably about 3%.

Sampling generally deals with ranges within which error rates will fall, and about 3% would be the best answer.

2

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In an audit of financial statements, a CPA will generally find stratified sampling techniques to be most applicable to

Confirming accounts receivables for customers at a large retail store.

Recomputing net wage and accrued payroll for employees.

Reviewing supporting documents for capital acquisitions.

Tracing hours worked from the payroll summary back to individual time cards

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Confirming accounts receivables for customers at a large retail store.

Since accounts receivable from customers will have a great deal of variation in amounts, using stratified sampling will minimize the effect on sample size of the variation within the population. Additionally, the auditor will be able to emphasize the larger account balances by stratifying the population.

3

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Physical access controls include all but the following

Clamps or chains

Regular backup

Control over access from outside

User reconciliations

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User reconciliations

Clamps or chains to prevent removal of hard disks or internal boards, regular backup and control over access from outside are all forms of physical access controls. Reconciliations are typically an accounting process.

4

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An advantage of using statistical sampling techniques is that such techniques:

Eliminate the need for judgmental decisions.

Mathematically measure risk.

Have been proven by GAAS to be superior to all other methods.

Define the value for reliability and precision required for 'due professional care' in an audit.

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Mathematically measure risk.

Statistical sampling differs from nonstatistical sampling in that, by applying mathematical rules, the auditor can quantify sampling risk in planning the sample and evaluating the results.

5

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If all other factors specified in the sample remain constant, changing the tolerable exception risk from 8% to 12% will cause the required sample size to

Increase.

Decrease.

Remain the same.

Become irrelevant.

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Decrease.

Tolerable exception rate represents the highest exception rate the auditor will permit in the control being tested and still be willing to conclude that the control is operating effectively. Tolerable exception rate can have a significant inverse impact on sample size--a smaller sample size is needed for a high tolerable exception rate than for a low tolerable exception rate.

6

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In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if

The standard deviation of the recorded amounts is relatively small.

The auditor's estimated tolerable misstatement is extremely small.

The population has highly variable recorded amounts.

Probability-proportional-to-size (PPS) sampling is used.

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The population has highly variable recorded amounts.

Stratification enables the auditor to emphasize certain population items and deemphasize others. Stratified sampling is used to minimize the effect on sample size of the variation within the population.

7

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In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $4,000. If this were the only error discovered by the auditor, the projected error of this sample would be

$1,000

$2,000

$5,000

$10,000

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$2,000

The answer $2,000 is correct since, when the sampling interval ($10,000) exceeds the account's recorded amount ($5,000), the projected error is determined , first by dividing the amount of misstatement by the recorded amount [($5,000-$4,000) /$5,000 = 0.2] The result times the sampling interval is the projected error. [0.2 x$10000 = $2,000].

8

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The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the

Effectiveness of an audit.

Efficiency of the audit.

Preliminary estimates of materiality levels.

Allowable risk of tolerable error.

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Effectiveness of an audit.

AU 350.14 states, "The risk of incorrect acceptance and the risk of assessing control risk too low relate to the effectiveness of an audit in detecting an existing material misstatement."

9

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A company uses computer processing to calculate and print out employee paychecks each period. The company is worried that data will be entered into the system incorrectly so that one or more paychecks will be overstated as a means of stealing money from the company. Which of the following is most likely to detect such fraud?

Control totals are calculated for significant figures.

All paychecks must be hand delivered to the employee by a paymaster.

A system is devised so that employees who are overpaid can file a form to reimburse the company.

Checks that are not picked up by an employee are given to a person in authority to uncover the reason.

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Control totals are calculated for significant figures.

Companies worry that numbers such as hours worked or pay rates will be increased in a scheme so that employees can steal money. For example, if 50 hours is entered rather than 40 hours for an employee, that person will get 25 percent more than has been earned. Thus, company officials determine control figures before computations are made and then verify those totals after the computations are made to ensure that no unauthorized changes have been made. Answers B and D are important controls but they are verifying that paychecks are written to actual employees rather than that the amounts have not been manipulated.

10

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The monetary unit sampling selection process appeals to auditors because

It provides a statistical solution rather than a nonstatistical one.

It reduces the cost of doing the audit testing because several sample items are test at once.

It automatically increases the likelihood of selecting high dollar items from the population being audited.

All of the above are correct.

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All of the above are correct.

Monetary unit sampling is the most commonly used statistical method of sampling for tests of details of balances because it has the statistical simplicity of attribute sampling yet provides a statistical result expressed in dollars.

11

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An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the

Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation.

Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.

Sample rate of deviation is less than the expected rate of deviation used in planning the sample.

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Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

In a test of controls, the auditor takes a sample, determines the sample deviation rate, compares this rate to the maximum rate he can tolerate and still rely on the control, and decides whether to rely on the control as planned or not.

12

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Which function is generally responsible for the daily computer operations?

Operator

Database Administrator

Systems Analyst

Systems programmer

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Operator

The Operator is responsible for the daily computer operations of both the hardware and software. The Operator mounts tapes, supervises operations on a console, accepts inputs and distributes outputs. The Operator should have documentation available to run programs but is not responsible for detailed program information.

13

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Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

Random-number sampling.

Variables sampling.

Attributes sampling.

Population sampling.

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Variables sampling.

Variables sampling estimates numerical measures of a population, such as the quantity of units or a dollar value. Attributes sampling is used when testing internal control and estimates the percentage of items in the population that possess a desired attribute, not a dollar value.

14

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Physical access controls prevent damage or other loss including all but the following

Unauthorized access by service pesonnel

Theft

Disgruntled employees

Online or electronic fraud

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Online or electronic fraud

Physical access controls prevent damage or other loss including theft, unauthorized acess, disgruntled employees or others.

15

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As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?

The sample size would be irrelevant.

The sample size would be higher.

The sample size would be lower.

The sample size would be unaffected.

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The sample size would be lower.

If a CPA has decided to reduce control risk, the impact on substantive testing sample size if all other factors remain constant, the sample size would be lower.

The higher the control risk is, the larger the sample size needs to be because there are expected to be more errors in the population. Therefore, the lower the control risk is, the smaller the sample size needs to be because there are expected to be fewer errors in the population.

16

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Three types of IT controls are

Require applications to be adequately tested before use, backup of files and control access to appropriate users

Require backup of files, adequate documentation and printer logs

Control access to appropriate users, application controls and decision trees

Adequate documentation, application controls and local area networks

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Require applications to be adequately tested before use, backup of files and control access to appropriate users

Requiring applications to be adequately tested before use, backup of files, control access to appropriate users, adequate documentation, and application controls are all examples of IT controls. Printer logs, decision trees and local area networks are not.

17

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One of the primary purposes of a generalized computer audit program is to allow the auditor to do which of the following?

Test the logic of computer programs used in the client's electronic data processing systems.

Independently process client electronic data processing records.

Test the logic of computer programs used in the client's HR systems.

Use the client's employees to perform routine audit checks of the electronic data processing records that otherwise would be done by the auditor's staff accountants.

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Independently process client electronic data processing records.

The primary use of a generalized computer audit program is to allow the auditor to independently process and verify client electronic data processing records.

18

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An independent auditor is looking at accounts receivable. More specifically, the auditor seeks to determine whether appropriate steps are taken when the company chooses to write off an account as uncollectible. The auditor expects errors to be made in 2 percent of these cases. The auditor can tolerate a rate as high as 5 percent. Based on these judgments, an appropriate sample size of 140 is computed. Which of the following statements is true?

If the expected rate changes to 1 percent, the sample size will be smaller.

If the tolerable rate changes to 4 percent, the sample size will be smaller.

Judgments cannot be used in a properly planned statistical sampling test.

This is an example of a variables sampling plan.

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If the expected rate changes to 1 percent, the sample size will be smaller.

Judgments such as the expected error rate and the maximum tolerable rate are necessary to form the basis for a statistical sampling test. Since an error rate is being estimated, this testing falls under sampling for attributes. Sampling for variables attempts to estimate a total such as an account balance. Sample size varies directly with the expected error rate. Thus, the more expected errors, the larger the sample size, and the less expected errors, the smaller the sample size. Sample size varies inversely with the tolerable error rate. The larger the rate that you can tolerate, the smaller the sample size will be. The smaller the rate you can tolerate, the larger the sample size will be.

19

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Three types of system documentation used by auditors and analysts are

Data Flow Diagrams, System Flowcharts and Entity Relationship Diagrams

Program Flowcharts, System Flowcharts and Process Flow Diagrams

Swim Lanes, Gantt Charts and PERT Charts

Run Charts, Error Logs and System Cycle Time Charts

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Data Flow Diagrams, System Flowcharts and Entity Relationship Diagrams

Auditors and analysts document information systems to understand, explain, and improve complex business processes and operations. Three main types of system documentation used by auditors and analysts are (a) Data Flow Diagrams (DFDs) that illustrate the system components and functions, data flows among the components and sources, destinations and storage of the data; (b) System Flowcharts that illustrate Informational Processes (such as logic flows, inputs, outputs, data storage), Operational Processes (such as physical flows) and (c) Entity Relationship Diagrams that illustrate the system's key entities and the relationships among those entities.

20

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In a probability-proportional-to-size sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be

$1,000

$2,000

$4,000

$5,000

###
$2,000

The requirement is to determine the projected error of misstatement of a PPS sample with a sampling interval of $5,000, when the auditor has discovered a recorded amount ($10,000) in excess of the sampling interval ($5,000). When an account recorded amount exceeds the sampling error, the projected error equals the actual misstatement, in this case, $2,000 ($10,000 - $8,000).

21

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The use of ratio estimation sampling technique is most effective when

The calculated audit amounts are approximately proportional to the client's book amounts.

A relative small number of differences exist in the population.

Estimating populations whose records consist of quantities but not book values.

Large overstatement differences and large understatement differences exist in the population.

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The calculated audit amounts are approximately proportional to the client's book amounts.

When audit differences are approximately proportional to account size the standard deviation of the ratio is small and this results in a relatively small required sample size.

22

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If all other factors specified in a sampling plan remain constant, changing the estimated occurrence rate from 3% to 5% would cause the required sample size to

Increase.

Decrease.

Remain the same.

Indeterminable.

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Increase.

Increasing the estimated occurrence rate will directly increase the sample size, all other factors remaining the same.

23

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Jim, CPA decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted random sampling is to

Allow the auditor to emphasize larger items from the population.

Reduce as much as possible the degree of variability in the population.

Give every item in the population an equal chance of being included in the sample.

Allow the person selecting the sample to use personal judgment in deciding which elements should be included in the sample.

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Allow the auditor to emphasize larger items from the population.

Stratification enables the auditor to emphasize certain population items and deemphasize others. Stratified sampling is used to minimize the effect on sample size of the variation within the population.

24

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Which of the following functions is responsible for implementing, debugging and modifying software?

Systems Analyst

Database Administrator

Systems Programmer

Applications Programmer

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Systems Programmer

The systems programmer is responsible implementing, modifying and debugging the software required to interface with the hardware. Examples include but are not limited to the operating systems, telecommunications monitoring and database management systems.

25

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Analytical procedures in which current financial statements are compared with budgets or previous statements are primarily intended to determine the

Adequacy of financial statement disclosure.

Existence of specific errors or omissions.

Overall reasonableness of statement contents.

Use of an erroneous cutoff date.

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Overall reasonableness of statement contents.

Adequacy of financial statement disclosure.

Analytical procedures have to do with the relationship among information. Analytical procedures will not determine the adequacy of financial statement disclosures.

Existence of specific errors or omissions.

Analytical procedures have to do with the relationship among information, not the existence of specific errors or omissions.

Use of an erroneous cutoff date.

Analytical procedures have to do with the relationship among data. Analytical procedures will not help detect the use of an erroneous cutoff date.

Overall reasonableness of statement contents.

Analytical procedures provide internal auditors with an efficient and effective means of assessing and evaluating information collected in an engagement. Analytical procedures are useful in identifying, among other things, differences that are not expected, the absence of differences when they are expected, potential errors, potential irregularities or illegal acts, or other unusual or nonrecurring transactions or events. A comparison of current financial statements with budgets will help the internal auditor determine the overall reasonableness of the statement information.

26

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Which of the following would NOT be considered an analytical procedure?

Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.

Developing the expected current-year sales based on the sales trend of the prior five years.

Computing accounts receivable turnover by dividing credit sales by the average net receivable and comparing it to prior periods.

Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.

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Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.

Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data, and involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Projecting error rates based on sample results relates more to tests of controls, rather than to analytical procedures.

REFERENCE

27

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In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be

$1,000

$2,000

$4,000

$5,000

###
$2,000

The answer $2,000 is correct since, when an account's recorded amount exceeds the sampling interval ($5,000), the projected error equals the actual misstatement, here $2,000 ($10,000 - $8,000).

28

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Which of the following statements is correct concerning statistical sampling in tests of controls?

There is an inverse relationship between the expected population deviation rate and the sample size.

As the population size increases, the sample size should increase proportionately.

Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.

All of the above are correct.

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Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.

Auditing literature states that in assessing the tolerable rate of deviations, the auditor should consider that, while deviations from pertinent control structure policies or procedures increase the risk of material misstatements in the accounting records, such deviations do not necessarily result in misstatements. Deviations would result in misstatements in the accounting records only if the deviations and the misstatements occurred on the same transactions.

29

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An auditor is assessing control risk in connection with a company’s payroll system. Two employees are supposed to sign every authorization of a payroll change. The auditors want to estimate how often the proper procedure is not followed. Which of the following statements is true?

Variables sampling is most likely to be used.

Mean per unit sampling is most likely to be used.

Probability proportional to size sampling is most likely to be used.

Attribute sampling is most likely to be used.

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Attribute sampling is most likely to be used.

Variables sampling is used when an amount (such as a dollar figure) is being estimated. Mean-per-unit and probability-proportional-to-size sampling are simply specific types of variables sampling. In contrast, attribute sampling estimates a percentage, often an error rate. In this question, the auditor wants to know the error rate for this particular procedure. Attribute sampling is used for that purposes.

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