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May 05, 2019

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Auditing Theory

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Auditing Theory

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control testing?

a. The expected population occurrence rate has little or no effect on determining

sample size except for very small populations.

b. As the population size doubles, the sample size also should double.

c. The population size has little or no effect on determining sample size except

for very small populations.

d. For a given tolerable rate, a larger sample size should be selected as the

expected population deviation rate decreases.

is within the five-percent tolerance level set by management. What sampling plan

should the auditor use?

a. Variables sampling.

b. Judgment sampling.

c. Attribute sampling

d. Probability Proportional to Size sampling.

(judgmental) sample is that with a statistical sample:

a. No judgment is required, everything is by formula.

b. A smaller sample size can be used.

c. Population estimates with measurable reliability can be made.

d. More accurate results are obtained.

measurement of a population, such as a peso value?

a. Numerical sampling.

b. Sampling for variables.

c. Discovery sampling.

d. Sampling for attributes

statistical sampling?

a. An assumption of PPS sampling is that the underlying accounting population is

normally distributed.

b. An auditor needs to estimate the peso amount of the standard deviation of the

population to use classical variables sampling.

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.

6. 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

proportional to its book value.

c. The precise number of items in the population must be known.

d. Each item in the sampled population must have an equal or known probability of

being selected.

7. Which of the following statements is not true regarding audit risk assessment?

a. The auditor studies the business and industry and applies analytical

procedures as a basis for assessing inherent risk.

b. When control risk and inherent risk are high, the auditor increases detection

risk to maintain overall audit risk at the desired level.

c. The auditor studies and evaluates internal control policies and procedures for

assessing control risk.

d. The auditor designs substantive audit procedures to reduce detection risk to

an acceptable level.

planning a particular audit sample for a control test?

a. Number of items in the population.

b. Total dollar amount of the items to be sampled.

c. Tolerable error.

d. Estimated standard deviation of the population.

9. Random numbers can be used to select a sample only when each item in the

population:

a. Can be assigned to a specific stratum.

b. Is independent of outside influence.

c. Can be identified with a unique number.

d. Is expected to be within plus or minus three standard deviations of the

population mean.

a. Lower than the expected occurrence rate in the related accounting records.

b. Identical to the expected occurrence rate in the related accounting records.

c. Higher than the expected occurrence rate in the related accounting records.

d. Unrelated to the expected occurrence rate in the related accounting records.

sampling:

a. Permits use of a smaller sample size than would be necessary with non-

statistical sampling.

b. Is compatible with a wider variety of sample selection methods than is non-

statistical sampling.

c. Allows auditors to inject their subjective judgment in determining sample size

and selection process in order to audit items of greatest value and highest

risk.

d. Enables auditors to objectively measure the reliability of their sample

results.

12. Of the following statements, which one best differentiates statistical sampling

from non-statistical sampling?

a. Non-statistical sampling has greater applicability to large populations than

statistical sampling.

b. Statistical sampling is a mathematical approach to inference, whereas non-

statistical sampling is a more subjective approach.

c. Non-statistical sampling is more subjective, but produces greater consistency

in the application of audit judgment.

d. Nonstatistical sampling has greater applicability to populations that lend

themselves to random selection.

13. Attribute sampling, as applied to control testing, can assist the auditor in

several ways. Which of the following tasks is not enhanced by sampling?

a. Examining the documents.

b. Determining the number of documents to examine in testing for a specific

attribute.

c. Selecting the documents to be tested.

d. Evaluating the sample results.

a. Choosing an audit procedure that is inconsistent with the audit objective.

b. Failing to detect an error on a document that has been inspected by the

auditor.

c. Choosing a sample size that is too small to achieve the sampling objective.

d. Failing to perform audit procedures that are required by the sampling plan.

performing control tests?

a. Do selling prices agree with published price lists?

b. Are proper labor rates being used to compute payroll?

c. Do purchased parts meet established quality standards?

d. Are account distributions (debits and credits) correct?

16. The precision limit for control testing necessary to justify lowering the

assessed control risk level depends primarily on which of the following?

a. The cause of the errors.

b. The amount of any substantive errors.

c. The materiality of the attribute(s) to be tested.

d. The limit used in audits of similar clients.

a. An increase in the tolerable occurrence rate, other factors remaining

unchanged, increases sample size.

b. The more critical the attribute being tested, the higher will be the tolerable

occurrence rate set by the auditor, and the larger will be the sample size.

c. The higher the expected occurrence rate, other factors remaining unchanged,

the larger will be the sample size.

d. The lower the acceptable risk of underassessment of control risk, the smaller

will be the sample size.

18. In the examination of the financial statements of Delta Company, the auditor

determines that in performing a test of internal control effectiveness, the rate

of error in the sample does not support the auditor's preconceived notion of a

tolerable occurrence rate when, in fact, the actual error rate in the population

does meet the auditor's notion of effectiveness. This situation illustrates the

risk of

a. Underassessment of control risk.

b. Incorrect rejection.

c. Overassessment of control risk.

d. Incorrect acceptance.

19. If all other factors in a sampling plan are held constant, changing the risk of

underassessment from five percent to three percent would cause the sample size to

be:

a. Smaller.

b. Unchanged.

c. Larger.

d. Indeterminate.

20. 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.

inventory items. From past experience, the auditor knows that a few specific

items are subject to unusually large amounts of shrinkage. In using statistical

sampling, the auditor's best course of action is to

a. Eliminate any of the items known to be subject to unusually large amounts of

shrinkage.

b. Increase the sample size to lessen the effect of the items subject to

unusually large amounts of shrinkage.

c. Stratify the inventory population so that items subject to unusually large

amounts of shrinkage are reviewed separately.

d. Continue to draw new samples until a sample is drawn which includes none of

the items known to be subject to large amounts of shrinkage.

that no material error exists. The risk that sample results will support the

hypothesis when a material error actually does exist is the risk of

a. Incorrect rejection.

b. Alpha error.

c. Incorrect acceptance.

d. Type I error.

23. An auditor performs a test to determine whether all merchandise for which the

client was billed was received. The population for this test consists of all

a. Merchandise received.

b. Canceled checks.

c. Vendors' invoices.

d. Receiving reports.

24. Although mathematically based, statistical sampling does not replace audit

judgment. In utilizing statistical sampling techniques, the auditor must apply

judgment in all but which of the following tasks?

a. Selecting a tolerable rate of error.

b. Determining an acceptable risk of under assessing control risk.

c. Calculating the actual error rate.

d. Assessing the materiality of control weaknesses.

specified?

a. Population mean, expected error rate, precision.

b. Precision, reliability, standard deviation.

c. Precision, reliability, expected occurrence rate.

d. Population mean, standard deviation, precision.

26. Which of the following statements regarding statistical sampling in auditing is

true?

a. Inasmuch as audits are test-based, generally accepted auditing standards

require the use of statistical sampling methods whenever the auditor decides

to examine only part of a population.

b. Although statistical sampling may be applied to control testing, it is

required for substantive testing purposes.

c. Sampling methods are used by auditors in both control testing and substantive

testing.

d. Statistical sampling methods are more appropriate for control testing when the

auditor elects to reprocess transactions, than when controls are tested by

means of document examination.

the following generally accepted auditing standards?

a. The work is to be adequately planned and assistants, if any, are to be

properly supervised.

b. A sufficient understanding of the internal control system is to be obtained to

plan the audit and to determine the nature, timing, and extent of tests to be

performed.

c. In all matters relating to the assignment, an independence in mental attitude

is to be maintained by the auditor or auditors.

d. Sufficient competent evidential matter is to be obtained through inspection,

observation, inquiries, and confirmations to afford a reasonable basis for an

opinion regarding the financial statements under examination.

a. Usually requires larger sample sizes than statistical sampling.

b. Frequently results in samples that are not representative of the population.

c. Does not allow sampling risk to be objectively measured.

d. Gives less accurate point estimates of parameters than statistical sampling.

29. If an auditor, planning to use statistical sampling, is concerned with the number

of a client's sales invoices that contain mathematical errors, the auditor would

most likely utilize

a. Random sampling with replacement.

b. Sampling for variables.

c. Sampling for attributes.

d. Stratified random sampling.

ofcontrols is that the statistical methods

a.Afford greater assurance than a non-statistical sample of equal size.

b.Can more easily convert the sample into a dual-purpose test useful for

substantive testing.

c. Provide an objective basis for quantitatively evaluating sample risks.

d. Eliminate the need to use judgment in determining appropriate sample sizes.

31. Several risks are inherent in the evaluation of audit evidence which has been

obtained through the use of statistical sampling. Which of the following risks

is an example of the risk of underassessment of control risk?

a. Failure to properly define the population to be sampled.

b. Failure to draw a random sample from the population.

c. Failure to accept the statistical hypothesis that internal control is

unreliable when, in fact, it is.

d. Failure to accept the statistical hypothesis that a book value is not

materially misstated when the true book value is not materially misstated.

decreased substantive testing. This underassessment occurred because the true

occurrence rate in the population was

a. Less than the risk of underassessment in the auditor's sample.

b. Less than the occurrence rate in the auditor's sample.

c. More than the occurrence rate in the auditor's sample.

d. More than the risk of underassessment in the auditor's sample.

33. If all other factors specified in an attribute sampling plan remain constant,

changing the specified precision from 6% to 10%, and changing the specified

reliability from 97% to 93% would cause the required sample size to

a. Increase.

b. Remain the same.

c. Decrease.

d. Change by 4%.

34. Use of the difference estimation sampling technique to estimate dollar amounts is

inappropriate when

a. The total book value is known and corresponds to the sum of all the individual

book values.

b. There are some observed differences between audited values and book values.

c. A book value for each sample item is unknown.

d. The audited values are nearly proportional to the book value.

a. Applying audit procedures which are inappropriate for the audit objectives.

b. Failing to recognize errors or deviations in the documents examined.

c. Choosing a sample which has proportionately more errors than the population

d. Arriving at incorrect statistical conclusions due to computational errors.

36. 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. Variables sampling.

d. Acceptance sampling.

37. Which of the following factors is generally not considered in determining the

sample size for a test of controls?

a. Tolerable rate.

b. Risk of underassessment.

c. Population size.

d. Expected population occurrence rate

38. The expected population occurrence rate of client billing errors is 3%. The

auditor has established a tolerable rate of 5%. In the review of client invoices

the auditor should use

a. Stratified sampling.

b. Variable sampling.

c. Attribute sampling.

d. Discovery sampling.

39. An auditor who uses statistical sampling for attributes in testing internal

controls should increase the assessed level of control risk when the

a. Sample occurrence rate is less than the expected occurrence rate used in

planning the sample.

b. Tolerable rate less the allowance for sampling risk exceeds the sample

occurrence rate.

c. Sample occurrence rate plus the allowance for sampling risk exceeds the

tolerable rate.

d. Sample occurrence rate plus the allowance for sampling risk equals the

tolerable rate.

the population variability is the

a. Basic precision.

b. Range.

c. Standard deviation.

d. Interval.

parts. Which of the following audit objectives would be most appropriate if the

sampling method used is probability proportional to size (PPS)?

a. The auditor plans to estimate the total dollar value of the inventory when a

recorded book value does not exist.

b. The auditor wishes to accept or reject the hypothesis that the proportion of

defective parts in the population is less than 5%.

c. The auditor plans to make a statement concerning the total dollar amount of

error in the population from the recorded book value.

population.

42. 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. An increase in control risk, other parameters remaining unchanged, causes a

narrowing of the precision range.

c. The narrower the range of precision, the smaller the sample size.

d. Overall audit risk is the complement of reliability.

43. In an application of mean per unit sampling, the following information has been

obtained:

Reported book value P 600,000

Point estimate (estimated total value) 591,000

Allowance for sampling risk (precision) +- 22,000

Tolerable error +- 45,000

a. Acceptable only if the risk of incorrect rejection is at least twice the risk

of incorrect acceptance.

b. Not acceptable.

c. Acceptable.

d. Acceptable only if the risk of incorrect acceptance is at least twice the risk

of incorrect rejection.

a. The auditor may use a less than optimal statistical method for the

circumstances, e.g. difference estimation instead of ratio estimation.

b. The auditor may fail to recognize an error that is included in the sample.

c. Even though a sample is properly chosen, it may not be representative of the

population.

d. The confidence level and/or precision established by the auditor are not

appropriate.

a. Obtain a smaller sample than would be required by non-statistical sampling

techniques.

b. Obtain a sample more representative of the population than would be obtained

by non-statistical sampling techniques.

c. Allow the auditor to quantify, and therefore control, the risk of making an

incorrect decision based on sample evidence.

d. Meet requirements of Statements on Auditing Standards.

a. Degree of asymmetry of a distribution.

b. Tendency of the means of large samples (at least 30 items) to be normally

distributed.

c. Extent to which the individual values of the items in the population are

spread about the mean.

d. Measure of the closeness of a sample estimate to a corresponding population

characteristic.

47. 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 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.

decides to specify a precision interval of P 100,000 instead of the P 200,000

precision interval that was called for in the sampling plan contained in the

audit program. Which of the following would be a result of the auditor's

decision to narrow the precision interval?

a. A decrease in the required sample size.

b. An increase in the population standard deviation.

c. An increase in the required sample size.

d. A decrease in the population standard deviation.

because statistical sampling helps the auditor

a. Measure the sufficiency of the evidential matter obtained.

b. Reduce the level of tolerable error to a relatively low amount.

c. Eliminate subjectivity in the evaluation of sampling results.

d. Minimize the failure to detect a material misstatement due to non-sampling

risk.

50. If all other factors in a sampling plan are held constant, changing the measure

of tolerable error to a smaller value would cause the sample size to be:

a. Smaller.

b. Unchanged.

c. Larger.

d. Indeterminate.

51. Which of the following sampling plans would be designed to estimate a numerical

measurement of a population, such as a dollar value?

a. Numerical sampling.

b. Discovery sampling.

c. Sampling for variables.

d. Sampling for attributes.

52. Based on a random sample, it is estimated that four percent, plus or minus two

percent, of a firm's invoices contain errors. The plus or minus two percent is

known as the estimate's:

a. Accuracy.

b. Confidence level.

c. Precision.

d. Standard error.

substantive test of details, the auditor should consider all of the following

except

a. Tolerable error.

b. Expected error.

c. Characteristics of the population.

d. Allowable risk of incorrect acceptance.

a. Decreases with the use of higher confidence levels.

b. Remains unchanged with changes in confidence levels.

c. Increases with the use of higher confidence levels.

d. Increases with the use of lower confidence levels.

55. In sampling for variables, which of the following must be known in order to

estimate the appropriate sample size required to meet the auditor's needs in a

given situation?

a. The total amount of the population.

b. The desired standard deviation.

c. The desired confidence level.

d. The estimated rate of error in the population.

56. Which of the following best illustrates the concept of sampling risk?

a. An auditor may select audit procedures that are not appropriate to achieve the

specific objective.

b. An auditor may fail to recognize errors in the documents examined for the

chosen sample.

c. A randomly chosen sample may not be representative of the population as a

whole on the characteristic of interest.

d. The documents related to the chosen sample may not be available for

inspection.

57. 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.

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.

a. Eliminate non-sampling errors of every type.

b. Obtain smaller sample sizes in all cases.

c. Quantify and control sampling risk.

d. Use less complex formulas than those required to evaluate non-statistical

samples.

a. Computerized account balances are being audited.

b. Statistical inferences are to be made.

c. The audit objective is oriented to understatements.

d. The account contains a large number of transactions.

60. 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 measure of tolerable error.

d. Smaller expected frequency of errors.

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