ch09-statistical sampling for testing control procedures.doc

8/14/2019 ch09-Statistical Sampling For Testing Control Procedures.doc

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Statistical Sampling for Testing Control Procedures

MULTIPLE CHOICE

1. Auditors who prefer statistical sampling to non-statisticalsampling may do so because statistical sampling helps theauditor

a. Measure the sufficiency of the evidential matterobtained.

b. Eliminate subjectivity in the evaluation of samplingresults.

c. Reduce the level of tolerable error to a relatively lowamount.

d. Minimize the failure to detect a material misstatementdue to non-sampling ris.

A!"#ER$ %

&. 'f all other factors in a sampling plan are held constant(changing the measure of tolerable error to a smaller valuewould cause the sample size to be$a. "maller.b. )arger.c. *nchanged.d. 'ndeterminate.

A!"#ER$ %

+. #hich of the following sampling plans would be designed to

estimate a numerical measurement of a population( such as adollar value,a. !umerical sampling.b. iscovery sampling.c. "ampling for attributes.d. "ampling for variables.

A!"#ER$

. %ased on a random sample( it is estimated that four percent(plus or minus two percent( of a firm/s invoices containerrors. 0he plus or minus two percent is nown as theestimate/s$a. recision.b. Accuracy.c. 2onfidence level.d. "tandard error.

A!"#ER$ A3. 'n order to 4uantify the ris that sample evidence leads to

erroneous conclusions about the sampled population

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Chapter 9 Statistical Sampling for Testing ControlProcedures

a. Each item in the sampled population must have an e4ualchance of being selected.

b. Each item in the sampled population must have a chanceof being selected proportional to its boo value.

c. Each item in the sampled population must have an e4ualor nown probability of being selected.

d. 0he precise number of items in the population must be

nown.

A!"#ER$ 2

5. #hich of the following statements is not true regarding auditris assessment,a. 0he auditor studies the business and industry and applies

analytical procedures as a basis for assessing inherentris.

b. #hen control ris and inherent ris are high( the auditorincreases detection ris to maintain overall audit ris at

the desired level.c. 0he auditor studies and evaluates internal control policiesand procedures for assessing control ris.

d. 0he auditor designs substantive audit procedures to reducedetection ris to an acceptable level.

A!"#ER$ %

6. #hich of the following factors does an auditor generallyneed to consider in planning a particular audit sample for acontrol test,a. !umber of items in the population.b. 0otal dollar amount of the items to be sampled.c. Estimated standard deviation of the population.d. 0olerable error.

A!"#ER$

7. Random numbers can be used to select a sample only when eachitem in the population$a. 2an be assigned to a specific stratum.b. 's independent of outside influence.c. 2an be identified with a uni4ue number.

d. 's e8pected to be within plus or minus three standarddeviations of the population mean.

A!"#ER$ 2

9. 0he tolerable occurrence rate for a control test isgenerallya. )ower than the e8pected occurrence rate in the related

accounting records.

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Chapter 9 Statistical Sampling for Testing Control Procedures

b. :igher than the e8pected occurrence rate in the relatedaccounting records.

c. 'dentical to the e8pected occurrence rate in therelated accounting records.

d. *nrelated to the e8pected occurrence rate in therelated accounting records.

A!"#ER$ %

1;. An advantage of statistical over non-statistical sampling isthat statistical sampling$a. Enables auditors to objectively measure the reliability

of their sample results.b. ermits use of a smaller sample size than would be

necessary with non-statistical sampling.c. 's compatible with a wider variety of sample selection

methods than is non-statistical sampling.d. Allows auditors to inject their subjective judgment in

determining sample size and selection process in order

to audit items of greatest value and highest ris.

A!"#ER$ A

11. An auditor samples cash disbursement records for significanterrors of


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a. #hich include errors will not be overlooed when theauditor e8ercises compatible reciprocal options.

b. May occur in a systematic pattern( thus maing thesample more representative.

c. May occur more than once in a sample.d. o not have to be prenumbered in order for the auditor

to use the techni4ue.

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1. #hen planning an attribute sampling application( thedifference between the e8pected occurrence rate and thetolerable occurrence rate is the planneda. recision.b. Reliability.c. ispersion.d. "ewness.

A!"#ER$ A

13. 'f certain forms are not consecutively numbereda. "election of a random sample probably is not possible.b. "ystematic sampling may be appropriate.c. "tratified sampling should be used.d. Random number tables cannot be used.

A!"#ER$ %

15. 'n an attribute sampling application( holding other factorsconstant( sample size will increase as which of thefollowing becomes smaller,a. Reliability level.b. opulation.c. lanned precision.d. E8pected rate of occurrence.

A!"#ER$ 2

16. #hich of the following sampling methods is most useful toauditors when testing for internal control effectiveness,a. "tratified random sampling.

b. Attribute sampling.c. >ariables sampling.d. *nrestricted random sampling with replacement.

A!"#ER$ %

17. Attribute sampling( as applied to control testing( can assistthe auditor in several ways. #hich of the following tass is notenhanced by sampling,

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a. etermining the number of documents to e8amine in testingfor a specific attribute.

b. "electing the documents to be tested.c. E8amining the documents.d. Evaluating the sample results.

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19. #hich of the following is an element of sampling ris,a. 2hoosing an audit procedure that is inconsistent with

the audit objective.b. 2hoosing a sample size that is too small to achieve the

sampling objective.c. ?ailing to detect an error on a document that has been

inspected by the auditor.d. ?ailing to perform audit procedures that are re4uired

by the sampling plan.

A!"#ER$ %

&;. #hich of the following would not be an attribute of interest toan auditor performing control tests,a. o selling prices agree with published price lists,b. o purchased parts meet established 4uality standards,c. Are proper labor rates being used to compute payroll,d. Are account distributions @debits and credits correct,

A!"#ER$ %

&1. 0he precision limit for control testing necessary to

justify lowering the assessed control ris level dependsprimarily on which of the following,a. 0he cause of the errors.b. 0he materiality of the attribute@s to be tested.c. 0he amount of any substantive errors.d. 0he limit used in audits of similar clients.

A!"#ER$ %

&&. #hich of the following statements concerning sample size is true,a. An increase in the tolerable occurrence rate( other factors

remaining unchanged( increases sample size.b. 0he higher the e8pected occurrence rate( other factors

remaining unchanged( the larger will be the sample size.c. 0he 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.

d. 0he lower the acceptable ris of underassessment of controlris( the smaller will be the sample size.

A!"#ER$ %

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&+. 'n the e8amination of the financial statements of elta2ompany( the auditor determines that in performing a test ofinternal control effectiveness( the rate of error in thesample does not support the auditor/s preconceived notion ofa tolerable occurrence rate when( in fact( the actual errorrate in the population does meet the auditor/s notion of

effectiveness. 0his situation illustrates the ris ofa. *nderassessment of control ris.b. =verassessment of control ris.c. 'ncorrect rejection.d. 'ncorrect acceptance.

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&. 'f all other factors in a sampling plan are held constant(changing the ris of underassessment from five percent to

three percent would cause the sample size to be$

a. "maller.b. )arger.c. *nchanged.d. 'ndeterminate.

A!"#ER$ %

&3. An auditor performs a test to determine whether allmerchandise for which the client was billed was received.0he population for this test consists of alla. Merchandise received.b. >endors/ invoices.c. 2anceled checs.d. Receiving reports.

A!"#ER$ %

&5. Although mathematically based( statistical sampling does notreplace audit judgment. 'n utilizing statistical samplingtechni4ues( the auditor must apply judgment in all but which ofthe following tass,a. "electing a tolerable rate of error.b. etermining an acceptable ris of underassessing

control ris.c. 2alculating the actual error rate.d. Assessing the materiality of control weanesses.

A!"#ER$ 2

&6. 0o determine sample size in an attribute samplingapplication( what must be specified,a. opulation mean( e8pected error rate( precision.b. recision( reliability( standard deviation.

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c. recision( reliability( e8pected occurrence rate.d. opulation mean( standard deviation( precision.

A!"#ER$ 2

&7. #hich of the following statements regarding statistical samplingin auditing is true,a. 'nasmuch as audits are test-based( generally accepted

auditing standards re4uire the use of statisticalsampling methods whenever the auditor decides toe8amine only part of a population.

b. Although statistical sampling may be applied to controltesting( it is re4uired for substantive testingpurposes.

c. "ampling methods are used by auditors in both controltesting and substantive testing.

d. "tatistical sampling methods are more appropriate forcontrol testing when the auditor elects to reprocesstransactions( than when controls are tested by means of

document e8amination.

A!"#ER$ 2

&9. 0he application of statistical sampling techni4ues is leastrelated to which of the following generally acceptedauditing standards,a. 0he wor is to be ade4uately planned and assistants( if

any( are to be properly supervised.

b. 'n all matters relating to the assignment( an independ-

ence in mental attitude is to be maintained by theauditor or auditors.

c. A sufficient understanding of the internal controlsystem is to be obtained to plan the audit and to

determine the nature( timing( and e8tent of teststo be performed.

d. "ufficient competent evidential matter is to beobtained through inspection( observation( in4uiries(

and confirmations to afford a reasonable basisfor an opinion regarding the financial statements under

e8amination.

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+;. 0he major weaness of nonstatistical @judgmental samplingis ita. *sually re4uires larger sample sizes than statistical

sampling.

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b. oes not allow sampling ris to be objectivelymeasured.

c. ?re4uently results in samples that are notrepresentative of the population.

d. Bives less accurate point estimates of parameters thanstatistical sampling.

A!"#ER$ %

+1. An auditor is testing credit authorization procedures bye8amining sales invoices for credit approval by the creditdepartment. 0he procedures will be considered to be woringade4uately if 95C of all sales invoices either indicateapproval or are cash sales. 0he auditor selects a randomsample of 1;; invoices. 'n this situation( which of thefollowing outcomes illustrates underassessment,a. 0he auditor finds five deviations and concludes that

procedures wor inade4uately. 0he actual populationdeviation rate is &C.

b. 0he auditor finds no deviations and concludes thatprocedures wor ade4uately. 0he true populationdeviation rate is 3C.

c. 0he auditor finds no deviations and concludes that theprocedures wor ade4uately. 0he true populationdeviation rate is &C.

d. 0he auditor finds five deviations and concludes thatprocedures wor inade4uately. 0he true populationdeviation rate is 5C.

A!"#ER$ %

+&. 'f an auditor( planning to use statistical sampling( isconcerned with the number of a client/s sales invoices thatcontain mathematical errors( the auditor would most lielyutilizea. Random sampling with replacement.b. "ampling for attributes.

c. "ampling for variables.d. "tratified random sampling.

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++. An advantage of using statistical over non-statisticalsampling methods in tests of controls is that thestatistical methods

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a. Afford greater assurance than a non-statistical sampleof e4ual size.

b. rovide an objective basis for 4uantitativelyevaluating sample riss.

c. 2an more easily convert the sample into a dual-purposetest useful for substantive testing.

d. Eliminate the need to use judgment in determiningappropriate sample sizes.

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+. "everal riss are inherent in the evaluation of auditevidence which has been obtained through the use ofstatistical sampling. #hich of the following riss is ane8ample of the ris of underassessment of control ris,a. ?ailure to properly define the population to be

sampled.

b. ?ailure to draw a random sample from the population.c. ?ailure to accept the statistical hypothesis thatinternal control is unreliable when( in fact( it is.

d. ?ailure to accept the statistical hypothesis that aboo value is not materially misstated when the trueboo value is not materially misstated.

A!"#ER$ 2

+3. As a result of tests of controls( an auditor underassessedcontrol ris and decreased substantive testing. 0his

underassessment occurred because the true occurrence rate inthe population wasa. )ess than the ris of underassessment in the auditor/s

sample.b. )ess than the occurrence rate in the auditor/s sample.c. More than the ris of underassessment in the auditor/s

sample.d. More than the occurrence rate in the auditor/s sample.

A!"#ER$

+5. 'f all other factors specified in an attribute sampling planremain constant( changing the specified precision from 5C to1;C( and changing the specified reliability from 96C to 9+Cwould cause the re4uired sample size toa. 'ncrease.b. Remain the same.c. ecrease.d. 2hange by C.

A!"#ER$ 2

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Chapter 9 Statistical Sampling for Testing ControlProcedures+6. #hich of the following factors is generally not considered

in determining the sample size for a test of controls,a. opulation size.b. 0olerable rate.c. Ris of underassessment.d. E8pected population occurrence rate.

A!"#ER$ A

+7. 0he e8pected population occurrence rate of client billingerrors is +C. 0he auditor has established a tolerable rateof 3C. 'n the review of client invoices the auditor shouldusea. "tratified sampling.b. >ariable sampling.c. iscovery sampling.d. Attribute sampling.

A!"#ER$

+9. An auditor desired to test credit approval on 1;(;;; salesinvoices processed during the year. 0he auditor designed astatistical sample that would provide a 1C ris of assessingcontrol ris too low @99C confidence that not more than 6Cof the sales invoices laced approval. 0he auditor estimatedfrom previous e8perience that about & 1D&C of the salesinvoices laced approval. A sample of &;; invoices wase8amined and 6 of them were lacing approval. 0he auditorthen determined the upper occurrence limit to be 7C. 'n theevaluation of this sample( the auditor decided to increasethe level of the preliminary assessment of control risbecause thea. 0olerable rate @6C was less than the achieved upper

occurrence limit @7C.

b. E8pected occurrence rate @6C was more than thepercentage of errors in the sample @+ 1D&C.

c. Achieved upper occurrence limit @7C was more than thepercentage of errors in the sample @+ 1D&C.

d. E8pected occurrence rate @& 1D&C was less than thetolerable rate @6C.

A!"#ER$ A

;. 0o evaluate the sample results for an attributes samplingapplication( a measure of precision is re4uired. #hich ofthe following statements is true regarding precision,a. recision is subtracted from the tolerable rate of

error to determine the acceptability of sample results.

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b. recision is added to the tolerable rate of error todetermine the acceptability of sample results.

c. recision is subtracted from the sample occurrence rateand the result is compared to the tolerable rate oferror.

d. recision is added to the sample occurrence rate andthe result is compared to the tolerable rate of error.

A!"#ER$

1. An auditor who uses statistical sampling for attributes intesting internal controls should increase the assessed levelof control ris when thea. "ample occurrence rate is less than the e8pected

occurrence rate used in planning the sample.b. 0olerable rate less the allowance for sampling ris

e8ceeds the sample occurrence rate.

c. "ample occurrence rate plus the allowance for sampling

ris e8ceeds the tolerable rate.d. "ample occurrence rate plus the allowance for samplingris e4uals the tolerable rate.

A!"#ER$ 2

&. #hich of the following statements is correct concerningstatistical sampling for control testing,a. 0he population size has little or no effect on

determining sample size e8cept for very smallpopulations.

b. 0he e8pected population occurrence rate has little orno effect on determining sample size e8cept for very

small populations.c. As the population size doubles( the sample size also

should double.

d. ?or a given tolerable rate( a larger sample size shouldbe selected as the e8pected population deviation ratedecreases.

A!"#ER$ A

+. An auditor wishes to determine if the error rate on travelreimbursement claims is within the five-percent tolerance levelset by management. #hat sampling plan should the auditor use,a. >ariables sampling.b. Attribute sampling.c. udgment sampling.d. " sampling.

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. 0he auditor samples cash disbursements for minor errors ofariables sampling.

c. Attributes sampling.d. iscovery sampling.

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3. An important difference between a statistical sample and anon-statistical @judgmental sample is that with astatistical sample$a. !o judgment is re4uired( everything is by formula.b. A smaller sample size can be used.c. More accurate results are obtained.

d. opulation estimates with measurable reliability can bemade.

A!"#ER$

COMPLETION:

6. "tatistical sampling for attributes is most applicable insituations where a visible in the form ofe8ists.

A!"#ER$ A*'0 0RA')( =2*ME!0A0'=!

7. As contrasted with statistical sampling( nonstatistical samplingis a more approach to inference.

A!"#ER$ "*%E20'>E

9. estimates the fre4uency of events(whereas is an estimate of amount.

A!"#ER$ A00R'%*0E "AM)'!B( >AR'A%)E" "AM)'!B

3;. 0he is the anticipatederror rate( whereas the is thema8imum rate of error acceptable to the auditor( while stillwarranting a lowering of assessed control ris below the ma8imumlevel.

A!"#ER$ EFE20E =22*RRE!2E RA0E( 0=)ERA%)E =22*RRE!2E RA0E

31. 0he the precision range( the larger the sample size.

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A!"#ER$ !ARR=#ER

3&. 0he more critical an attribute to those control policies andprocedures relevant to an audit( the the tolerableoccurrence rate.

A!"#ER$ )=#ER

53. Another term for Gris of underassessmentG is HHHHHHHHHHHHI ris.

A!"#ER$ %E0A

3. Random selection re4uires that items to be included in thesample must be drawn on a basis.

A!"#ER$ R=%A%')'0J

33. #hen documents are not prenumbered( an acceptable alternative to

the use of random number tables or computer-generated numbers is.

A!"#ER$ "J"0EMA0'2 "AM)'!B

35. *nder conditions of detection ris( a minimal 4uantity ofaudit evidence is needed.

A!"#ER$ :'B:

MATCHIN:

36. 'ndicate by letter the term matching the definition given.

A. Attribute sampling%. Alpha ris2. iscovery sampling. %eta risE. E8pected occurrence rate?. recisionB. iscovery sampling:. "ampling ris'. "ystematic sampling. 0olerable occurrence rateK. *pper occurrence limit). >ariables sampling

HHHH1. An estimate of fre4uency of events.

HHHH&. An orderly approach to locating a particular event.

HHHH+. 0he anticipated error rate.

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Chapter 9 Statistical Sampling for Testing ControlProceduresHHHH. Ris of underassessment.

HHHH3. Ma8imum rate of error acceptable to the auditor.

HHHH5. Ris that the auditorLs conclusions about a populationwill be incorrect.

HHHH6. A random selection method that involves choosing every nth item in the population until the re4uisite samplesize has been reached.

HHHH7. 0he calculated ma8imum error rate based on the results of sampling.

HHHH9. Ris of overassessment.

HHHH1;. Range within the true answer most liely falls.

"=)*0'=!$1.A&.2 +.E . 3. 5.: 6.' 7.K 9.% 1;.?

P!O"LEM#ESSA$:

37. Margaret :opins( 2A( wishes to test the effectiveness ofinternal controls over the customer billing function ofacLs #holesale :ardware( an audit client. :opins hasidentified the following attributes to be tested. ?or eachattribute( indicate the appropriate sampling unit and

carefully define what constitutes an error.

1. oes the customer order agree with the invoice as totype and 4uantity of goods,

&. oes the shipping order agree with the invoice as totype and 4uantity of goods,

+. :as customer credit been approved,. oes the invoice amount cause the customer to e8ceed

the prepared credit limit,3. :ave goods been billed but not shipped,5. :ave goods been shipped but not billed,

6. o invoiced prices agree with official price lists,7. o credit and discount terms appearing on face of

customer invoice accord with company policy,9. Are proper accounts debited and credited,

"=)*0'=!$

1. "AM)'!B *!'0$ "ales invoiceERR=R$ )ac of agreement between invoice and order

as to$0ype of goods

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uantity of goodsrice of goods2redit and discount terms

&. "AM)'!B *!'0$ "ales invoiceERR=R$ )ac of agreement between invoice and

shipping order as to$0ype of goods

uantity of goods

+. "AM)'!B *!'0$ "ales invoiceERR=R$ )ac of evidence of credit approval on face

of invoice

. "AM)'!B *!'0$ "ales invoiceERR=R$ 'nvoice amount plus previous customer

balance e8ceeds prepared credit limit

3. "AM)'!B *!'0$ "ales invoice

ERR=R$ "hipping order andDor bill of lading not attached to customer invoice

5. "AM)'!B *!'0$ %ill of ladingERR=R$ Matching invoice not located

6. "AM)'!B *!'0$ "ales invoiceERR=R$ rice not in agreement with master price list

and no evidence of proper approval ofbilled price

7. "AM)'!B *!'0$ "ales invoiceERR=R$ 2redit andDor discount terms at variance withcompany policy( and no evidence of properapproval of 4uoted credit and discountterms.

9. "AM)'!B *!'0$ "ales invoiceERR=R$ 'ncorrect debits or credits appearing on face

of invoice and not corrected before postingaccounts.

39. "ampling can assist the auditor in various ways during thee8amination of documentary evidence for tests of internalcontrols. *sing a vouchering and vendor billing applicationas an e8ample( assume that you are interested in evaluatinginternal controls relative to ordering goods( receivinggoods( and processing vendor invoices. iscuss howattribute sampling might assist you in the following phasesof your tests of controls$

a. etermining the number of vouchers to testNb. "electing the vouchers for testingNc. Evaluating the results of the voucher testN

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d. Assessing audit ris associated with thee8penditure cycle.

"=)*0'=!$

a. 'n determining the number of vouchers to test( the auditorwill need to set a tolerable occurrence rate and an acceptable ris

of underassessment. 0hese parameters( along with an estimatedoccurrence rate may then be used as inputs to determining sample size.b. 'f vouchers are prenumbered( the auditor can elect to use

a random selection approach to selecting vouchers testfor predefined attributes.

c. :aving e8amined the sample for the attributes ofinterest( the auditor can calculate the observed errorrate and the upper occurrence limit.

d. 0he upper occurrence limit can be compared with thetolerable occurrence rate to support raising or lowering theassessed level of control ris.

5;. Beorge ones( 2A( wishes to test payroll controls for:opins Manufacturing( an audit client. :e has identifiedthe following attributes of interest for testing purposes$

1. 2orrectness of pay rates and hours used inpreparing the payroll summaryN

&. Benuineness of listed employeesN+. 2orrectness of gross pay( withholdings( and net

payN. 2orrectness of debits and credits.

A pilot test of forty payroll transactions revealed thefollowing errors$ =ne transaction revealed an incorrectpay rateN two transactions resulted in incorrectcalculations of either gross pay or withholdingsN and twotransactions resulted in erroneous debits or credits. Alllisted employees were found to be woring for the companyduring the pay period being tested. ones believes thatfour or more errors for each of the four attributes issignificant.

Required:

a. %ased on the pilot sample( calculate the e8pectedoccurrence rate and the tolerable occurrence rate for

each attribute.b. 'n determining sample size( ones can select an

e8pected occurrence rate ranging from the low forattribute number & to the high for attributes + and .#hat impact will a low rate relative to a high ratehave on the calculated sample size,

c. #hat other factors must ones consider beforedetermining the sample size,

c. Assuming that a sample of 1;; payroll summary entriesproduced the following calculated upper occurrence

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limits( what impact will these limits have onones substantive audit program,

Attribute 1$ 6.;CAttribute &$ .;CAttribute +$ 1&.;CAttribute $ 5.;C

"=)*0'=!$

a. 0he tolerable occurrence rate is 1;C @D; for eachof the attributes. 0he e8pected occurrence rates are$ Attribute !o. 1$ &.3C Attribute !o. &$ ;.;C Attribute !o. +$ 3.;C Attribute !o. $ 3.;C

b. 0he higher the e8pected occurrence rate( the largerwill be the sample size.

c. ones must determine the acceptable ris of

underassessing control ris.d. =nly attribute + produces an unacceptable upperoccurrence limit( e8ceeding the tolerable rate of 1;C.Biven incorrect calculation of gross pay( withholdings(and net pay( ones should plan to focus more heavilyon inventory costing( inasmuch as inventory includesboth direct and indirect labor components. :e shouldalso concentrate on payroll cost included in generaland administrative e8pense( as well as on accruedpayroll and payroll ta8es payable at year end.'ncorrect calculation of gross pay and withholdings

will also impact the calculation of employerLs payrollta8 e8pense. 0herefore( ones must plan to audit theseaccounts more intensively than under conditions ofstrong internal control.

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ch09-statistical sampling for testing control procedures.doc

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