Deck 19: Variables Sampling

Question 1

The risk of incorrect rejection typically results in an efficiency loss for the auditor.

Answer 1

True

Question 2

In a monetary unit sampling (MUS)application,the auditor has a higher level of concern with the risk of incorrect acceptance than the risk of incorrect rejection.

Answer 2

True

Question 3

A significant advantage of monetary unit sampling (MUS)is that it typically results in relatively small sample sizes.

Answer 3

True

Question 4

Nonstatistical sampling methods are not permitted under generally accepted auditing standards.

Question 5

If the auditor's estimate of the recorded amount of the account balance falls within the precision interval,the auditor will decide to accept the account balance as fairly recorded.

Question 6

Stratifying the sample allows the auditor to reduce the overall sample size required in a classical variables sampling application.

Question 7

Monetary unit samples are selected using a form of systematic random selection.

Question 8

If the upper limit on misstatement is less than or equal to the tolerable misstatement,the auditor would conclude that the account balance or class of transactions is fairly recorded.

Question 9

One logical unit can account for more than one sample selection in a monetary unit sampling (MUS)application.

Question 10

Both the expected error and tolerable misstatement have direct relationships with sample size.

Question 11

The standard deviation has an inverse relationship with sample size in a classical variables sampling application.

Question 12

The level of tolerable misstatement assessed by the auditor is based on the recorded balance of the account balance or class of transactions as well as the relationship of the account balance to important financial statement subtotals.

Question 13

In a classical variables sampling application,the precision interval has a (1 minus the risk of incorrect acceptance)probability of including the true population value.

Question 14

The tainting percentage is determined by dividing the recorded amount of the sample item by the sampling interval.

Question 15

If the upper limit on misstatement exceeds the tolerable misstatement,the auditor could not initially conclude that the account balance is fairly recorded.

Question 16

Variables sampling is used primarily when the auditor uses analytical procedures.

Question 17

The projected misstatement assumes that the sampling interval contains a slightly higher percentage of misstatement than the sample item.

Question 18

Classical variables sampling methods are unique in that they define the population as a number of dollars in an account balance or class of transactions.

Question 19

In a first-year engagement,auditors cannot estimate the expected error because they have no prior historical relationship with the client.

Question 20

The basic allowance for sampling risk should only be calculated if the auditor identifies a misstatement.

Question 21

How does the auditor typically determine the appropriate level of the risk of incorrect rejection when using classical variables sampling?

A) Based on prior assessments of audit risk, risk of material misstatement, and analytical procedures risk.
B) Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals.
C) Based on the findings in prior audits or based on a small sample taken during the current year.
D) Based on the anticipated cost of conducting additional substantive procedures.

Question 22

Which of the following courses of action would an auditor who is aware of several unusually large cash disbursements most likely follow in planning a sample of cash disbursements?

A) Set the tolerable misstatement 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.

Question 23

An auditor may decide to increase the risk of incorrect rejection when

A) Increased reliability from the sample is desired.
B) Many differences are expected.
C) Initial sample results do not support the planned level of control risk.
D) The cost and effort of selecting additional items is low.

Question 24

When the _______________________ exceeds the ______________________,the audit team risks incorrect acceptance.

A) upper limit on misstatement, tolerable misstatement
B) tolerable misstatement, expected error
C) tolerable misstatement, upper limit
D) upper limit, expected error

Question 25

The sampling method used to examine a population when the auditor wants to estimate a continuous amount (or value)of the population is

A) Attributes sampling.
B) Balance sampling.
C) Discovery sampling.
D) Variables sampling.

Question 26

Which of the following would not result in a lower level of the risk of incorrect acceptance?

A) An increase in the acceptable level of audit risk from 5% to 10%.
B) The inability of the auditor to rely on the internal control as planned.
C) An increase in the susceptibility of the account balance to misstatement.
D) A reduction in the utilization of analytical procedures in the audit examination.

Question 27

When performing substantive procedures,auditors run the sampling risk(s)of

A) Assessing control risk too high or too low.
B) Incorrect acceptance and incorrect rejection.
C) Assessing control risk too low only.
D) Incorrect acceptance only.

Question 28

Which of the following is not true with respect to the risk of incorrect acceptance?

A) This risk provides the auditor an efficiency loss.
B) This risk results in the auditor's making an incorrect conclusion about the client's account balance or class of transactions.
C) This risk occurs when the sample results suggest that the account balance is fairly stated.
D) This risk is controlled by the auditor in determining sample size under monetary unit sampling (MUS).

Question 29

Why is the auditor more concerned with controlling the exposure to the risk of incorrect acceptance than with the risk of incorrect rejection?

A) Only the risk of incorrect acceptance results in an incorrect decision by the auditor.
B) The risk of incorrect rejection is not related to the auditor's substantive procedures.
C) The risk of incorrect rejection can be controlled by performing substantive procedures during the interim period.
D) The risk of incorrect acceptance may ultimately result in the auditor's incorrectly issuing an unqualified opinion on the client's financial statements.

Question 30

Incorrect rejection occurs when the auditor concludes that the account balance is _______________________ when in fact it is ______________________.

A) material, immaterial
B) immaterial, material
C) fairly stated, misstated
D) misstated, fairly stated

Question 31

The auditor's sample would indicate that the client's account balance is fairly stated when the _______________________ is less than the ______________________.

A) upper limit on misstatement, tolerable misstatement.
B) actual misstatement, tolerable misstatement.
C) tolerable misstatement, upper limit on misstatement.
D) tolerable misstatement, actual misstatement.

Question 32

Which of the following would not be estimated using variables sampling?

A) The balance in the client's accounts receivable.
B) The extent to which an internal control procedure is not functioning as intended.
C) The amount of misstatement in a client's inventory.
D) All of the above would be estimated using variables sampling.

Question 33

Which of the following is not true with respect to the risk of incorrect rejection?

A) Incorrect rejection occurs when the auditor concludes that the account balance is not fairly stated.
B) The risk of incorrect rejection has an inverse relationship with sample size.
C) The risk of incorrect rejection exposes the auditor to an efficiency loss.
D) Incorrect rejection occurs when the true (but unknown) account balance is materially misstated.

Question 34

The total amount of actual monetary misstatement found in a sample is referred to as the

A) Projected misstatement.
B) Tolerable misstatement.
C) Actual misstatement.
D) Incremental allowance for sampling risk.

Question 35

The risk of incorrect acceptance relates to the

A) Effectiveness of the audit.
B) Efficiency of the audit.
C) Preliminary estimate of materiality.
D) Allowable risk of tolerable misstatement.

Question 36

How does monetary unit sampling (MUS)ensure that larger dollar components are selected for examination?

A) It requires the auditor to identify all items having a balance higher than performance materiality prior to beginning the sample selection process.
B) It requires the auditor to stratify the sample into larger and smaller dollar components prior to beginning the sample selection process.
C) It defines the sampling unit as an individual dollar within an account balance or class of transactions.
D) It selects components having large balances in the prior audit.

Question 37

The amount at which an item would be recorded assuming no mistakes in judgment or incorrect applications of generally accepted accounting principles were made is the

A) Audited value.
B) Expected error.
C) Recorded value.
D) Tolerable misstatement.

Question 38

Which of the following is not an advantage associated with monetary unit sampling (MUS)?

A) Its methods typically include transactions or components reflecting relatively large dollar amounts.
B) Its methods are more effective in identifying overstatement errors.
C) Its methods provide a conservative (higher) estimate of misstatement in the account balance or class of transactions.
D) Its methods typically result in relatively small sample sizes.

Question 39

Which of the following is true with respect to the risk of incorrect acceptance?

A) The risk of incorrect acceptance is determined in the planning stages of the audit prior to the study of internal control.
B) The risk of incorrect acceptance has an inverse relationship with sample size.
C) The risk of incorrect acceptance exposes the auditor to an efficiency loss.
D) The risk of incorrect acceptance may occur when the true (but unknown) account balance is fairly stated.

Question 40

Which component of the expanded audit risk model is most closely associated with the risk of incorrect acceptance?

A) Analytical procedures risk.
B) Risk of material misstatement.
C) Nonsampling risk.
D) Test of details risk.

Question 41

What is the auditor's normal course of action if a "logical unit" is selected twice in MUS sampling?

A) The auditor should count the logical unit as a single selection and proceed as normal.
B) The auditor should count the logical unit as two selections and proceed as normal.
C) The auditor should not include the logical unit as a selection because the dollar amount of this unit is excessively large.
D) The auditor should replicate the sample using an alternative random start.

Question 42

Which of the following is not considered in establishing the sample size in a monetary unit sampling (MUS)application?

A) Expected error.
B) Population size.
C) Risk of incorrect acceptance.
D) All of the above are considered.

Question 43

Which of the following factors is most likely established based on the results of prior audit examinations?

A) Expected error.
B) Population size.
C) Risk of incorrect acceptance.
D) Tolerable misstatement.

Question 44

Bama's accounts receivable were recorded at $600,000.Assume that the auditor determined a sample size of 20 customer accounts and prepared confirmations to those customers.One misstatement was determined; an account recorded at $10,000 was confirmed to have a balance of $5,000. What is the projected misstatement?

A) $5,000.
B) $10,000.
C) $15,000.
D) $30,000.

Question 45

Under MUS sampling,the sampling interval is determined by dividing the _______________________ by the ______________________.

A) sample size, population size
B) population size, sample size
C) tolerable misstatement, population size
D) population size, tolerable misstatement

Question 46

A number of factors influence the sample size for a variables sampling application.All other factors held constant,which of the following would lead to a larger sample size?

A) A lower assessed level of risk of material misstatement.
B) Increased use of analytical procedures to obtain evidence about particular assertions.
C) Lower frequency and magnitude of misstatements.
D) Lower levels of tolerable misstatement.

Question 47

Bama's accounts receivable were recorded at $600,000.Assume that the auditor determined a sample size of 20 customer accounts and prepared confirmations to those customers.One misstatement was determined; an account recorded at $10,000 was confirmed to have a balance of $5,000. Using an incremental reliability factor of 1.58 (corresponding to the risk of incorrect acceptance of 5 percent),what is the incremental allowance for sampling risk?

A) $5,000.
B) $7,900.
C) $8,700.
D) $23,700.

Question 48

Which of the following expresses the relationship between changes in the factors and changes in sample size in variables sampling?

A) Tolerable misstatement, direct; expected error, inverse; risk of incorrect rejection, direct.
B) Tolerable misstatement, inverse; expected error, direct; risk of incorrect rejection, inverse.
C) Tolerable misstatement, inverse; expected error, inverse; risk of incorrect rejection, inverse.
D) Tolerable misstatement, inverse; expected error, inverse; risk of incorrect rejection, direct.

Question 49

Which of the following factors has a direct relationship with sample size in a variables sampling application?

A) Tolerable misstatement, yes; expected error, yes.
B) Tolerable misstatement, no; expected error, yes.
C) Tolerable misstatement, yes; expected error, no.
D) Tolerable misstatement, no; expected error, no.

Question 50

How does the auditor establish the level of tolerable misstatement in a variables sampling application?

A) Based on prior assessments of audit risk, risk of material misstatement, and analytical procedures risk.
B) Based on the recorded amount of the account balance as well as the relationship of the account balance with important financial statement subtotals.
C) Based on the findings in prior audits or based on a small sample taken during the current year.
D) Based on the anticipated cost of conducting additional substantive procedures.

Question 51

Which of the following factors that affect sample size can be determined by considering the recorded account balance of the account or class of transactions as well as the relationship between the recorded account balance or class of transactions with important financial statement subtotals?

A) Expected error.
B) Population size.
C) Risk of incorrect acceptance.
D) Tolerable misstatement.

Question 52

Which of the following is found by dividing the amount of misstatement noted in a logical unit by the recorded amount of that logical unit?

A) Sample size.
B) Sampling interval.
C) Projected misstatement.
D) Tainting percentage.

Question 53

In a classical variables sampling application,the sample size will be smaller when the

A) Risk of incorrect acceptance is lower.
B) Risk of incorrect rejection is lower.
C) Tolerable misstatement is lower.
D) Population variability is lower.

Question 54

Which of the following components of the upper limit on misstatement is determined by multiplying the sampling interval by the reliability factor for the acceptable risk of incorrect acceptance?

A) Basic allowance for sampling risk.
B) Incremental allowance for sampling risk.
C) Projected misstatement.
D) Sampling interval.

Question 55

Which of the following set of conditions would provide the auditor the smallest sample size under monetary unit sampling (MUS)(RIA = risk of incorrect acceptance,TM = tolerable misstatement,PS = population size)?

A) RIA = 5%, TM = $15,000, PS = $200,000.
B) RIA = 5%, TM = $10,000, PS = $200,000.
C) RIA = 5%, TM = $10,000, PS = $100,000.
D) RIA = 5%, TM = $15,000, PS = $300,000.

Question 56

Which of the following components of the upper limit on misstatement will exist in all MUS sampling applications,including those for which no misstatements are found?

A) Basic allowance for sampling risk.
B) Computed allowance for sampling risk.
C) Incremental allowance for sampling risk.
D) Projected misstatement.

Question 57

Bama's accounts receivable were recorded at $600,000.Assume that the auditor determined a sample size of 20 customer accounts and prepared confirmations to those customers.One misstatement was determined; an account recorded at $10,000 was confirmed to have a balance of $5,000. What is the appropriate sampling interval?

A) $60.
B) $250.
C) $500.
D) $30,000.

Question 58

K.Brown,CPA,was using monetary unit sampling (MUS)to audit an inventory of $3,000,000 composed of 6,000 items.A sample size of 500 was determined and a tolerable misstatement of $20,000 was established.The sampling interval would be

A) $500.
B) $5,000.
C) $6,000.
D) $20,000.

Question 59

The amount by which a projected misstatement in an account balance or class of transactions differs from an actual misstatement as a result of the sample not being representative of the population would typically arise from

A) A misunderstanding of accounting principles.
B) Sampling risk.
C) Management override of an internal control policy or procedure.
D) Risk of incorrect acceptance.

Question 60

All other factors being equal,as the risk of incorrect acceptance and tolerable misstatement increase,the sample size will

A) Not be affected.
B) Increase.
C) Decrease.
D) Cannot determine from the information given.

Question 61

Which of the following types of variables sampling plans has a tendency to select higher dollar items for examination?

A) Difference estimation.
B) Mean-per-unit estimation.
C) Monetary unit sampling.
D) Ratio estimation.

Question 62

Variables sampling methods can be used to estimate

A) Option A
B) Option B
C) Option C
D) Option D

Question 63

Which of the following major stages of the audit is most closely related to variables sampling?

A) Determining preliminary levels of performance materiality.
B) Performing tests of controls procedures.
C) Performing substantive procedures.
D) Searching for the possible occurrence of subsequent events.

Question 64

When determining sample size under monetary unit sampling,an audit team does not need to make a judgment or estimate of

A) Audit risk.
B) Tolerable misstatement.
C) Expected misstatement.
D) Standard deviation of error.

Question 65

A.Jeter,CPA,performed a nonstatistical sampling plan to examine the inventory balances of Big Apple Company and audited 200 items from a sample and found an audited value of $36,000.The sample had a recorded value of $40,000.If the entire inventory contained 3,000 items and the total recorded value of the inventory was $500,000,the estimated account balance using nonstatistical estimation and projecting the error based on number of items examined was

A) $393,600.
B) $474,500.
C) $450,000.
D) $540,000.

Question 66

The process of subdividing a population into homogeneous subgroups is known as

A) Classification.
B) Identification.
C) Sampling.
D) Stratification.

Question 67

In a classical variables sampling application,if the _____________________ exceeds the maximum difference between the recorded balance and any point within the precision interval,the auditor would decide to _____________________ the account balance as fairly stated.

A) sample estimate, accept.
B) sample estimate, reject.
C) tolerable misstatement, accept.
D) tolerable misstatement, reject.

Question 68

G.Summitt,CPA,performed a nonstatistical sampling plan to examine the inventory balances of Hero,Inc.Which of the following methods of sample selection are available to Summitt?

A) Random and systematic only.
B) Block and haphazard only.
C) Any method Summitt believes will result in a representative sample.
D) Any method where the results can be probabilistically estimated.

Question 69

K.Samantha,CPA,used stratified random selection in the statistical sampling plan.Which of the following is the most likely reason this approach was used?

A) It eliminates the need for random selection.
B) The population is relatively homogenous in terms of the dollar amount of components or transactions.
C) It reduces the expected sample size.
D) It eliminates the need for calculating the projected misstatement in the account being examined.

Question 70

When the audit risk is 0.015,inherent risk is 0.50,control risk is 0.30 ,and analytical procedures risk is 0.50,the risk of incorrect acceptance is

A) 0.02.
B) 0.20.
C) 0.50.
D) 2.00.

Question 71

What is one of the primary benefits of stratifying a population?

A) It allows different types of audit procedures to be performed on large and small transactions or components.
B) It allows the auditor to have a higher likelihood of reaching a favorable conclusion with respect to the client's financial statements.
C) It allows the auditor to reduce the necessary sample size.
D) It reduces the auditor's exposure to nonsampling risk.

Question 72

In which of the following situations would the auditor be more likely to use monetary unit sampling (MUS)as opposed to classical variables sampling?

A) Larger expected error, yes; concern with overstatements, yes.
B) Larger expected error, yes; concern with overstatements, no.
C) Larger expected error, no; concern with overstatements, yes.
D) Larger expected error, no; concern with overstatements, no.

Question 73

N.Green,CPA,performed a mean per unit sampling plan to examine the inventory balances of ABC Company.Green audited 120 items from a sample and found an audited value of $24,600.The sample had a recorded value of $30,000.If the entire inventory contained 2,400 items and the total recorded value of the inventory was $480,000,the estimated account balance using mean-per-unit estimation is

A) $393,600.
B) $474,500.
C) $480,000.
D) $492,000.

Question 74

Which of the following is considered in determining the sample size in a classical variables sampling application but not in a monetary unit sampling (MUS)application?

A) Standard deviation, yes; risk of incorrect acceptance, yes.
B) Standard deviation, yes; risk of incorrect acceptance, no.
C) Standard deviation, no; risk of incorrect acceptance, yes.
D) Standard deviation, no; risk of incorrect acceptance, no.

Question 75

If a customer's account was recorded at $45,000,the audited value was $30,000,and the sampling interval was $30,000,the projected misstatement would be

A) $10,000.
B) $15,000.
C) $20,000.
D) $30,000.

Question 76

The unique feature of monetary unit sampling is that

A) Sampling units are not chosen at random.
B) A dollar unit selected in a sample is not replaced before the sample selection is completed.
C) Auditors need not worry about the risk of incorrect acceptance decision.
D) The population is defined as the number of dollar units in an account balance or class of transactions.

Question 77

D.Pujols,CPA,performed a nonstatistical sampling plan to examine the inventory balances of Wieserbud Brewing,Inc.Pujols audited 120 items from a sample and found an audited value of $24,600.The sample had a recorded value of $30,000.If the entire inventory contained 2,400 items and the total recorded value of the inventory was $480,000,the estimated account balance using nonstatistical methods is

A) $393,600.
B) $474,500.
C) $480,000.
D) $500,000.

Question 78

When making a decision about the dollar amount in an account balance based on a sample,the audit team considers the risk of incorrect acceptance more serious than the risk of incorrect rejection because

A) The incorrect rejection decision impairs the efficiency of the audit.
B) The audit team will do additional work and discover the misstatement of the incorrect decision.
C) The incorrect acceptance decision impairs the effectiveness of the audit.
D) Sufficient appropriate audit evidence will not have been obtained.

Question 79

Which of the following sampling methods uses normal distribution theory and the central limit theorem to provide an estimate range of the account balance or class of transactions or the misstatement in the account balance or class of transactions?

A) Attributes.
B) Classical variables.
C) Nonstatistical.
D) Monetary unit sampling (MUS).

Question 80

V.Solo,CPA,performed a nonstatistical sampling plan to examine the inventory balances of Hope,Inc.In selecting the sample of 70 items,Solo used an expected misstatement of $40,000 and a tolerable misstatement of $65,000.The account balance consisted of 1,050 items totaling $1,200,000.The sample's recorded value was $80,000,and the audited value was $76,000.What conclusion did Solo draw regarding the account balance?

A) To accept it because the estimated misstatement is less than the tolerable misstatement.
B) To reject it because the estimated misstatement is more than the expected misstatement.
C) To accept because the estimated misstatement is less than the expected misstatement.
D) To reject because the estimated misstatement is more than the tolerable misstatement.