09 Chapter - Audit Sampling: An Application to Substantive Tests ...
Chapter 09
Audit Sampling: An Application to Substantive Tests ...
Multiple Choice Questions
1. The risk of incorrect acceptance and the risk of over reliance relate to the
A. Preliminary estimates of materiality levels
B. Allowable risk of tolerable error
C. Efficiency of the audit
D. Effectiveness of the audit
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: 1
Learning Objective: 2
2. While performing a substantive test of details during an audit, the auditor determined that
the sample results supported the conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. The situation illustrates the risk of
A. Incorrect rejection
B. Incorrect acceptance
C. Assessing control risk too high
D. Assessing control risk too low
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: 1
Learning Objective: 2
9-1
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
3. A number of factors influence 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. Greater reliance on internal controls
B. Greater reliance on analytical procedures
C. Smaller expected frequency of misstatements
D. Smaller measure of tolerable misstatements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 1
Learning Objective: 2
4. Which of the following sample planning factors would influence the sample size for a
substantive test of details for a specific account?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 1
Learning Objective: 2
9-2
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
5. In statistical sampling methods used in substantive testing, an auditor most likely would
stratify a population into meaningful groups if
A. Probability-proportional-to-size (PPS) sampling is used
B. The population has highly variable recorded amounts
C. The auditor's estimated tolerable misstatement is extremely small
D. The standard deviation of recorded amounts is relatively small
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 1
Learning Objective: 2
6. An auditor is preparing to sample a client's customer receivables for overstatement. A
statistical sampling method that automatically provides stratification when using systematic
selection is
A. Attribute sampling
B. Ratio-estimation sampling
C. Monetary-unit sampling
D. Mean-per-unit sampling
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 2
7. Which of the following statements best describes an inherent limitation of the probabilityproportional-to-size (PPS) sampling method?
A. It can only be used for substantive testing of asset accounts
B. It requires the use of a computer system to perform the required calculations
C. Misstatement rates must be large and the misstatements must be overstatements
D. Misstatement rates must be small and the misstatements must be overstatements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: 2
9-3
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
8. For monetary-unit sampling, the number of items tested is
A. Always equal to sample size
B. Always greater than sample size
C. Always greater than or equal to sample size
D. Always less than or equal to sample size
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 2
9. Monetary-unit sampling should not be used if
A. The population includes several large items
B. The auditor expects overstatement errors
C. Many errors are expected
D. No items in the account have zero balances
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 2
10. In monetary-unit sampling, population size is
A. The dollar balance in an account
B. The number of items in an account
C. Unrelated to sample size
D. Included in the denominator of the formula to determine sample size
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 2
9-4
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
11. Monetary-unit sampling is said to eliminate the need to stratify the sample because
A. Sample items are selected in proportion to their dollar amount
B. The risk of incorrect acceptance is inversely related to sample size
C. Tolerable misstatement is considered when determining sample size
D. The upper limit on misstatements can be computed based on statistical principles
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 2
12. An account balance is $300,000 and there are 25 items in the account, six of which have
balances that equal or exceed $15,000. The auditor plans to use a monetary-unit sampling
plan with systematic sample selection. To ensure that all accounts with balances of at least
$15,000 are selected, the sampling interval should be
A. 6
B. 20
C. 12,000
D. 15,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 2
Learning Objective: 3
13. For monetary-unit sampling, a sampling interval of 400 means that
A. Every 400th item in the account will be selected in the sample
B. The average size of items in the account is 400
C. Every 400th dollar in the account will be included in the sample
D. The average misstatement in sample items is $400
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 2
Learning Objective: 3
9-5
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
14. Which of the following sampling methods would be used to estimate a numerical
measurement of population, such as a dollar value?
A. Attributes sampling
B. Stop-or-go sampling
C. Variables sampling
D. Random-number sampling
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 5
15. Which of the following would be designed to estimate a numerical measurement of a
population, such as a dollar value?
A. Sampling for variables
B. Sampling for attributes
C. Discovery sampling
D. Numerical sampling
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 5
16. In applying variables sampling, an auditor attempts to
A. Estimate a qualitative characteristic of interest
B. Determine various rates of occurrence for specified attributes
C. Discover at least one instance of a critical deviation
D. Predict a monetary population value within a range of precision
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 5
9-6
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
17. How would increases in tolerable misstatement and assessed level of control risk affect
the sample size in a substantive test of details?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Moderate
Learning Objective: 1
Learning Objective: 2
18. Precision is a statistical measure of the maximum likely difference between the sample
estimate and the true but unknown population total and is directly related to
A. Reliability of evidence
B. Relative risk
C. Materiality
D. Cost benefit analysis
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Moderate
Learning Objective: 1
Learning Objective: 2
9-7
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
19. In examining cash disbursements, an auditor plans to choose a sample using systematic
selection with a random start. The primary advantage of such a systematic selection is that
population items
A. Which include fraud will not be overlooked when the auditor exercises compatible
reciprocal options
B. May occur in a systematic pattern, thus making the sample more representative
C. May occur more than once in a sample
D. Do not have to be prenumbered in order for the auditor to use the technique
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: Moderate
Learning Objective: 2
20. Which of the following courses of action would an auditor most likely follow in planning
a sample of cash disbursements if the auditor is aware of several unusually large cash
disbursements?
A. Set the tolerable deviation rate at a lower level than originally planned
B. Stratify the cash disbursements population so that the unusually large disbursements are
selected
C. Increase the sample size to reduce the effect of the unusually large disbursements
D. Continue to draw new samples until all the unusually large disbursements appear in the
sample
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Moderate
Learning Objective: 2
9-8
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
21. What is the primary objective of using stratification as a sampling method in auditing?
A. To increase the audit risk at which a decision will be reached from the results of the sample
selected
B. To determine the tolerable deviation rate for a given characteristic in the population being
studied
C. To decrease the effect of variance in the total population
D. To determine the precision range of the sample selected
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Moderate
Learning Objective: 2
22. In statistical sampling, setting the appropriate confidence level and desired sample
precision are decisions made by the auditor that will affect sample size for a substantive
procedure. Which of the following should not be a factor in the choice of desired precision?
A. The sampling risk
B. The size of an account balance misstatement considered material
C. The audit resources available for execution of the sampling plan
D. The objectives of the audit test being conducted
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Moderate
Learning Objective: 2
23. Which of the following would be an improper technique when using monetary-unit
statistical sampling in an audit of accounts receivable?
A. Combining negative and positive dollar misstatements in the appraisal of a sample
B. Using a sampling technique in which the same account balance could be selected more
than once
C. Selecting a random starting point and then sampling every nth dollar
D. Defining the sampling unit in the population as an individual dollar and not as an
individual account balance
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Moderate
Learning Objective: 2
9-9
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
24. In a monetary-unit sampling plan, the upper limit on misstatements is $11,200 and this
risk of incorrect acceptance is 5%. This means that
A. Tolerable misstatement is $11,200
B. There is a 95% chance that the misstatement in the account is $11,200 or more
C. There is a 95% chance that the misstatement in the account is $11,200
D. There is a 95% chance that the misstatement in the account is $11,200 or less
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Moderate
Learning Objective: 2
Learning Objective: 3
25. If the upper limit on misstatements exceeds tolerable misstatement, the auditor is least
likely to
A. Increase sample size
B. Conduct other substantive procedures
C. Adjust the account balance
D. Increase the risk of incorrect rejection
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Moderate
Learning Objective: 2
Learning Objective: 3
26. Which of the following most likely would be an advantage in using classical variables
sampling rather than probability-proportional-to-size (PPS) sampling?
A. An estimate of the standard deviation of the population's recorded amounts is not required
B. The auditor rarely needs the assistance of a computer program to design an efficient
sample
C. Inclusion of zero and negative balances generally does not require special design
considerations
D. Any amount that is individually significant is automatically identified and selected
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Objective: Moderate
Learning 2
Learning Objective: 5
9-10
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
27. The assurance factor for non-statistical sampling is based on
A. The number of items in the account
B. Auditor judgment
C. The risk of misstatement in the account and the level of desired assurance
D. Variability in the population and the risk of misstatement in the account
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Moderate
Learning Objective: 4
28. The formula for nonstatistical sampling for tests of account balances provided by the
AICPA
A. Must be used for nonstatistical sampling
B. Includes a provision for the risk of incorrect acceptance
C. Is affected by the nature of other substantive procedures used to test the account balance
D. Is largely based on the variation of items in the account
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Moderate
Learning Objective: 4
29. The use of the ratio estimation sampling technique is most effective when
A. The calculated audit amounts are approximately proportional to the client's book amounts
B. A relatively small number of differences exist in the population
C. Estimating populations whose records consist of quantities but not book values
D. Large overstatement differences and large understatement differences exist in the
population
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Moderate
Learning Objective: 4
Learning Objective: 5
9-11
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
30. Which one of the following statements is true regarding two random samples drawn in the
same way from the same population, one of size 30 and one of size 300?
A. The two samples would have the same expected value
B. The larger sample is more likely to produce a large sample mean
C. The smaller sample will have a smaller 95% confidence interval for the mean
D. The smaller sample, will, on the average, produce a lower estimate of the variance of the
population
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Moderate
Learning Objective: 5
31. The accounting department reports that the balance of accounts receivable is $210,000.
You are willing to accept that balance if it is within $15,000 of the actual balance. Using a
variables sampling plan, you compute a 95% confidence interval of $208,000 to $225,000.
You would therefore
A. Not be able to determine the acceptability of the receivable balance
B. Accept the balance but with a lower level of confidence
C. Take a larger sample before totally rejecting the balance and requiring adjustments
D. Accept the $210,000 balance because the confidence interval is within the materiality
limits
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Moderate
Learning Objective: 5
9-12
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
32. 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 $2,000. The projected error of this sample was
A. $3,000
B. $4,000
C. $6,000
D. $8,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Hard
Learning Objective: 2
Learning Objective: 3
33. An auditor established a $60,000 tolerable misstatement for an asset with an account
balance of $1,000,000. The auditor selected a sample of every twentieth item from the
population of 1,000 items that represented the asset account balance and discovered
overstatements of $3,700 and understatements of $200. Under these circumstances, the
auditor most likely would conclude that
A. There is an unacceptably high risk that the actual misstatements in the population exceed
the tolerable misstatement because the total projected misstatement is more that the tolerable
misstatement
B. There is an unacceptably high risk that the tolerable misstatement exceeds the sum of
actual overstatements and understatements
C. The asset account is fairly stated because the total projected misstatement is less than the
tolerable misstatement
D. The asset account is fairly stated because the tolerable misstatement exceeds the net of
projected actual overstatements and understatements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Hard
Learning Objective: 2
Learning Objective: 3
9-13
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
34. An auditor is performing substantive procedures of pricing and extension of perpetual
inventory balances consisting of a large number of items. Past experience indicates numerous
pricing and extension errors. Which of the following statistical sampling approaches is most
appropriate?
A. Unstratified mean-per-unit
B. Probability-proportional-to-size
C. Stop or go
D. Ratio or difference estimation
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 2
Learning Objective: 5
35. An auditor has taken a large sample from an audit population that is skewed in the sense
that it contains a large number of small dollar balances. The auditor can conclude
A. The sampling distribution is not normal; therefore PPS sampling will more accurately
define the nature of the population
B. The sampling distribution is normal; therefore the confidence coefficient value can be used
to evaluate the sample results
C. The sampling distribution is not normal; thus attribute sampling is the only alternative
statistical tool that can be appropriately used
D. None of the above answers is correct
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Hard
Learning Objective: 2
Learning Objective: 5
9-14
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
Short Answer Questions
36. Summarize the concept behind monetary-use sampling (MUS). How does MUS use
attribute-sampling theory?
MUS uses attribute-sampling theory to estimate the percentage of monetary units in a
population that might be misstated and then multiplies this percentage by an estimate of the
degree to which the dollars are misstated.
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: 2
37. Describe two advantages and two disadvantages of monetary-use sampling (MUS).
Should include two advantages and disadvantages from the following:
Advantages:
When the auditor expects no misstatements, MUS sample size can be computed and usually
results in a smaller sample size than classical variables sampling.
The calculation of the sample size and the evaluation of the sample results are not based on
the variation between items in the population.
When applied using a probability-proportional-to-size sample selection procedure, MUS
automatically results in a stratified sample because sampled items are selected in proportion to
their dollar amounts. In effect, larger dollar items have a higher probability of being selected.
Disadvantages:
The selection of zero or negative balances generally requires special design consideration.
If the auditor detects items that are in error by more than 100 percent, special adjustments will
be necessary when calculating sample results.
When more than one or two misstatements are detected using a MUS approach, the sample
results calculations may overstate the allowance for sampling risk.
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 2
9-15
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
38. Matching
1. C, 2. B, 3. D, 4. A
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 2
39. You have been placed in charge of determining the sample size for an audit of accounts
receivable. Your superior would like a confidence level of 99%. How does this affect your
determination of size? What can you infer about the risk of incorrect acceptance that your
superior will be willing to accept?
A lot of work will be required to achieve a 99% confidence level. This work is reflected in a
relatively large sample size. Because confidence levels and the risk of incorrect acceptance
are complements, the superior is willing to accept a 1% risk of incorrect acceptance.
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Moderate
Learning Objective: 2
9-16
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
40. Matching
Match each factor of sample size to (1) its relationship to sample size (a or b) and (2) the
appropriate effect on the sample size if the factor increases (c or d).
1. B, D 2. A, C 3. A, C 4. A, C
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Moderate
Learning Objective: 2
41. Whenever a statistical method is used, a decision rule determines whether the population
is acceptable. The decision rule for monetary unit sampling is "Accept the conclusion that the
book value is not misstated" by a material amount if:
"Accept the conclusion that the book value is not misstated by a material amount if the upper
misstatement limit is less than or equal to the tolerable misstatement."
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Moderate
Learning Objective: 2
9-17
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
42. In no statistical sampling, describe the two methods auditors use to project sample results
to the population. How does an auditor determine which method to use?
With ratio estimation, the auditor applies the misstatement ratio observed in the sample to the
population. Ratio estimation should be used if the auditor expects the amount of misstatement
to relate closely to the size of the item. Difference estimation projects the average
misstatement of each item in the sample to all items in the population. Difference estimation
should be used if the auditor expects the misstatements to be relatively constant for all items
in the population.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Moderate
Learning Objective: 4
9-18
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
43. You are auditing accounts receivable for a small company and have found the following
results:
Use ratio estimation to project your results.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Difficulty: Hard
Learning Objective: 4
9-19
Chapter 09 - Audit Sampling: An Application to Substantive Tests ...
44. What is one advantage and one disadvantage of classical variables sampling?
Should include one advantage and disadvantage from the following:
Advantages:
When the auditor expects a large number of differences between book and audited values,
classical variables sampling will normally result in a smaller sample size than monetary-unit
sampling.
Classical variables sampling techniques are effective for both overstatements and
understatements. No special evaluation considerations are necessary if the sample data
include both types of misstatements.
The selection of zero balances generally does not require special sample design considerations
because the sampling unit will be not an individual dollar but rather an account or a
transaction or a line item.
Disadvantages:
Difference estimation does not work well with "clean" populations or populations with little
to no error, which is common in auditing. The reason is that difference estimation requires
information on differences to determine sample size and evaluate results.
In order to determine the sample size, the auditor must estimate the standard deviation of the
audited value or differences.
If few misstatements are detected in the sample data, the true variance tends to be
underestimated and the resulting projection of the misstatements to the population is likely to
not be reliable.
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 5
45. When auditing accounts payable using classical variables sampling, Sue finds evidence
indicating that the account may be materially misstated. What are Sue's options?
Sue can (1) increase the sample size, (2) perform additional substantive procedures, (3) adjust
the account or (4) issue a qualified or adverse opinion if management refuses to adjust the
account.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 5
9-20