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Ch. 17 Audit
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1) Both sampling and nonsampling risks are associated with:
A)
Tests of controls. Substantive tests of transactions.
Yes Yes
B)
Tests of controls. Substantive tests of transactions.
No No
C)
Tests of controls. Substantive tests of transactions.
Yes No
D)
Tests of controls. Substantive tests of transactions.
No Yes
A
2) Tests for rates of occurrence are appropriately used in all but which of the following situations?
A)
Testing of internal
controls Substantive testing of transactions Substantive testing of
details of balances
Yes Yes Yes
B)
Testing of internal
controls Substantive testing of transactions Substantive testing of
details of balances
No Yes Yes
C)
Testing of internal
controls Substantive testing of transactions Substantive testing of
details of balances
Yes Yes No
D)
Testing of internal
controls Substantive testing of transactions Substantive testing of
details of balances
No No Yes
C
3) Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns?
A) Controls over cutoff
B) Controls that prevent or detect embezzlements
C) Controls over sales discounts
D) Controls related to the allowance for uncollectible accounts
C
3) The most important difference among tests of controls, substantive tests of transactions, and tests of details of balances lies in what the auditor wants to measure. Explain what each type of test attempts to measure.
Tests of controls focus on testing the effectiveness of internal controls. In substantive tests of transactions, the auditor is concerned about both the effectiveness of internal controls and the monetary correctness of transactions in the accounting system. In tests of details of balances, the concern is determining whether the dollar amount of an account balance is materially misstated.
1) When selecting a sample size for substantive tests of balances which factor, other factors being equal, would result in a larger sample?
A) A decrease in the tolerable misstatement
B) Small expected misstatements
C) An increase in the tolerable misstatement
D) An increase in the acceptable risk of incorrect acceptance
A
2) The auditors principal objective when using a sample of tests of details of balances is whether the:
A) account balance being audited is fairly stated.
B) transactions being audited are free of misstatements.
C) controls being tested are operating effectively.
D) transactions and account balances being audited are fairly stated.
A
3) What is the purpose of applying stratified sampling to a population?
A)
To avoid items that may
contain misstatements To emphasize certain items
and deemphasize others
Yes Yes
B)
To avoid items that may
contain misstatements To emphasize certain items
and deemphasize others
No No
C)
To avoid items that may
contain misstatements To emphasize certain items
and deemphasize others
Yes No
D)
To avoid items that may
contain misstatements To emphasize certain items
and deemphasize others
No Yes
D
4) If an auditor desires a greater level of assurance in auditing a balance, the acceptable risk of incorrect acceptance:
A) is reduced.
B) is increased.
C) is not changed.
D) may be reduced or increased depending upon other circumstances.
A
5) In estimating the population misstatement, the first step in projecting from the sample to the population is to:
A) make a point estimate.
B) revise the upper error bound.
C) calculate the precision interval.
D) determine the population mean.
A
6) Tolerable misstatement is used to:
A)
Determine sample size Select the sample. Evaluate results.
Yes Yes No
B)
Determine sample size Select the sample. Evaluate results.
No Yes No
C)
Determine sample size Select the sample. Evaluate results.
No No Yes
D)
Determine sample size Select the sample. Evaluate results.
Yes No Yes
D
7) The word below that best explains the relationship between required sample size and the acceptable risk of incorrect acceptance is:
A) inverse.
B) direct.
C) proportional.
D) indeterminate.
A
8) The final step in the evaluation of the audit results is the decision to:
A) accept the population as fairly stated or to require further action.
B) determine sampling error and calculate the estimated total population error.
C) project the point estimate.
D) determine the error in each sample.
A
9) Which of the following does not have to be considered in determining the initial sample size of a test of details?
A) Tolerable misstatement
B) Acceptable risk of incorrect rejection
C) Estimate of misstatements in the population
D) Acceptable audit risk
B
10) If an auditor concludes that internal controls are likely to be effective, the preliminary assessment of control risk can be reduced, leading to which of the following impacts on the acceptable risk of incorrect acceptance?
A) The acceptable risk of incorrect acceptance will be reduced.
B) The acceptable risk of incorrect acceptance will be increased.
C) The acceptable risk of incorrect acceptance will be eliminated.
D) The acceptable risk of incorrect acceptance will not be impacted.
B
11) If acceptable audit risk is increased, acceptable risk of incorrect acceptance should be:
A) increased.
B) reduced.
C) unaffected.
D) modified.
A
12) You are auditing Raji and Company. You discover an item of inventory with an audited value of $5,000 with a recorded amount of $3,000. If this is the only error you discover the projected misstatement for the sample would be:
A) $5,000.
B) $2,000.
C) $3,000.
D) $4,000.
B
13) One of the steps involved in planning the sample for the tests of details of balances is to:
A) select the sample.
B) perform the audit procedures.
C) define a misstatement.
D) analyze the misstatements.
C
14) The risk the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance under audit is greater than the tolerable misstatement is:
A) the upper bound.
B) the tolerable risk.
C) the acceptable risk of incorrect acceptance.
D) the lower bound.
C
15) As the amount of misstatements expected in the population approaches tolerable misstatement, the planned sample size will:
A) decrease.
B) increase.
C) vary based on characteristics of the population.
D) be unaffected.
B
16) An auditor using nonstatistical sampling cannot formally measure sampling error and therefore must subjectively consider the possibility that the true population misstatement exceeds a tolerable amount. Which of the following factors should be considered by the auditor in making this assessment?
A)
The dollar difference between the point estimate and tolerable misstatement. The extent to which items in the population have been audited 100 percent.
Yes Yes
B)
The dollar difference between the point estimate and tolerable misstatement. The extent to which items in the population have been audited 100 percent.
No No
C)
The dollar difference between the point estimate and tolerable misstatement. The extent to which items in the population have been audited 100 percent.
Yes No
D)
The dollar difference between the point estimate and tolerable misstatement. The extent to which items in the population have been audited 100 percent.
No Yes
A
17) The appropriate assumption to make regarding the overall percent of error in those population items containing an error is:
A) determined using random number tables.
B) set after a quantitative analysis of client's internal control system.
C) based on the auditor's personal judgment in the circumstances.
D) based on statistical analysis using confidence limits.
C
18) When errors are found in a sample, auditors in practice generally make the assumption:
A) of a 100% assumption for all errors.
B) that the population errors are larger than the sample errors.
C) that the population errors are smaller than the sample errors.
D) that the actual sample errors are representative of the population errors.
D
19) Which of the following needs to be considered when the auditor generalizes from the sample to the population?
A)
Acceptable risk of incorrect acceptance Sampling error
Yes Yes
B)
Acceptable risk of incorrect acceptance Sampling error
No No
C)
Acceptable risk of incorrect acceptance Sampling error
Yes No
D)
Acceptable risk of incorrect acceptance Sampling error
No Yes
A
20) The client's trial balance has a balance of $410,000 for merchandise inventory. As the auditor you are willing to accept a balance that is within $20,000 of either side of the recorded balance. You compute a 95% confidence interval of $395,000 to $425,000. You could therefore:
A) reject the trial balance amount.
B) accept the trial balance amount.
C) increase the sample size to assure more precision.
D) use alternative audit procedures to satisfy yourself as to the correct balance.
B
21) 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 not materially misstated. It was, in fact, materially misstated. This situation illustrates the risk of:
A) incorrect rejection.
B) incorrect acceptance.
C) assessing control risk too low.
D) assessing control risk too high.
B
22) 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. Which of the following is the least likely auditor reaction to this discovery?
A) Perform expanded audit tests in the relevant areas.
B) Increase detection risk in the relevant areas.
C) Increase the sample size.
D) Take no action until tests of other audit areas are completed.
B
23) When selecting a stratified sample, the sample size is:
A) determined for the unstratified population and then apportioned to each stratum.
B) determined for each stratum and selected from that stratum.
C) determined for each stratum and selected randomly from the entire unstratified population.
D) always larger than if unstratified sampling had been used.
B
24) Factors considered by an auditor to determine the possibility that the true population misstatement exceeds a tolerable amount in a nonstatistical sample include all of the following except for:
A) the extent to which items in the population have been audited 100%.
B) the difference between the point estimate and acceptable control risk.
C) whether misstatements tend to be offsetting or in only one direction.
D) the amounts of individual misstatements.
B
25) When defining the population and the sampling unit for tests of details of balances:
A) the population is defined as all of the transactions in the journal for the period.
B) the sampling unit must be the same for all balance sheet accounts.
C) if sampling for completeness, the sampling unit will be customers with zero balances.
D) if sampling for completeness, the sampling unit will be the items making up the recorded population.
C
26) Which of the following is a correct statement?
A) When internal controls are effective, control risk can be reduced, and therefore the auditor will decrease the ARIA.
B) There is a direct relationship between ARIA and the required sample size.
C) A lower control risk risk requires a lower ARO in testing the controls.
D) ARO measures the auditor's desired assurance for an account balance.
C
27) If no exceptions were found in the substantive tests of transactions:
A) ARIA would stay the same.
B) the sample size would stay the same.
C) ARIA would increase.
D) the sample size would increase.
C
28) If analytical procedures are performed with no indications of likely misstatements, ARIA will ________ and the sample size will ________.
A) remain the same, increase
B) decrease, decrease
C) increase, decrease
D) decrease, increase
C
29) Which of the following conditions would lead to a larger sample size?
A) Larger tolerable misstatement
B) Low inherent risk
C) High control risk
D) Smaller account balance
C
30) The AICPA audit sampling formula for computing nonstatistical tests of details of balances sample size is to multiply the population recorded amount by the ________ and then divide by the ________.
A) confidence factor, ARIA
B) confidence factor, tolerable misstatement
C) ARO, tolerable misstatement
D) risk of incorrect acceptance, confidence factor
B
31) If the population is not considered acceptable, one step the auditor is likely to take is to:
A) retest all internal controls.
B) ask the client to adjust the account balance.
C) test the entire population.
D) decrease inherent risk.
B
38) For stratified sampling, the auditor selects samples independently from each stratum.
A) True
B) False
A
39) The larger the sample size, the more confident the auditor can be that the point estimate is close to the true population value.
A) True
B) False
A
40) Acceptable risk of incorrect acceptance is directly affected by acceptable audit risk.
A) True
B) False
A
41) Tolerable misstatement is inversely related to sample size.
A) True
B) False
A
42) Acceptable risk of incorrect acceptance (ARIA) and sample size are inversely related; that is, as ARIA increases, sample size decreases.
A) True
B) False
A
43) Estimated misstatement in the population and sample size are inversely related; that is, as estimated misstatement increases, sample size decreases.
A) True
B) False
B
44) The purpose of stratification is to permit auditors to emphasize certain aspects of a population and deemphasize others.
A) True
B) False
A
45) An auditor using nonstatistical sampling cannot formally measure sampling error.
A) True
B) False
A
46) If the misstatement in a population is larger then tolerable misstatement without considering sampling error, the population will be considered unacceptable.
A) True
B) False
B
47) When using nonstatistical sampling, the larger the sample size, the greater the auditor's confidence that the point estimate is close to the true population value.
A) True
B) False
A
48) Required sample size increases as the auditor's tolerable misstatement for an account balance or class of transactions decreases.
A) True
B) False
A
49) The primary factor affecting the auditor's decision about acceptable risk of incorrect acceptance (ARIA) is assessed inherent risk.
A) True
B) False
B
50) The purpose of stratified sampling is to achieve a greater confidence level (lower risk of incorrect acceptance) for a given sample size.
A) True
B) False
B
51) ARIA measures the auditor's desired assurance for an account balance.
A) True
B) False
A
52) Acceptable audit risk and acceptable risk of incorrect acceptance are inversely related; that is, as AAR increases, ARIA decreases.
A) True
B) False
B
53) An increased sample size will always cause the population to be accepted.
A) True
B) False
B
54) Sampling used for tests of details of balances provides results in terms of exception rates.
A) True
B) False
B
4) The most commonly used method of statistical sampling for tests of details of balances is:
A) attributes sampling.
B) systematic sampling.
C) discovery sampling.
D) monetary unit sampling.
D
10) Which balance-related audit objective cannot be assessed using monetary unit sampling?
A) Accuracy
B) Completeness
C) Existence
D) All of the above can be assessed using monetary unit sampling.
B
1) You are auditing Nelson and Company and determined that the sample results support a conclusion that the account is materially misstated, when in fact it was not misstated. This illustrates the risk of:
A) incorrect acceptance.
B) incorrect rejection.
C) control risk too low.
D) control risk too high.
B
2) The method used to measure the estimated total error amount in a population when there is both a recorded value and an audited value for each item in the sample is:
A) difference estimation.
B) mean-per-unit estimation.
C) ratio estimation.
D) monetary unit sampling.
A
4) Acceptable risk of incorrect rejection affects auditors' action only when they conclude that a population is:
A) fairly stated.
B) acceptable.
C) not fairly stated.
D) acceptable after certain adjustments.
C
5) If the auditor believes that there will be more than just a few exceptions discovered, and desires an accurate estimate of the dollar value of the exceptions, he or she will use:
A) attributes sampling.
B) monetary unit sampling.
C) block sampling.
D) variables sampling.
D
6) The risk of incorrect rejection is important only when there is a ________ cost to increasing the sample size.
A) high
B) low
C) moderate
D) marginal
A
11) Which of the following is not a type of statistical method that provides results in dollar terms?
A) Variables sampling
B) Attributes sampling
C) Monetary unit sampling
D) Sampling with probability proportional to size
B
15) Match six of the terms (a-l) with the definitions provided below (1-6):
a. Acceptable risk of incorrect acceptance
b. Acceptable risk of incorrect rejection
c. Difference estimation
d. Misstatement bounds
e. Monetary unit sampling
f. Mean-per-unit estimation
g. Point estimate
h. Probability proportional to size sample selection
i. Ratio estimation
j. Statistical inferences
k. Stratified sampling
l. Variable sampling
________ 1. Conclusions drawn from sample results based on knowledge of sampling distributions.
________ 2. Sampling techniques for tests of details that use the statistical inference processes.
________ 3. The risk that the auditor is willing to take of concluding a balance is materially misstated when it is, in fact, fairly stated.
________ 4. A statistical sampling method that provides upper and lower misstatement bounds expressed in monetary amounts.
________ 5. A method of variables sampling in which the auditor estimates the population misstatement by multiplying the average misstatement in the sample by the total number of population items and also calculates sampling risk.
________ 6. The risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is greater than tolerable misstatement.
Answer:
1. j
2. l
3. b
4. e
5. c
6. a
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