Question 1

Sampling is required when an audit procedure is tested on an entire group of transactions or
all items within an account balance.

Accepted Answer

A) True 
 B)False  False

Question 2

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Helen Holt was explaining to her group partner that the completeness assertion implies that transactions and events that have been recorded have occurred and pertain to the entity.
b) Keith Lake was explaining to Ben Fitz how sampling risk works for the audit team: "Sampling risk is the risk that as auditors we will arrive at a conclusion that has nothing to do with sampling issues."
c) Larry Baneiro was vehemently arguing about the benefits of using non-statistical versus statistical sampling methods for a client in the excavation business. Here is what he had to say about non-statistical sampling: "Non-statistical sampling is easier to use than statistical sampling, it requires less staff training, it has lower cost, and it allows an auditor to make a sample choice that they believe is appropriate."
d) Georgia Walters has started her sample selection of sales transactions for a gemstone conglomerate. She believes that she can improve audit efficiency by stratifying the sample.

Accepted Answer

a) Disagree. The occurrence assertion implies that transactions and events that have been recorded have occurred and pertain to the entity. The completeness objective infers that all transactions that should have been recorded, indeed have been recorded.
b) Disagree. Keith Lake was describing non-sampling risk. Sampling risk is the risk that an auditor will conclude that a material misstatement exists when it does not or a material misstatement does not exist when it does.
c) Agree. All the elements Larry brings up are generally true. Statistical sampling can have the disadvantage of the cost involved in using it. Most audit firms use a combination of statistical and non-statistical sampling as both methods provide appropriate audit evidence and allow the auditor to form a conclusion on the items being tested.
d) Agree. Stratification can be used ahead of random selection to improve audit efficiency. This means that an auditor partitions a population ahead of sampling, by identifying sub populations with similar characteristics. For example, for accounts receivable, the auditor may stratify high dollar items or balances that are overdue. After stratifying a popula?tion, items can be randomly selected within each stratum. Thus, stratification can be used to ensure the sample includes items that have the characteristics required by the auditor, such as the inclusion of material or risky items in the sample, while remaining a statistical sampling technique, when items are randomly selected.

Question 3

The most common statistical sample selection method according to the study by Hall et al (2002) is dollar-unit sampling. Explain in detail how this method operates and evaluate the advantages and disadvantages of using it.

Accepted Answer

Dollar-unit sampling is a statistical sample selection method that is commonly used in auditing and accounting. This method operates by selecting items for sampling based on their dollar value, rather than their physical quantity or number. The process involves assigning a dollar value to each item in the population, and then selecting a sample of items based on their dollar value.

The first step in dollar-unit sampling is to determine the total dollar value of the population being sampled. Then, a sampling interval is calculated by dividing the total dollar value by the desired sample size. Once the sampling interval is determined, items are selected for the sample by randomly choosing a starting point and then selecting every nth item based on the sampling interval.

One of the main advantages of dollar-unit sampling is that it allows for a more efficient and effective way of selecting a sample. By focusing on the dollar value of items, this method can help to identify high-value items that may have a greater impact on the overall results. Additionally, dollar-unit sampling can also help to reduce the risk of under- or over-auditing certain items, as it provides a systematic and structured approach to sample selection.

However, there are also some disadvantages to using dollar-unit sampling. One potential drawback is that it may not be suitable for populations with a wide range of dollar values, as it could result in a skewed sample that does not accurately represent the entire population. Additionally, the method requires a thorough understanding of the population and its dollar values, which may be time-consuming and resource-intensive.

In conclusion, dollar-unit sampling is a common statistical sample selection method that operates by selecting items based on their dollar value. While it offers advantages such as efficiency and effectiveness, it also has limitations in its applicability to certain populations and the resources required for its implementation. Therefore, it is important for auditors and researchers to carefully consider the specific characteristics of the population before deciding to use dollar-unit sampling.

Question 4

Which of the following best describes the concept of key item testing?

Accepted Answer

A)   the selection of items that are grouped together within the population of items available
B)   the proportion of items tested that did not conform to the client's prescribed control procedure
C)   focus is on selecting the largest transactions within a balance to obtain coverage of the total
D)   the selection of items that an auditor believes should be included in the sample for testing

Question 5

Joe Jones walked out of the Old Rock Bakery operation and chewed on a Cheese Danish. He had chosen random selection to test for proper authorization of purchasing transactions. He had just completed the initial audit testing of the purchasing transactions and had evaluated the results. His conclusion was that the deviation rate of 12 exceptions in a sample of 80 transactions was relatively high.
In addition, Joe was preparing to start the audit of another client, Rohr Industries, an airplane component manufacturer. He had discussed sampling methodology with his audit team and it had been determined that the Rohr Industries systems did not lend themselves easily to statistical sampling techniques. The audit team would have to employ non-statistical sampling.
Required:
a) What is the procedure that Joe Jones would follow when his initial testing showed a relatively high deviation rate for the Old Rock Bakery transactions?
b) What is non-statistical sampling?
c) Describe the non-statistical sampling methods that were open to Joe and his team for the Rohr Industries audit.
d) Which of Joe's two clients' systems would lend themselves to stratification?

Accepted Answer

The answer of Joe Jones walked out of the Old...

Question 6

Tolerable error is the minimum error an auditor is willing to accept within the population
tested.

Accepted Answer

A) True 
 B)False

Question 7

Vita Zitkauskas, the senior on the audit of Magna International, was explaining how audit strategy and audit plans have an impact on tests of controls and substantive procedures. She
Made two statements:
Which statements were true, if any?

Accepted Answer

A)   (i)  only
B)   (ii)  only
C)   both (i)  and (ii) 
D)   neither (i)  or (ii)

Question 8

Which of the following statements regarding statistical sampling is correct?

Accepted Answer

A)   It is easier to use than non-statistical sampling.
B)   It involves haphazard selection.
C)   It is generally used for low risk accounts.
D)   It involves random selection.

Question 9

Tests of controls are audit procedures designed to detect material misstatements at the
assertion level.

Accepted Answer

A) True 
 B)False

Question 10

When conducting substantive testing, which of the following is not a factor that influences the sample size?

Accepted Answer

A)   an increase in the tolerable rate of deviation
B)   an increase in the auditor's assessment of the risk of material misstatement
C)   stratification of the population when appropriate
D)   an increase in tolerable misstatement

Question 11

When testing controls, sampling risk is the risk that the auditor

Accepted Answer

A)   concludes that their client's internal controls are ineffective when they are effective.
B)   concludes that their client's internal controls are effective when they are ineffective.
C)   both a and b
D)   none of the above

Question 12

When auditors conclude that an internal control is effective, they will rely on the control to
prevent and detect a material misstatement and reduce their detailed substantive procedures.

Accepted Answer

A) True 
 B)False

Question 13

When testing controls, non-sampling risk is the risk that an auditor

Accepted Answer

A)   designs tests that are ineffective.
B)   does not select a sample.
C)   both a and b
D)   none of the above

Question 14

Olivia Peralta was training a team of new auditors and delivered some interesting rules of thumb about control risk and detection risk:
Which of the above two statements are true?

Accepted Answer

A)   (i)  only
B)   (ii)  only
C)   both (i)  and (ii) 
D)   neither (i)  nor (ii)

Question 15

What impact will there be on sample size for substantive testing when there is an increase in the tolerable misstatement?

Accepted Answer

A)   decrease
B)   negligible
C)   increase
D)   none of the above

Question 16

An account is at a higher risk of misstatement when it requires

Accepted Answer

A)   complex calculations.
B)   estimation.
C)   both a and b
D)   simple valuation techniques.

Question 17

Milushka Icaza, who was representing her CPA firm at a conference, made the following statement about assertions: When our auditors conduct substantive procedures, we search for
Evidence that recorded accounts exist and that all accounts that should have been recorded, indeed have been recorded. Which assertions was she talking about?

Accepted Answer

A)   rights and obligations
B)   accuracy, valuation, and allocation
C)   occurrence and completeness
D)   none of the above

Question 18

When testing controls, a decrease in the sample size will occur when there is

Accepted Answer

A)   an increase in the tolerable rate of deviation.
B)   a decrease in the tolerable rate of deviation.
C)   an increase in the extent to which the auditor's risk assessment takes into account relevant controls.
D)   an increase in the number of sampling units in the population.

Question 19

Which of the following is not an advantage of non-statistical sampling?

Accepted Answer

A)   It allows an auditor to select a sample that they believe is appropriate.
B)   It allows an auditor to measure sampling risk.
C)   It is lower cost than statistical sampling.
D)   It requires less staff training.

Question 20

The risk that an auditor concludes that a material misstatement does not exist when it does will result in an

Accepted Answer

A)   increased risk that the audit will not be effective.
B)   increased risk that the audit will be inefficient.
C)   increase in the auditor's assessment of the risk of material misstatement.
D)   none of the above

Exam 6: Sampling and Overview of the Risk Response Phase of the Audit

Sampling is required when an audit procedure is tested on an entire group of transactions or all items within an account balance.

The most common statistical sample selection method according to the study by Hall et al (2002) is dollar-unit sampling. Explain in detail how this method operates and evaluate the advantages and disadvantages of using it.

Which of the following best describes the concept of key item testing?

Tolerable error is the minimum error an auditor is willing to accept within the population tested.

Vita Zitkauskas, the senior on the audit of Magna International, was explaining how audit strategy and audit plans have an impact on tests of controls and substantive procedures. She Made two statements: Which statements were true, if any?

Which of the following statements regarding statistical sampling is correct?

Tests of controls are audit procedures designed to detect material misstatements at the assertion level.

When conducting substantive testing, which of the following is not a factor that influences the sample size?

When testing controls, sampling risk is the risk that the auditor

When auditors conclude that an internal control is effective, they will rely on the control to prevent and detect a material misstatement and reduce their detailed substantive procedures.

When testing controls, non-sampling risk is the risk that an auditor

Olivia Peralta was training a team of new auditors and delivered some interesting rules of thumb about control risk and detection risk: Which of the above two statements are true?

What impact will there be on sample size for substantive testing when there is an increase in the tolerable misstatement?

An account is at a higher risk of misstatement when it requires

When testing controls, a decrease in the sample size will occur when there is

Which of the following is not an advantage of non-statistical sampling?

The risk that an auditor concludes that a material misstatement does not exist when it does will result in an