Statistical Sampling for Substantive Testing

MULTIPLE CHOICE: 1. 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 error. d. Predict a monetary population value within a range of precision. A !"E#$ %. the a. b. c. d. 'asic precision. #ange. !tandard deviation. Interval. ( D

&he measure of variability of a statistical sample that serves as an estimate of the population variability is

A !"E#$ ).

An auditor selects a statistical sample from a large inventory of replacement parts. "hich of the following audit ob*ectives would be most appropriate if the sampling method used is probability proportional to si+e ,PP!-. a. &he auditor plans to estimate the total dollar value of the inventory when a recorded boo/ value does not e0ist. b. &he auditor plans to ma/e a statement concerning the total dollar amount of error in the population from the recorded boo/ value. c. &he auditor wishes to accept or re*ect the hypothesis that the proportion of defective parts in the population is less than 12. d. &he auditor wishes to estimate the proportion of defective parts in the population. A !"E#$ 3. '

Precision is defined as the range ,plus or minus- within which the true answer most li/ely falls. #eliability, also referred to as the confidence level, is the li/elihood that

160

161

Chapter 10 Statistical Sampling for Substantive the sample range contains the true value. 4f 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 ris/. b. &he narrower the range of precision, the smaller the sample si+e. c. An increase in control ris/, other parameters remaining unchanged, causes a narrowing of the precision range. d. 4verall audit ris/ is the complement of reliability. A !"E#$ '

Testing

1.

In an application of mean per unit sampling, the following information has been obtained$ #eported boo/ value 5677,777 Point estimate ,estimated total value181,777 Allowance for sampling ris/ ,precision9: %%,777 &olerable error 9: 31,777 &he appropriate conclusion would be that the reported boo/ value is a. Acceptable only if the ris/ of incorrect re*ection is at least twice the ris/ of incorrect acceptance. b. Acceptable. c. ot acceptable. d. Acceptable only if the ris/ of incorrect acceptance is at least twice the ris/ of incorrect re*ection. A !"E#$ '

6.

!ampling ris/ refers to the possibility that$ a. &he auditor may use a less than optimal statistical method for the circumstances, e.g. difference estimation instead of ratio estimation. b. &he auditor may fail to recogni+e 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. &he confidence level and;or precision established by the auditor are not appropriate. A !"E#$ (

<.

&he primary reason for an auditor to use statistical sampling is to

Chapter 10 Statistical Sampling for Substantive Testing a. b. c. d.

162

4btain a smaller sample than would be required by non:statistical sampling techniques. 4btain a sample more representative of the population than would be obtained by non:statistical sampling techniques. Allow the auditor to quantify, and therefore control, the ris/ of ma/ing an incorrect decision based on sample evidence. =eet requirements of !tatements on Auditing !tandards. (

A !"E#$

>. &he variability of a population, as measured by the standard deviation, is the a. E0tent to which the individual values of the items in the population are spread about the mean. b. Degree of asymmetry of a distribution. c. &endency of the means of large samples ,at least )7 items- to be normally distributed. d. =easure of the closeness of a sample estimate to a corresponding population characteristic. A !"E#$ A

8. =anagement has as/ed 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. &he audit staff decides that it needs to determine the amount currently being lost and can do so by ta/ing a sample from payments made in the last si0 months, e0amining each, and recording the amount, if any, of the discount lost. &his information can be used to pro*ect the total amount of discounts lost for the period. &his proposed plan is an e0ample of a. Attribute sampling. b. Acceptance sampling. c. ?ariables sampling. d. Discovery sampling. A !"E#$ 17. (

During an audit involving testing of accounts receivable balances, an auditor decides to specify a precision interval of 5177,777 instead of the 5%77,777 precision interval that was called for in the sampling plan contained in the

163

Chapter 10 Statistical Sampling for Substantive program. "hich of the following would be a auditor@s decision to narrow the precision

Testing audit result of interval. a. b. c. d. the

An increase in the required sample si+e. A decrease in the required sample si+e. An increase in the population standard deviation. A decrease in the population standard deviation. A

A !"E#$ 11.

&o determine the number of items to be selected in a sample for a particular substantive test of details, the auditor should consider all of the following e0cept a. &olerable error. b. E0pected error. c. Allowable ris/ of incorrect acceptance. d. (haracteristics of the population. A !"E#$ D of higher confidence levels. of higher confidence levels. changes in confidence levels. of lower confidence levels.

1%.

!ample si+e a. Increases with the use b. Decreases with the use c. #emains unchanged with d. Increases with the use A !"E#$ A

1).

In sampling for variables, which of the following must be /nown in order to estimate the appropriate sample si+e required to meet the auditor@s needs in a given situation. a. &he total amount of the population. b. &he desired standard deviation. c. &he desired confidence level. d. &he estimated rate of error in the population. A !"E#$ 13. to In a will 812. a. b. c. d. (

variables sampling application, which of the following result when the confidence level is changed from 872 !tandard error of the mean will not be affected. on:sampling error will decrease. !ample si+e will increase. Point estimate of the arithmetic mean will increase.

Chapter 10 Statistical Sampling for Substantive Testing A !"E#$ 11. (

164

An auditor wishes to estimate inventory shrin/age by weighing a sample of inventory items. Arom past e0perience, the auditor /nows that a few specific items are sub*ect to unusually large amounts of shrin/age. In using statistical sampling, the auditor@s best course of action is to a. Eliminate any of the items /nown to be sub*ect to unusually large amounts of shrin/age. b. Increase the sample si+e to lessen the effect of the items sub*ect to unusually large amounts of shrin/age. c. !tratify the inventory population so that items sub*ect to unusually large amounts of shrin/age are reviewed separately. d. (ontinue to draw new samples until a sample is drawn which includes none of the items /nown to be sub*ect to large amounts of shrin/age. A !"E#$ 16. (

In conducting a substantive test of an account balance, an auditor hypothesi+es that no material error e0ists. &he ris/ that sample results will support the hypothesis when a material error actually does e0ist is the ris/ of a. Incorrect re*ection. b. Alpha error. c. Incorrect acceptance. d. &ype I error. A !"E#$ 1<. (

of

"hich of the following best illustrates the concept of sampling ris/. a. A randomly chosen sample may not be representative of the population as a whole on the characteristic interest. b. An auditor may select audit procedures that are not appropriate to achieve the specific ob*ective. c. An auditor may fail to recogni+e errors in the documents e0amined for the chosen sample. d. &he documents related to the chosen sample may not be available for inspection. A !"E#$ A

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Chapter 10 Statistical Sampling for Substantive

Testing 1>. Bsing the following results from a variables sample, compute the achieved precision$ Population si+e C 17,777 !ample si+e C 133 !ample standard deviation C 5%3.77 (onfidence level C 872 ,D C 1.61=ean C 5>3.77 a. 51,<7% b. 5)),777 c. 5%7,777 d. 516,177 A !"E#$ 18. '

"hich of the following sampling plans would be designed to estimate a numerical measurement of a population, such as a dollar value. a. Discovery sampling. b. umerical sampling. c. !ampling for variables. d. !ampling for attributes. A !"E#$ (

%7.

An auditor is using the mean:per:unit method of variables sampling to estimate the correct total value of a group of inventory items. 'ased on the sample, the auditor estimates with precision of 9:32 and confidence of 872 that the correct total is 5>77,777. &his means that$ a. &here is a 32 chance that the actual correct total is less than 5<%7,777 or more than 5>>7,777. b. &here is a 172 chance that the actual correct total is less than 5<6>,777 or more than 5>)%,777. c. &he probability that the inventory is not significantly overstated is between 62 and 132. d. &he inventory is not li/ely to be overstated by more than 3.32 ,5)1,%77- nor understated by more than ).62 ,5%>,>77-. A !"E#$ %1. '

"hich of the following statements is correct concerning the auditor@s use of statistical sampling. a. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical

Chapter 10 Statistical Sampling for Substantive Testing

166

b. c. d. require PP!

variables sampling. An assumption of PP! sampling is that the underlying accounting population is normally distributed. A classical variables sample needs to be designed with special considerations to include negative balances in the sample. &he selection of +ero balances usually does not special sample design considerations when using sampling. A

A !"E#$ %%.

"hich of the following statements concerning alpha and beta ris/ is true. a. As alpha ris/ increases, beta ris/ decreases. b. As inherent ris/ and;or control ris/ increase, beta ris/ should also increase. c. As inherent ris/ and;or control ris/ increase, beta ris/ should decrease. d. As a Erule of thumb,E the auditor generally sets beta ris/ equal to or less than 172, inasmuch as it is the basis for the audit opinion. A !"E#$ (

%).

!tatistical samples as compared to non:statistical samples permit the auditor to a. Fuantify and control sampling ris/. b. Eliminate non:sampling errors of every type. c. 4btain smaller sample si+es in all cases. d. Bse less comple0 formulas than those required to evaluate non:statistical samples. A !"E#$ A

%3.

Probability:proportional:to:si+e ,PP!- sampling is less efficient if a. (omputeri+ed account balances are being audited. b. !tatistical inferences are to be made. c. &he audit ob*ective is oriented to understatements. d. &he account contains a large number of transactions. A !"E#$ (

%1.

A number of factors influences the sample si+e for a substantive test of details of an account balance. All

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Chapter 10 Statistical Sampling for Substantive

Testing other factors being equal, which of the following would lead to a larger sample si+e. a. Gowering of assessed level of control ris/. b. Gowering of assessed inherent ris/ through use of analytical review procedures. c. !maller e0pected frequency of errors. d. !maller measure of tolerable error. A !"E#$ %6. D

Aor variables sampling purposes, changes in certain parameters affect sample si+e positively while changes in others have a negative effect. In this regard, which of the following statements is true. a. An increase in beta ris/ reduces sample si+e. b. Population si+e affects sample si+e inversely, i.e., as population si+e increases, sample si+e decreases. c. An increase in alpha ris/ increases sample si+e. d. As materiality ,=- increases, sample si+e increases. A !"E#$ A

%<.

A population that is physically separated into two or more groups based on the sample variation being less than that for the entire population is called a a. !ystematic sample. b. Hudgment sample. c. !imple random sample. d. !tratified sample. A !"E#$ D

%>.

&he standard deviation of a sample will usually decrease with a. A decrease in sample si+e. b. &he use of stratification. c. An increase in desired precision. d. An increase in confidence level. A !"E#$ '

%8.

An auditor is primarily concerned with substantial overstatements of accounts receivable balances and e0pects few, if any, errors. In an effort to concentrate on the large dollar values, the auditor would logically employ

Chapter 10 Statistical Sampling for Substantive Testing a. b. c. d. #atio estimation. Probability proportional to si+e sampling Discovery sampling. =ean per unit sampling. '

168

A !"E#$ )7.

(onsider the following sampling plan$ An auditor too/ a sample of )7 receiving reports completed in the last 1% months. &he receiving reports were filed along with their corresponding requisitions and purchase orders by the date on which the goods were moved from the receiving department to their storage area in the warehouse. !ampling from a five:place random digit table, the first two digits were used to determine the month ,from 1 to 1%and the ne0t two digits to determine the day of the month ,from 1 to )1-. &he auditor discarded random numbers for which corresponding dates did not e0ist or on which the warehouse was closed. Aor each selected date the auditor then too/ as the sample item the second report in the file for that day. (an the auditor rely on the statistical inference of this test. a. Ies, because the plan eliminated any possible deliberate or unconscious bias in the auditor@s selection of the sample items. b. Ies, because a random number table was used to ma/e the selection. c. o, because the auditor sampled without replacement. d. o, because all items do not have an equal chance of being selected. A !"E#$ )1. D

In testing accounts receivable, an auditor sends out positive confirmation requests to 177 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. &his is an e0ample of a. &ainting. b. !ampling error. c. !tandard error. d. on:sampling error. A !"E#$ )%. the D

An auditor wishes to use stratified sampling to estimate boo/ value of a large accounts receivable file. &he

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Chapter 10 Statistical Sampling for Substantive

Testing auditor has a complete listing of the file in account number order. &he listing is several pages long and includes the account balance of each customer. !everal customers have very large account balances while most balances are small. "hich of the following would be the most appropriate means of classifying members of this population into strata. a. Account balance. b. Account number. c. Alphabetically by name. d. umerically by pages of the listing. A !"E#$ )). A

Auditors who prefer statistical to non:statistical sampling believe that the principal advantage of statistical sampling flows from its unique ability to a. Define the precision required to provide adequate satisfaction. b. Provide a mathematical measurement of ris/. c. Establish conclusive audit evidence with decreased audit effort. d. Promote a more legally defensible procedural approach. A !"E#$ '

)3. In a probability:proportional:to:si+e sample with a sampling interval of 517,777, an auditor discovered that a selected account receivable with a recorded amount of 51,777 had an audit amount of 5%,777. &he pro*ected error of this sample was a. 5),777 b. 53,777 c. 56,777 d. 5>,777 A !"E#$ )1. (

An auditor selects a preliminary sample of 177 items out of a population of 1,777 items. &he sample statistics generate an arithmetic mean of 567, a standard deviation of 56, and a standard error of the mean of 5.67. If the sample was adequate for the auditor@s purposes and the auditor@s desired precision was plus or minus 51,777, the minimum acceptable dollar value of the population would be

Chapter 10 Statistical Sampling for Substantive Testing a. b. c. d. 561,777. 567,777. 518,777. 51>,>77. (

170

A !"E#$ )6.

During the audit of inventories an e0ternal auditor specified a precision of five percent instead of the four percent contained in the preliminary audit program. "hat would be the impact of the change in precision. a. A decrease in population standard deviation. b. An increase in population standard deviation. c. A decrease in required sample si+e. d. An increase in required sample si+e. A !"E#$ )<. (

&he inventory of a subsidiary consists of 1%,8>7 items valued at 518,6%1,777. &he inventory data are not available in computer readable form, but are contained in %1< pages of printout with 67 lines per page. Each page has a page total. 'ased on the last audit, the auditor e0pects there to be a few errors of overstatement. &he most efficient sampling technique to test the reasonableness of the stated value is a. !tratified mean:per:unit estimation. b. Probability proportional to si+e sampling ,PP!c. Difference estimation. d. #atio estimation. A !"E#$ )>. '

!tatistical sampling would be appropriate to estimate the value of an auto dealer@s ),777 line:item inventory because statistical sampling is$ a. #eliable and ob*ective. b. &horough and complete. c. &horough and accurate. d. (omplete and precise. A !"E#$ A

)8. In a variables estimation application involving a boo/ value of 5117,777, with a tolerable error of specified

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Chapter 10 Statistical Sampling for Substantive

Testing precision limits of plus or minus 517,777, the auditor has calculated a point estimate of the population value to be 5387,777. At the 812 reliability level, sample results indicate an achieved precision of plus or minus 517,777. 'ased on these data, the auditor would a. (onclude that the boo/ value is acceptable at the 812 reliability level. b. #e*ect the boo/ value and e0tend control testing. c. (onclude that the boo/ value is acceptable at a level of reliability higher than 812. d. E0tend substantive testing. A !"E#$ 37. D

"hat effect does an increase in the standard deviation have on the required sample si+e of mean:per:unit estimation and probability proportional to si+e sampling. Assume no change in any of the other characteristics of the population and no change in desired precision and confidence. =ean:per:unit Estimation PP! a. b. c. d. Decrease in sample si+e o change in sample si+e Increase in sample si+e o change in sample si+e ( o change in sample si+e Decrease in sample si+e o change in sample si+e Increase in sample si+e

A !"E#$ 31.

Bse of the difference estimation sampling technique to estimate dollar amounts is inappropriate when a. &he total boo/ value is /nown and corresponds to the sum of all the individual boo/ values. b. A boo/ value for each sample item is un/nown. c. &here are some observed differences between audited values and boo/ values. d. &he audited values are nearly proportional to the boo/ value. A !"E#$ '

3%.

!elect the description which illustrates sampling ris/. a. Applying audit procedures which are inappropriate for the audit ob*ectives. b. Aailing to recogni+e errors or deviations in the documents e0amined. c. Arriving at incorrect statistical conclusions due to

Chapter 10 Statistical Sampling for Substantive Testing computational errors. (hoosing a sample which has proportionately more than the population. D

172

d. errors

A !"E#$ 3).

A ban/ auditor is interested in estimating the average account balance of its depositors based on a sample. &his substantive test is an e0ample of a. Attribute sampling. b. Discovery sampling. c. Acceptance sampling. d. ?ariables sampling. A !"E#$ D

COMPLETION: 44. 4f the two variations of classical variables sampling, often results in smaller sample si+es and is therefore more cost:effective under those circumstances. A !"E#$ 31. DIAAE#E (E E!&I=A&I4

Detection ris/, defined as the ris/ that material errors or fraud that are not prevented or detected by the client@s system of internal control, will not be discovered by the auditor, is referred to as by statisticians. A !"E#$ 'E&A #I!J

36.

#e*ecting a boo/ value that is stated fairly is referred to as ris/. A !"E#$ AGPKA

3<.

!tandard deviation is defined as the degree of variation of individual values about the population mean. &he more narrowly dispersed the values in the population, the ,larger or smaller- the standard deviation. A !"E#$ !=AGGE#

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Chapter 10 Statistical Sampling for Substantive

Testing 3>. In applying probability proportional to si+e sampling, the auditor re*ects a boo/ value as being materially overstated when upper error limit is ,greater or lessthan the tolerable error. A !"E#$ 38. L#EA&E#

Aor PP! sampling purposes, the allowance for sampling ris/ is the sum of basic precision plus the . A !"E#$ I (#E=E &AG AGG4"A (E

17.

&he incremental allowance for precision need be calculated only when errors are found in logical units that are ,larger or smallerthan the MMMMMMMMMMMMMMM . A !"E#$ !=AGGE#, !A=PGI L I &E#?AG

11.

As contrasted with classical variables sampling, probability proportional to si+e sampling has the advantage of automatically the population such that logical units equal to or greater than the MMMMMMMMMMMMM MMMMMMMMM have a 1772 chance of being included in the sample. A !"E#$ !&#A&IAII L, !A=PGI L I &E#?AG

1%.

Probability proportional to si+e sampling has its greatest applicability to situations in which the auditor suspects a few material errors of . A !"E#$ 4?E#!&A&E=E &

1).

In evaluating sampling results for mean per unit sampling purposes, achieved precision ,A@- must be equal to or MMMMMM ,greater or less- than desired precision ,A-. 4therwise, the actual beta ris/ is higher than specified in the sampling plan, and further sampling would be necessary to reduce the ris/ to an acceptable level. A !"E#$ GE!!

MATCHING:

Chapter 10 Statistical Sampling for Substantive Testing 13. =atch the following terms with their definitions$ A. '. (. D. E. A. K. I. H. J. G. =. . MMMM1. MMMM%. MMMM). MMMM3. MMMM1. Pro*ected error Achieved precision 'asic precision Desired precision Ainite correction factor #ange of acceptability !ampling ris/ !tandard deviation Bpper error limit #eliability !ampling interval Precision Gogical sampling unit &he ris/ that the auditorNs conclusions regarding a population are incorrect. A measure of population variability.

174

&he range within which the true answer most li/ely falls. &he li/elihood that the sample range contains the true value. #equired for mean per unit and difference estimation sampling applications when the preliminary sample si+e equals or e0ceeds 12 of the population si+e. &he calculated range within which the true answer most li/ely falls. &he range of possible values considered acceptable to the auditor. &he item to which a randomly selected dollar attaches. &he distance between two consecutive sample items.

MMMM6. MMMM<. MMMM>. MMMM8.

MMMM17. AuditorNs best estimate of overstatement error. !4GB&I4 $ 1. %. ). K I =

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Chapter 10 Statistical Sampling for Substantive 3. 1. 6. <. >. 9. 10. J E ' A L A

Testing

!"#$%M&%SSA': 11. An auditor wishes to randomly select a sample of customers@ accounts receivable for confirmation purposes. &he population consists of 3,777 accounts with a boo/ value of 56,777,777. &he preliminary estimate of standard deviation ,computer calculated from boo/ value- is 5%1. &he auditor considers 537,777 to be a material misstatement of accounts receivable. &he auditor has assessed inherent ris/ at 672 and control ris/ at <72, and has set alpha ris/ and overall audit ris/ at 172. a. Assuming the following D values, calculate the sample si+e$

AGPKA;% 4# 'E&A 1.772 %.77 %.17 1.77 17.77 20.0 %3.7 b.

D ?AGBE %.)) %.76 1.86 1.61 1.%8 .>1 .<1

An e0amination of the sample items produces a sample mean of 51,%77 and a standard deviation of the sample items equal to 5%%. "hat is the estimated population value. c. "hat is the achieved precision. d. "hat is the minimum audit ad*ustment based on these findings. !4GB&I4 $

Chapter 10 Statistical Sampling for Substantive Testing a. b. c. d. )1 53,>77,777 5%3,1)8 Downward ad*ustment of 51,1>3,31)8

176

16. An auditor suspects that the client@s ending merchandise inventory is materially overstated and wishes to apply probability proportional to si+e sampling to estimate the e0tent of overstatement. &he inventory consists of 17,777 line items on computer printouts with a total boo/ value of 513,777,777. &he auditor has set the ris/ of incorrect acceptance at 12, the tolerable error at 51>7,777, and the anticipated error at 5<7,777. a. Liven the following reliability and e0pansion factors at a 12 ris/ of incorrect acceptance, calculate sample si+e$ 4?E#!&A&E=E & E##4#! 7 1 % ) b. c. #EGIA'IGI&I AA(&4# ).77 3.<1 6.)7 <.<6 EOPA !I4 1.67 AA(&4#

"hat is the sampling interval. In auditing the sample, the auditor discovered the following errors$ Item A E ! 'oo/ ?alue 5%7,777 5>77,777 5%%7,777 Audited ?alue 7 5377,777 7

d. !4GB&I4 $ a. b. c. d.

(alculate the pro*ected error. Determine the allowance for sampling ris/ and the upper error limit.

61> $22,653 $642,653 Allowance for samplin ris! " $84,949 #$67,959 $ $16,990%

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Chapter 10 Statistical Sampling for Substantive &pper error limi' " $727,602 #$642,653 $ $84,949%

Testing