Chap 009

Chapter 09 Audit Sampling: An Application to Substantive Tests of Account Balances

Chapter 09 - Audit Sampling: An Application to Substantive Tests of Account Balances

Chapter 09

Audit Sampling: An Application to Substantive Tests of Account Balances

True / False Questions

1.The purpose of audit sampling is to draw inferences about the entire population from the results of a sample.TrueFalse

2.The size of the upper limit on misstatement is largely dependent on the sample size, which is inversely related to the desired confidence level.TrueFalse

3.Monetary-unit sampling is based on attribute sampling concepts.TrueFalse

4.Confidence level is inversely related to sample size.TrueFalse

5.Expected misstatement is directly related to sample size.TrueFalse

6.Monetary-unit sampling is commonly used by auditors to test controls.TrueFalse

7.The objective of monetary-unit sampling is to test the assertion that no material misstatements exist in an account balance or class of transactions.TrueFalse

8.Haphazard selection allows the auditor to select items judgmentally.TrueFalse

9.After a sample is drawn randomly, the allowance for sampling risk must be statistically quantified within a specified level of confidence.TrueFalse

10.Classical variables sampling uses normal distribution theory to evaluate the characteristics of a population based on sample data.TrueFalse

Multiple Choice Questions

11.The risk of incorrect acceptance and the risk of overreliance relate to theA.Preliminary estimates of materiality levels.B.Allowable risk of tolerable error.C.Efficiency of the audit.D.Effectiveness of the audit.

12.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. Such a situation illustrates the risk ofA.Incorrect rejection.B.Incorrect acceptance.C.Assessing control risk too high.D.Assessing control risk too low.

13.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.

14.Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?A.Expected amount of misstatement but not the measure of tolerable misstatement.B.Expected amount of misstatement and the measure of tolerable misstatement.C.Measure of tolerable misstatement but not the expected amount of misstatement.D.Neither the expected amount of misstatement nor the measure of tolerable misstatement.

15.In statistical or nonstatistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups ifA.Monetary-unit sampling (MUS) is used.B.The population contains both very high and very low recorded amounts.C.The auditor's estimated tolerable misstatement is extremely small.D.The standard deviation of recorded amounts is relatively small.

16.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 isA.Attribute sampling.B.Ratio-estimation sampling.C.Monetary-unit sampling.D.Mean-per-unit sampling.

17.Which of the following statements best describes an inherent limitation of the monetary-unit 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.

18.For monetary-unit sampling, the number of items tested isA.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.

19.Monetary-unit sampling should not be used ifA.The population includes several large items.B.The auditor expects overstatement errors.C.Many items in the account are expected to have errors.D.No items in the account are expected to have errors.

20.In monetary-unit sampling, population size isA.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.

21.Monetary-unit sampling is said to eliminate the need to stratify the sample becauseA.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.

22.An accounts receivable account balance is $500,000 and the auditor determines a sample size of 30 would provide adequate assurance. The auditor plans to use a monetary-unit sampling plan with systematic sample selection. The auditor notices that there are six customer accounts of at least $15,000 and would like the systematic selection technique to select all items that are at least $15,000, even if that means the sample size is slightly larger than 30. To achieve the auditor's objectives, the sampling interval should beA.6.B.20.C.16,666.D.15,000.

23.For monetary-unit sampling, a sampling interval of 400 means thatA.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.

24.Which of the following sampling methods would be used to estimate a numerical measurement of population, such as the dollar value of an account?A.Attributes sampling.B.Stop-or-go sampling.C.Classical variables sampling.D.Random-number sampling.

25.In applying classical variables sampling, an auditor attempts toA.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.

26.In a monetary-unit sample with a sampling interval of $5,000, an auditor discovers that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement for this sample would beA.$5,000.B.$4,000.C.$2,000.D.$1,000.

27.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 toA.Reliability of evidence.B.Relative risk.C.Confidence level.D.Cost benefit analysis.

28.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 itemsA.That 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.

29.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.Identify the large and unusual disbursements as individually significant and test 100 percent.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.

30.What is the primary objective of testing all individually significant items rather than sample testing?A.To increase the audit risk at which a decision will be reached from the results of the sample selected.B.To increase sample size.C.To accept no sampling risk for items greater than tolerable misstatement.D.To increase the size of the confidence bound around the projected misstatement.

31.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.

32.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.

33.In a monetary-unit sampling plan, the upper misstatement limit is $11,200 and the risk of incorrect acceptance is 5%. This means thatA.Tolerable misstatement is $11,200.B.There is a 95% chance that the actual misstatement in the account is $11,200 or more.C.There is a 95% chance that the actual misstatement in the account is $11,200.D.There is a 95% chance that the actual misstatement in the account is $11,200 or less.

34.If the upper limit on misstatements exceeds tolerable misstatement, the auditor is least likely toA.Increase sample size.B.Conduct other substantive procedures.C.Adjust the account balance.D.Increase the risk of incorrect rejection.

35.Which of the following most likely would be an advantage in using classical variables sampling rather than monetary-unit 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.

36.The assurance factor for nonstatistical sampling is based onA.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.

37.The formula for nonstatistical sampling for tests of account balances provided by the AICPAA.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.

38.The use of the ratio projection is most effective whenA.The dollar amount of the misstatement is expected to relate to the dollar amount of items tested.B.A small number of differences exist in the population.C.Estimating populations whose records consist of quantities but not book values.D.Large understatement differences exist in the population.

39.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 are expected to have the same sample mean.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 average, produce a lower estimate of the variance of the population.

40.The accounting department reports that the balance of accounts receivable is $210,000. You are willing to accept that balance if audit sampling suggests it is within $15,000 of the actual balance. Using a classical variables sampling plan, you compute a 95% confidence interval of $208,000 to $225,000. You would thereforeA.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.

41.In a monetary-unit 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 misstatement of this sample wasA.$3,000.B.$4,000.C.$6,000.D.$8,000.

42.An auditor established a $60,000 tolerable misstatement for 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 thatA.There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than 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.

43.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.Monetary-unit sampling.C.Stop or go.D.Difference projection.

44.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 concludeA.The sampling distribution is not normal; therefore MUS 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.

Short Answer Questions

45.Summarize the concept behind monetary-unit sampling (MUS). How does MUS use attribute-sampling theory?

46.Describe two advantages and two disadvantages of monetary-use sampling (MUS).

47.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 sample size? What can you infer about the level of risk of incorrect acceptance that your superior is willing to accept?

48.Match each factor of sample size to (1) its relationship to sample size (A-Direct or B-Inverse) and (2) the appropriate effect on the sample size if the factor increases (C-Increase or D-Decrease).

1. Tolerable misstatement2. Population size3. Desired confidence level4. Expected misstatement

49.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 _________________________."

50.In nonstatistical sampling, describe the two methods auditors use to project sample results to the population. How does an auditor determine which method to use?

51.You are auditing accounts receivable for a small company and have found the following results:

Use ratio projection to project your results.

52.What is one advantage and one disadvantage of classical variables sampling?

53.When auditing accounts payable using classical variables sampling, Sue finds evidence indicating that the account may be materially misstated. What are Sue's options?

Matching Questions

54.Matching

1.Mus logical unitan individual dollar____

2.MUS Sampling unitthe total of the projected misstatement plus the allowance for sampling risk____

3.MUS Upper misstatement limitthe account or transaction that contains the selected dollar____

4.MUS misstatementthe difference between monetary amounts in the client's records and amounts supported by audit evidence____

Chapter 09 Audit Sampling: An Application to Substantive Tests of Account Balances Answer Key

True / False Questions

1.The purpose of audit sampling is to draw inferences about the entire population from the results of a sample.TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Topic: Sampling for Substantive Tests of Details of Account Balances2.The size of the upper limit on misstatement is largely dependent on the sample size, which is inversely related to the desired confidence level.FALSE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Topic: Sampling for Substantive Tests of Details of Account Balances3.Monetary-unit sampling is based on attribute sampling concepts.TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Topic: Sampling for Substantive Tests of Details of Account Balances4.Confidence level is inversely related to sample size.FALSE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Topic: Sampling for Substantive Tests of Details of Account Balances5.Expected misstatement is directly related to sample size.TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Topic: Sampling for Substantive Tests of Details of Account Balances6.Monetary-unit sampling is commonly used by auditors to test controls.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling7.The objective of monetary-unit sampling is to test the assertion that no material misstatements exist in an account balance or class of transactions.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling8.Haphazard selection allows the auditor to select items judgmentally.FALSE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-04 Learn to apply nonstatistical sampling techniques.Topic: Nonstatistical Sampling for Tests of Account Balances9.After a sample is drawn randomly, the allowance for sampling risk must be statistically quantified within a specified level of confidence.FALSE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 2 MediumLearning Objective: 09-04 Learn to apply nonstatistical sampling techniques.Topic: Nonstatistical Sampling for Tests of Account Balances10.Classical variables sampling uses normal distribution theory to evaluate the characteristics of a population based on sample data.TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables Sampling

Multiple Choice Questions

11.The risk of incorrect acceptance and the risk of overreliance relate to theA.Preliminary estimates of materiality levels.B.Allowable risk of tolerable error.C.Efficiency of the audit.D.Effectiveness of the audit.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Learning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit SamplingTopic: Sampling for Substantive Tests of Details of Account Balances12.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. Such a situation illustrates the risk ofA.Incorrect rejection.B.Incorrect acceptance.C.Assessing control risk too high.D.Assessing control risk too low.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Learning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit SamplingTopic: Sampling for Substantive Tests of Details of Account Balances13.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: AnalyzeDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Learning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit SamplingTopic: Sampling for Substantive Tests of Details of Account Balances14.Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?A.Expected amount of misstatement but not the measure of tolerable misstatement.B.Expected amount of misstatement and the measure of tolerable misstatement.C.Measure of tolerable misstatement but not the expected amount of misstatement.D.Neither the expected amount of misstatement nor the measure of tolerable misstatement.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Learning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit SamplingTopic: Sampling for Substantive Tests of Details of Account Balances15.In statistical or nonstatistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups ifA.Monetary-unit sampling (MUS) is used.B.The population contains both very high and very low recorded amounts.C.The auditor's estimated tolerable misstatement is extremely small.D.The standard deviation of recorded amounts is relatively small.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Learning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit SamplingTopic: Sampling for Substantive Tests of Details of Account Balances16.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 isA.Attribute sampling.B.Ratio-estimation sampling.C.Monetary-unit sampling.D.Mean-per-unit sampling.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling17.Which of the following statements best describes an inherent limitation of the monetary-unit 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: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling18.For monetary-unit sampling, the number of items tested isA.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling19.Monetary-unit sampling should not be used ifA.The population includes several large items.B.The auditor expects overstatement errors.C.Many items in the account are expected to have errors.D.No items in the account are expected to have errors.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling20.In monetary-unit sampling, population size isA.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling21.Monetary-unit sampling is said to eliminate the need to stratify the sample becauseA.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling22.An accounts receivable account balance is $500,000 and the auditor determines a sample size of 30 would provide adequate assurance. The auditor plans to use a monetary-unit sampling plan with systematic sample selection. The auditor notices that there are six customer accounts of at least $15,000 and would like the systematic selection technique to select all items that are at least $15,000, even if that means the sample size is slightly larger than 30. To achieve the auditor's objectives, the sampling interval should beA.6.B.20.C.16,666.D.15,000.

Typically the threshold would be $16,666 ($500,000/30), but in order to guarantee the selection of all items greater than $15,000, the sampling interval needs to be no greater than $15,000. While a sampling interval of $6 or $20 would also guarantee that all items greater than $15,000 are selected, such small intervals would be inefficient and result in a sample size much greater than 30.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-03 Work through an extended example of monetary-unit sampling.Topic: An Extended Example: MUSTopic: Monetary-Unit Sampling23.For monetary-unit sampling, a sampling interval of 400 means thatA.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-03 Work through an extended example of monetary-unit sampling.Topic: An Extended Example: MUSTopic: Monetary-Unit Sampling24.Which of the following sampling methods would be used to estimate a numerical measurement of population, such as the dollar value of an account?A.Attributes sampling.B.Stop-or-go sampling.C.Classical variables sampling.D.Random-number sampling.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables Sampling25.In applying classical variables sampling, an auditor attempts toA.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables Sampling26.In a monetary-unit sample with a sampling interval of $5,000, an auditor discovers that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected misstatement for this sample would beA.$5,000.B.$4,000.C.$2,000.D.$1,000.

Since the item sampled is greater than the sampling interval, the known error of $2,000 is equal to the projected error.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 2 MediumLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Learning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit SamplingTopic: Sampling for Substantive Tests of Details of Account Balances27.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 toA.Reliability of evidence.B.Relative risk.C.Confidence level.D.Cost benefit analysis.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 09-01 Understand the similarities and differences between audit sampling for tests of controls and substantive tests of details of account balances.Learning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit SamplingTopic: Sampling for Substantive Tests of Details of Account Balances28.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 itemsA.That 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: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling29.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.Identify the large and unusual disbursements as individually significant and test 100 percent.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling30.What is the primary objective of testing all individually significant items rather than sample testing?A.To increase the audit risk at which a decision will be reached from the results of the sample selected.B.To increase sample size.C.To accept no sampling risk for items greater than tolerable misstatement.D.To increase the size of the confidence bound around the projected misstatement.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling31.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling32.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling33.In a monetary-unit sampling plan, the upper misstatement limit is $11,200 and the risk of incorrect acceptance is 5%. This means thatA.Tolerable misstatement is $11,200.B.There is a 95% chance that the actual misstatement in the account is $11,200 or more.C.There is a 95% chance that the actual misstatement in the account is $11,200.D.There is a 95% chance that the actual misstatement in the account is $11,200 or less.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-03 Work through an extended example of monetary-unit sampling.Topic: An Extended Example: MUSTopic: Monetary-Unit Sampling34.If the upper limit on misstatements exceeds tolerable misstatement, the auditor is least likely toA.Increase sample size.B.Conduct other substantive procedures.C.Adjust the account balance.D.Increase the risk of incorrect rejection.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-03 Work through an extended example of monetary-unit sampling.Topic: An Extended Example: MUSTopic: Monetary-Unit Sampling35.Which of the following most likely would be an advantage in using classical variables sampling rather than monetary-unit 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: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables SamplingTopic: Monetary-Unit Sampling36.The assurance factor for nonstatistical sampling is based onA.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 2 MediumLearning Objective: 09-04 Learn to apply nonstatistical sampling techniques.Topic: Nonstatistical Sampling for Tests of Account Balances37.The formula for nonstatistical sampling for tests of account balances provided by the AICPAA.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 09-04 Learn to apply nonstatistical sampling techniques.Topic: Nonstatistical Sampling for Tests of Account Balances38.The use of the ratio projection is most effective whenA.The dollar amount of the misstatement is expected to relate to the dollar amount of items tested.B.A small number of differences exist in the population.C.Estimating populations whose records consist of quantities but not book values.D.Large understatement differences exist in the population.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 09-04 Learn to apply nonstatistical sampling techniques.Learning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables SamplingTopic: Nonstatistical Sampling for Tests of Account Balances39.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 are expected to have the same sample mean.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 average, produce a lower estimate of the variance of the population.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: EvaluateDifficulty: 2 MediumLearning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables Sampling40.The accounting department reports that the balance of accounts receivable is $210,000. You are willing to accept that balance if audit sampling suggests it is within $15,000 of the actual balance. Using a classical variables sampling plan, you compute a 95% confidence interval of $208,000 to $225,000. You would thereforeA.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.

The upper bound of the confidence interval is not greater than $15,000 above the recorded value of the account receivable balance.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables Sampling41.In a monetary-unit 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 misstatement of this sample wasA.$3,000.B.$4,000.C.$6,000.D.$8,000.

The misstatement amount is 60% with a taint of .60 of the book value of the selected item. The taint is applied to the sampling interval to determine the projected misstatement for the account. The projected misstatement would be $6,000 ($10,000 x .60).

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 3 HardLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-03 Work through an extended example of monetary-unit sampling.Topic: An Extended Example: MUSTopic: Monetary-Unit Sampling42.An auditor established a $60,000 tolerable misstatement for 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 thatA.There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than 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.

Net overstatement is $3,500. Using difference projection, the mean misstatement per sampling unit is $70 ($3,500/50) and the projected misstatement is $70,000 ($70 x 1,000). The projected misstatement is larger than the tolerable (even before considering sampling risk).

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 3 HardLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-03 Work through an extended example of monetary-unit sampling.Topic: An Extended Example: MUSTopic: Monetary-Unit Sampling43.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.Monetary-unit sampling.C.Stop or go.D.Difference projection.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 3 HardLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables SamplingTopic: Monetary-Unit Sampling44.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 concludeA.The sampling distribution is not normal; therefore MUS 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: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 3 HardLearning Objective: 09-02 Learn to apply monetary-unit sampling.Learning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables SamplingTopic: Monetary-Unit Sampling

Short Answer Questions

45.Summarize the concept behind monetary-unit 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: CommunicationAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling46.Describe two advantages and two disadvantages of monetary-use sampling (MUS).

Should include two advantages and disadvantages from the following:

Advantages:

1. When the auditor expects no misstatements, MUS sample size can be computed and usually results in a smaller sample size than classical variables sampling.2. The calculation of the sample size and the evaluation of the sample results are not based on the variation between items in the population.3. 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:

1. The selection of zero or negative balances generally requires special design consideration.2. If the auditor detects items that are in error by more than 100 percent, special adjustments will be necessary when calculating sample results.3. 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: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling47.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 sample size? What can you infer about the level of risk of incorrect acceptance that your superior is 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: CommunicationAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling48.Match each factor of sample size to (1) its relationship to sample size (A-Direct or B-Inverse) and (2) the appropriate effect on the sample size if the factor increases (C-Increase or D-Decrease).

1. Tolerable misstatement2. Population size3. Desired confidence level4. Expected misstatement

1. B, D 2. A, C 3. A, C 4. A, C

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: AnalyzeDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling49.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: CommunicationAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: RememberDifficulty: 2 MediumLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling50.In nonstatistical 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 projection, the auditor applies the misstatement ratio observed in the sample to the population. Ratio projection should be used if the auditor expects the amount of misstatement to relate closely to the size of the item.Difference projection projects the average misstatement of each item in the sample to all items in the population. Difference projection should be used if the auditor expects the misstatements to be relatively constant for all items in the population.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 2 MediumLearning Objective: 09-04 Learn to apply nonstatistical sampling techniques.Topic: Nonstatistical Sampling for Tests of Account Balances51.You are auditing accounts receivable for a small company and have found the following results:

Use ratio projection to project your results.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: 3 HardLearning Objective: 09-04 Learn to apply nonstatistical sampling techniques.Topic: Nonstatistical Sampling for Tests of Account Balances52.What is one advantage and one disadvantage of classical variables sampling?

Should include one advantage and disadvantage from the following:

Advantages:

1. 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.2. 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.3. 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, a transaction, or a line item.

Disadvantages:

1. 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.2. In order to determine the sample size, the auditor must estimate the standard deviation of the audited value or differences.3. 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: CommunicationAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables Sampling53.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: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: ApplyDifficulty: 1 EasyLearning Objective: 09-05 Learn to apply classical variables sampling.Topic: Classical Variables Sampling

Matching Questions

54.Matching

1.Mus logical unitan individual dollar2

2.MUS Sampling unitthe total of the projected misstatement plus the allowance for sampling risk3

3.MUS Upper misstatement limitthe account or transaction that contains the selected dollar1

4.MUS misstatementthe difference between monetary amounts in the client's records and amounts supported by audit evidence4

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Decision MakingBlooms: RememberDifficulty: 1 EasyLearning Objective: 09-02 Learn to apply monetary-unit sampling.Topic: Monetary-Unit Sampling9-1