chapter 9 appa - test bank

Chapter 09 Appendix A - Probability-Proportional-to-Size (PPS) Sampling

Chapter 09 Appendix AProbability-Proportional-to-Size (PPS) Sampling

True / False Questions

1. Increasing the expected misstatement for a probability-proportional-to-size sample increases the required sample size. True False

2. Probability-proportional-to-size sampling is especially efficient for populations with high misstatement rates. True False

3. The upper limit on misstatement in a probability-proportional-to-size sample plan consists of the total of the projected misstatement and the tolerable misstatement. True False

4. A normally distributed sample is assumed when using probability-proportional-to-size sampling. True False

5. An increase in the scope of analytical procedures may result in a lower allowable risk of incorrect acceptance for a substantive test of details. True False

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Multiple Choice Questions

6. 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 $5000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be: A. $1,000.B. $2,000.C. $5,000.D. $10,000.

7. In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that as selected account receivable with a recorded amount of $12,000 had an audited amount of $9,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be: A. $2,000.B. $2,500.C. $3,000.D. $10,000.

8. In a PPS sample, the most likely misstatement in the population is equal to the: A. Projected Misstatement.B. Upper limit on misstatement.C. Basic Precision.D. Total misstatements identified in the sample.

9. When no misstatements are identified in a PPS sample, the upper limit on misstatement equals: A. An amount dependent upon the sample's standard deviation.B. Basic precision.C. ½ of the allowance for sampling risk.D. Zero.

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10. Which statement is most proper for evaluating the results of this PPS sample? A. Accept the population because the projected misstatement is less than the tolerable misstatement.B. Accept the population because the sum of the projected misstatement and the basic precision exceeds the incremental allowance.C. Reject the population because the sum of the projected misstatement, basic precision and incremental allowance exceeds the tolerable misstatement.D. Reject the population because the tolerable misstatement exceeds the basic precision plus the incremental allowance.

11. The use of probability-proportional-to-size sampling would be least likely to be efficient if: A. Commercial receivable accounts are being audited.B. Statistical inferences are to be made.C. Many accounts are known to be in error.D. The population has a high total dollar value.

Assume the following relating to a PPS sample:

Projected Misstatement = $20,000. Basic Precision = $16,000. Incremental Allowance = $4,500. Tolerable Misstatement = $34,000.

12. The upper limit on misstatement equals: A. $20,000.B. $20,500.C. $40,500.D. $74,500.

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13. The allowance for sampling risk is equal to: A. $20,000.B. $20,500.C. $40,500.D. $74,500.

14. The most likely amount of misstatement in the population is equal to: A. $20,000.B. $20,500C. $40,000.D. $40,500.

15. For which of the following populations would probability-proportional-to-size sampling be most likely to be the most efficient technique in confirming accounts receivable? A. 2,000 accounts with a standard deviation of $650, with few misstatements expected.B. 2,000 accounts with a standard deviation of $25, with few misstatements expected.C. 6,000 accounts with a standard deviation of $650, with many misstatements expected.D. 6,000 accounts with a standard deviation of $25 with many misstatements expected.

16. Which of the following statements is correct concerning probability-proportional-to-size sampling? A. The sampling distribution should approximate the normal distribution.B. The auditors control the risk of incorrect rejection by specifying that risk level for the sampling plan.C. The sampling interval is calculated by dividing the population book value by the sample size.D. The auditors control the risk of incorrect acceptance by incorporating an expected misstatement into the sample size formula.

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17. In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account with a book value of $6,000 had an audited value of $4,000. The projected misstatement is: A. $2,000.B. $3,333.C. $6,000.D. $10,000.

18. When using probability-proportional-to-size sampling, the actual total misstatement in a population is most likely to be closest to the: A. Projected misstatement.B. Basic precision.C. Allowance for sampling risk.D. Upper limit on misstatement.

19. When using probability-proportional-to-size sampling, the allowance for sampling risk is the combination of basic precision and the: A. Projected misstatement.B. Incremental allowance.C. Upper limit on misstatements.D. Tainting.

20. In a probability-proportional-to-size sample, increasing the tolerable misstatement has what effect on sample size, when all other factors are held constant? A. Increases.B. Decreases.C. No effect.D. Indeterminate.

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21. Which of the following factors would indicate that probability-proportional-to-size sampling should be used rather than other statistical sampling techniques? A. There is a book value for every item in the population.B. There is a low expected misstatement rate in the population.C. The auditors wish to obtain an estimate of the amount of misstatement in the population.D. The book value of the population is large.

22. Which statement is correct with respect to the probability-proportional-to-size technique? A. The technique insures that every account in the population has an equal chance of being selected.B. The technique automatically stratifies the population.C. The technique results in a representative sample every time.D. The technique allows the auditors to measure more precisely the risk of incorrect acceptance.

23. The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, there is a 40 percent risk that material misstatement could have bypassed the client's system of internal control, and a 50 percent risk that any existing material misstatement would not have been brought to light by the auditors' analytical procedures. What is the maximum risk of incorrect acceptance the auditors should specify in their substantive tests of details of accounts receivable? A. 5 percent.B. 10 percent.C. 20 percent.D. 25 percent.

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Essay Questions

24. Williams, CPA intends to use probability-proportional-to-size sampling. He has properly selected and audited a sample of 100 accounts receivable from his client's population of 3000 accounts. He calculated a sampling interval of $5,000 and the tolerable misstatement for the account is $40,000. He has the following table available:

Williams also recalls that "basic precision" is equal to the appropriate reliability factor multiplied times the sampling interval. He wishes to accept a risk of incorrect acceptance of 10 percent.

He found that 97 of the 100 accounts in the sample were properly calculated. However, the following three errors existed:

a. Calculate the projected misstatement.b. Calculate the basic precision.c. Calculate the incremental allowance.d. Calculate the upper limit on misstatement.e. Explain how the auditors would consider the results calculated above.

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Chapter 09 Appendix A Probability-Proportional-to-Size (PPS) Sampling Answer Key

True / False Questions

1. Increasing the expected misstatement for a probability-proportional-to-size sample increases the required sample size. TRUE

AACSB: AnalyticAACSB: TechnologyAICPA BB: IndustryAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: Appendix 9ATopic: Probability-Proportional-to-Size (PPS) Sampling

2. Probability-proportional-to-size sampling is especially efficient for populations with high misstatement rates. FALSE


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3. The upper limit on misstatement in a probability-proportional-to-size sample plan consists of the total of the projected misstatement and the tolerable misstatement. FALSE


4. A normally distributed sample is assumed when using probability-proportional-to-size sampling. FALSE

AACSB: AnalyticAACSB: TechnologyAICPA BB: IndustryAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: Appendix 9ATopic: Probability-Proportional-to-Size (PPS) Sampling

5. An increase in the scope of analytical procedures may result in a lower allowable risk of incorrect acceptance for a substantive test of details. TRUE


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Multiple Choice Questions

6. 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 $5000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be: A. $1,000.B. $2,000.C. $5,000.D. $10,000.

AACSB: AnalyticAACSB: TechnologyAICPA BB: IndustryAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: Appendix 9ASource: AICPATopic: Probability-Proportional-to-Size (PPS) Sampling

7. In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that as selected account receivable with a recorded amount of $12,000 had an audited amount of $9,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be: A. $2,000.B. $2,500.C. $3,000.D. $10,000.

AACSB: AnalyticAACSB: TechnologyAICPA BB: IndustryAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: Appendix 9ATopic: Probability-Proportional-to-Size (PPS) Sampling

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8. In a PPS sample, the most likely misstatement in the population is equal to the: A. Projected Misstatement.B. Upper limit on misstatement.C. Basic Precision.D. Total misstatements identified in the sample.


9. When no misstatements are identified in a PPS sample, the upper limit on misstatement equals: A. An amount dependent upon the sample's standard deviation.B. Basic precision.C. ½ of the allowance for sampling risk.D. Zero.


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10. Which statement is most proper for evaluating the results of this PPS sample? A. Accept the population because the projected misstatement is less than the tolerable misstatement.B. Accept the population because the sum of the projected misstatement and the basic precision exceeds the incremental allowance.C. Reject the population because the sum of the projected misstatement, basic precision and incremental allowance exceeds the tolerable misstatement.D. Reject the population because the tolerable misstatement exceeds the basic precision plus the incremental allowance.


11. The use of probability-proportional-to-size sampling would be least likely to be efficient if: A. Commercial receivable accounts are being audited.B. Statistical inferences are to be made.C. Many accounts are known to be in error.D. The population has a high total dollar value.


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Assume the following relating to a PPS sample:

Projected Misstatement = $20,000. Basic Precision = $16,000. Incremental Allowance = $4,500. Tolerable Misstatement = $34,000.

12. The upper limit on misstatement equals: A. $20,000.B. $20,500.C. $40,500.D. $74,500.


13. The allowance for sampling risk is equal to: A. $20,000.B. $20,500.C. $40,500.D. $74,500.


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14. The most likely amount of misstatement in the population is equal to: A. $20,000.B. $20,500C. $40,000.D. $40,500.


15. For which of the following populations would probability-proportional-to-size sampling be most likely to be the most efficient technique in confirming accounts receivable? A. 2,000 accounts with a standard deviation of $650, with few misstatements expected.B. 2,000 accounts with a standard deviation of $25, with few misstatements expected.C. 6,000 accounts with a standard deviation of $650, with many misstatements expected.D. 6,000 accounts with a standard deviation of $25 with many misstatements expected.


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16. Which of the following statements is correct concerning probability-proportional-to-size sampling? A. The sampling distribution should approximate the normal distribution.B. The auditors control the risk of incorrect rejection by specifying that risk level for the sampling plan.C. The sampling interval is calculated by dividing the population book value by the sample size.D. The auditors control the risk of incorrect acceptance by incorporating an expected misstatement into the sample size formula.


17. In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account with a book value of $6,000 had an audited value of $4,000. The projected misstatement is: A. $2,000.B. $3,333.C. $6,000.D. $10,000.


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18. When using probability-proportional-to-size sampling, the actual total misstatement in a population is most likely to be closest to the: A. Projected misstatement.B. Basic precision.C. Allowance for sampling risk.D. Upper limit on misstatement.


19. When using probability-proportional-to-size sampling, the allowance for sampling risk is the combination of basic precision and the: A. Projected misstatement.B. Incremental allowance.C. Upper limit on misstatements.D. Tainting.

AACSB: AnalyticAACSB: TechnologyAICPA BB: IndustryAICPA BB: Leveraging TechnologyAICPA FN: Leveraging TechnologyAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: Appendix 9ATopic: Probability-Proportional-to-Size (PPS) Sampling

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20. In a probability-proportional-to-size sample, increasing the tolerable misstatement has what effect on sample size, when all other factors are held constant? A. Increases.B. Decreases.C. No effect.D. Indeterminate.


21. Which of the following factors would indicate that probability-proportional-to-size sampling should be used rather than other statistical sampling techniques? A. There is a book value for every item in the population.B. There is a low expected misstatement rate in the population.C. The auditors wish to obtain an estimate of the amount of misstatement in the population.D. The book value of the population is large.


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22. Which statement is correct with respect to the probability-proportional-to-size technique? A. The technique insures that every account in the population has an equal chance of being selected.B. The technique automatically stratifies the population.C. The technique results in a representative sample every time.D. The technique allows the auditors to measure more precisely the risk of incorrect acceptance.


23. The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, there is a 40 percent risk that material misstatement could have bypassed the client's system of internal control, and a 50 percent risk that any existing material misstatement would not have been brought to light by the auditors' analytical procedures. What is the maximum risk of incorrect acceptance the auditors should specify in their substantive tests of details of accounts receivable? A. 5 percent.B. 10 percent.C. 20 percent.D. 25 percent.


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Essay Questions

24. Williams, CPA intends to use probability-proportional-to-size sampling. He has properly selected and audited a sample of 100 accounts receivable from his client's population of 3000 accounts. He calculated a sampling interval of $5,000 and the tolerable misstatement for the account is $40,000. He has the following table available:

Williams also recalls that "basic precision" is equal to the appropriate reliability factor multiplied times the sampling interval. He wishes to accept a risk of incorrect acceptance of 10 percent.

He found that 97 of the 100 accounts in the sample were properly calculated. However, the following three errors existed:

a. Calculate the projected misstatement.b. Calculate the basic precision.c. Calculate the incremental allowance.d. Calculate the upper limit on misstatement.e. Explain how the auditors would consider the results calculated above.

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chapter 9 appa - test bank

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projected misstatement

tolerable misstatement

likely misstatement

misstatement equals

expected misstatement

size sampling

pps sample

required sample size