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AUDITING THEORY

AT.114-Audit Sampling

L. R. CABARLES
1st Sem. SY 2013-14

LECTURE NOTES
Means of Selecting Items for Testing
When designing tests of controls and tests of details, the
auditors means of selecting items for testing are:

Selecting all items (100% examination),

Selecting specific items, and

Audit sampling.
These approaches are described in further detail below.
Selecting All Items
100% examination is unlikely in the case of tests of
controls; however, it is more common for tests of details.
100% examination may be appropriate when, for example:

The population constitutes a small number of large


value items;

There is a significant risk and other means do not


provide sufficient appropriate audit evidence; or

Cost effective by using CAATs.


Selecting Specific Items
Specific items selected may include:

High value or key items.

All items over a certain amount.

Items to obtain information about matters such as the


nature of the entity or the nature of transactions.
This does not constitute audit sampling. The results of
audit procedures applied to items selected in this way
cannot be projected to the entire population; accordingly,
selective examination of specific items does not provide
audit evidence concerning the remainder of the population.
Audit Sampling
Audit sampling is the application of audit procedures to
less than 100% of items within a population of audit
relevance such that all sampling units have a chance of
selection in order to provide the auditor with a reasonable
basis on which to draw conclusions about the entire
population. Audit sampling enables the auditor to obtain
and evaluate audit evidence about some characteristic of
the items selected in order to form or assist in forming a
conclusion concerning the population from which the
sample is drawn. This is the case when it is not efficient to
review 100% of the records or other circumstances make
reviewing all of the records difficult.
Representative Sample
A representative sample is one in which the characteristics
in the sample of audit interest are approximately the same
as those of the population. However, the two things that
cause a sample to be non-representative of the population
are sampling risk and non-sampling risk. These could also
be the two aspects of audit risk, i.e., [Audit risk = (f)
Sampling risk x Non-sampling risk].
Sampling Risks
Sampling risk is the risk that the auditors conclusion
based on a sample may be different from the conclusion if
the entire population were subjected to the same audit

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procedure. Sampling risk can lead to two types of


erroneous conclusions, such as:
Alpha Risk
(Type I
Misstatement)
Test of Controls
Sampling risks
Assessing control
risk too high
Controls are:
less effective
than they
actually are
Reliance on
Underreliance
internal control
Test of Details
Sampling risks
Incorrect
Rejection
Material
exists when in
misstatement:
fact it does not
Affects audit:
Efficiency

Beta Risk
(Type II
Misstatement)
Assessing control
risk too low
more effective than
they actually are
Overreliance

Incorrect Acceptance
does not exist when
in fact it does
Effectiveness

The auditor is more concerned with beta risk. The


mathematical complements of these two risks are termed
confidence levels.
Dealing with sampling risks
The auditor can eliminate sampling risks by through
examining the entire population. However, examining the
entire population is normally not possible for the auditor.
Instead, the auditor usually manages or controls sampling
risk by making the sample more representative of the
population by:

Increasing the sample size

Using appropriate method of selecting sample items


Non-sampling Risks
Non-sampling risk is the risk that the auditor reaches an
erroneous conclusion for any reason not related to
sampling risk. Non-sampling risk is also an aspect of audit
risk not attributable to sampling such as human error due
to:

Use or application of inappropriate audit procedures

Failure to recognize errors (misstatements or


deviations) in the samples tested

Misinterpretation of evidence obtained


Dealing with non-sampling risks
Non-sampling risks cannot be totally eliminated in audit.
There is always human error in audit as the auditors
judgment may not always be correct. However, the auditor
can manage non-sampling risks through:

Proper planning

Adequate direction and supervision of the audit team


and timely review of their work
The Two Sampling Approaches
Audit sampling can be applied using either non-statistical
or statistical sampling approaches. These two approaches
involve the use of auditors professional judgment in
planning and performing the sampling procedure and
evaluating the results of the sample.

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The table below summarizes the comparison between the two sampling
Statistical Sampling
Basic concepts

Random selection of the sample items

Apply the laws or theory of probability to:


o Design efficient sample
o Measure sufficiency of sample

o Evaluate sample results


o

Measure sampling risk quantitatively

approaches:
Non-statistical Sampling
A sampling approach that does not have
characteristics of statistical sampling (i.e., no
random selection of sample items and does not
apply laws of probability)
Cannot measure sampling risk quantitatively,
only based on the auditors judgment.

Advantages

More defendable
Free from bias

Easy to apply
Less costly

Disadvantages

Overvalue the evidence it provides


Reduces auditor skepticism
Increased cost
o Train auditors
o Design samples

Relies exclusively on professional judgment to


o Determine sample size
o Evaluate sample results

Audit Sampling Process


When designing and performing audit sampling, the
auditor normally observes the following 10 steps:
Step 1: Define the purpose (objective) of the audit test.
Step 2: Define the deviation or misstatement.
Step 3: Identify and understand the relevant population.
Step 4: Determine the relevant sampling unit.
Step 5: Select an appropriate approach of sampling.
Step 6: Determine the sample size.
Step 7: Select the sample items.
Step 8: Examine and evaluate the evidence for the sample.
Step 9: Evaluate the tests results.
Step 10: Document the audit sampling performed.
The steps above are the same regardless of, the sampling
approach selected whether statistical or non-statistical, the
type of audit sampling technique utilized and whether the
test is the performance of test of controls or test of details.
Step 1: Define the purpose (objective) of the audit
test
When designing an audit sample, the auditor shall consider
the purpose (objective) of the audit procedure. The
auditors consideration includes the specific purpose (test
of controls or test of details) to be achieved and the
combination of audit procedures that is likely to best
achieve that purpose.
Step 2: Define a deviation or misstatement
The auditor considers what conditions constitute a
deviation or misstatement by reference to the objectives of
the test.
Deviations for Tests of Controls
For example, suppose that a control requires support for
every disbursement to include an invoice, a voucher, a
receiving report, and a purchase order; all stamped Paid.
The auditor believes that the existence of an invoice and a
receiving report, both stamped Paid, is necessary to
indicate adequate performance of the control. Therefore, in
this case, a deviation may be defined as a disbursement
not supported by an invoice and a receiving report that has
been stamped Paid.
Misstatement for Tests of Details
For example, in a test of details relating to the existence of
accounts receivable, such as confirmation, payments made
by the customer before the confirmation date but received
shortly after that date by the client, are not considered a
misstatement.
Step 3: Identify and understand the relevant
population

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Population means the entire set of data from which a


sample is selected and about which the auditor wishes to
draw conclusions. For example, all of the items in an
account balance or a class of transactions constitute a
population. The auditor needs to identify the relevant
population and consider its characteristics from which the
sample will be drawn. Considering the characteristics of
the population would include:

Preliminary assessment of expected rate of deviation


or misstatement and the auditors tolerable rate of
deviation or misstatement.

Determining whether stratification or value-weighted


selection is appropriate.

Ascertaining the completion of population.


In addition, it is important that the population is
appropriate to satisfy the established objective of the audit
procedures by considering the direction of the test.
Assessment of Expected Rate of Deviation or Misstatement
and Tolerable Rate of Deviation or Misstatement
For test of controls, the auditor makes a preliminary
assessment of the expected rate of deviation based on the
auditors understanding of the relevant controls or on the
examination of a small number of items from the
population (pilot testing). This assessment is made in
order to design an audit sample and to determine sample
size. For example, if the expected rate of deviation is
unacceptably high than the auditors tolerable rate of
deviation, the auditor will normally decide not to perform
tests of controls. Similarly, for test of details, the auditor
makes an assessment of the expected misstatement in the
population. If the expected misstatement is high, 100%
examination or use of a large sample size may be
appropriate when performing tests of details. This is
normally the case when the auditors expected
misstatement is approximately or higher than tolerable
misstatement. Tolerable deviation rate or misstatement is
the rate of deviation or monetary amount the auditor is
willing to accept on the population.
Stratification and Value-Weighted Selection
Stratification
Audit efficiency may be improved if the auditor stratifies a
population by dividing it into discrete sub-populations
which have an identifying characteristic. Stratification
reduces the variability of items within each stratum and
allow sample size to be reduced without increasing
sampling risk. For example, 20% of the items in a
population may make up 90% of the value of an account
balance. The results of audit procedures applied to a

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sample of items within a stratum can only be projected to
the items that make up that stratum.
Value-Weighted Selection
When performing tests of details it may be efficient to
identify the sampling unit as the individual monetary units
that make up the population. This is discussed further
below under Monetary Unit Sampling.
Completeness of the population
The population used to make a sample selection needs to
contain all sampling units that are to be subjected to
sampling procedures. The totality of the population may
be verified by:

Footing the population items and comparing the total


obtained to that of the population

Accounting for numerical sequence of prenumbered


documents or records.
Direction of the Test, Appropriate to Test Objective
For test of controls
If the auditor wishes to test the operating effectiveness of
a prescribed control designed to ensure that all shipments
are billed, the auditor would not detect deviations by
sampling billed items because that population would not be
expected to contain items that were shipped but not billed.
An appropriate population for detecting such deviations is
usually the population of all shipped items.
For test of details
When understanding the risks of material misstatement
the direction in which the population may be misstated
may need to be considered.
When testing for overstatement, items to be examined are
selected directly from the population of audit interest.
When testing for understatement, items to be examined
are selected from a reciprocal or independent population.
Populations on which we may perform audit sampling to
test for understatement and examples of appropriate
reciprocal populations may include:
Population of audit
interest
Accounts payable
Sales

Example of a potential
reciprocal population
Subsequent disbursements
Shipping documents

The auditor shall determine a sample size sufficient to


reduce sampling risk to an acceptably low level. The
sample size can be determined by the application of a
statistically-based formula or through the exercise of
professional judgment (non-statistical).
The tables below list the factors affecting sample size for
test of controls and test of details.
Test of Controls (Attribute Sampling)
Factor
Tolerable deviation rate
Allowable risk of assessing control risk
too low/Sampling risk (beta risk)
Expected population deviation rate
Population size

Factor
Tolerable misstatement
Allowable risk of incorrect
acceptance/Sampling risk (beta risk)
Expected amount of misstatement
Assessed level of control risk
Population size

However, sample size is not a valid criterion to distinguish


between statistical and non-statistical approaches and the
choice between the two approaches is independent of audit
procedures to be performed.
Step 6: Determine the sample size

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Relationship
Inverse
Inverse
Direct
Direct
Negligible effect

Step 7: Select the sample items


The auditor shall select items for the sample in such a way
that each sampling unit in the population has a chance of
selection. It is important that the auditor selects a
representative sample, so that bias is avoided.
Sample Selection Methods
The principal methods of selecting samples are the use of
random selection, systematic selection and haphazard
selection. Sample selection methods are classified into
probabilistic (statistical) and non-probabilistic (nonstatistical).
Probabilistic Sample Selections
a. Random-number Selection
Every sampling unit has the same probability of
being selected as every other sampling unit in the
population.
Uses computer-generated numbers to select
sampling units.
Match number to prenumbered documents.

b.

Step 5: Select an appropriate approach of sampling


The decision whether to use a statistical or non-statistical
sampling approach is a matter for the auditors judgment;
in making that judgment the auditor consider the
following:

The choice is based on relative costs and benefits

Effectiveness

Need for quantitative estimate of sampling risk

Direct
Negligible effect

Test of Details (Variables Sampling)

Step 4: Determine the relevant sampling unit


Sampling unit is the individual items constituting a
population. The sampling units might be physical items
(for example, checks listed on deposit slips, credit entries
on bank statements, sales invoices or debtors balances) or
monetary units. The total population of the sampling units
could be manually prepared documents or lists, documents
generated from computer systems, or an electronic file
provided by the entity.

Relationship
Inverse
Inverse

c.

Appropriate for both statistical and nonstatistical


sampling.
Systematic Selection

The number of sampling units in the population is


divided by the sample size to give a sampling
interval, for example 50, and having determined a
starting point within the first 50, each 50th
sampling unit thereafter is selected. Starting point
may be determined haphazardly or randomly.

Determine that sampling units within the


population are not structured in such a way that
the sampling interval corresponds with a particular
pattern in the population.

Useful when identification numbers lacking

Appropriate for both statistical and nonstatistical


sampling
Stratified Selection

Stratification is the process of dividing a population


into sub-populations, each of which is a group of
sampling units which have similar characteristics
(often monetary value).

Subdivide population into homogeneous strata

Select separate sample for each strata by on of


prior methods

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Non-probabilistic Sample Selections
a. Block Selection
Involves selection of a block(s) of contiguous items
from within the population.

Inefficient & not generalizable

Should not be used for statistical or nonstatistical


sampling without care in controlling sampling risk
b. Haphazard Selection

The auditor selects the sample without following a


structured technique.

Sampling units selected without special reason or


conscious bias

Inappropriate for statistical sampling

Useful for nonstatistical sampling


c. Direct sample selection

Auditor selects items based on judgmental criteria


such as likelihood of misstatement, characteristics
such as different time periods, or large amounts.
Step 8: Examine and evaluate the evidence for the
sample
The auditor shall perform audit procedures, appropriate to
the purpose, on each item selected.
Voided Sample
The auditor shall perform the procedure on a replacement
item. If the auditor is satisfied that the sample has been
properly voided such that it does not constitute a
deviation, and the chosen replacement is examined.
Missing or Lost Sample
If the auditor is unable to apply the designed audit
procedures, or suitable alternative procedures, to a
selected item, the auditor shall treat that item as a
deviation from the prescribed control, in the case of tests
of controls, or a misstatement, in the case of tests of
details.

Projecting Deviations for Tests of Controls


For tests of controls, no explicit projection of deviations is
necessary since the sample deviation rate (SDR) is also the
projected deviation rate (PDR) for the population as a
whole. SDR is the rate of deviation in the operation of
controls detected in the sample by performing tests of
controls. SDR = # of sample deviations / sample size.
PDR, a.k.a., upper deviation or precision limit, is the rate
of deviation that the auditor estimates to be in the
population. PDR = SDR + allowance for sampling risk
(Beta risk). An allowance for sampling risk can only be
calculated where the auditor has used statistical sampling.
Projecting Misstatements for Tests of Details
For tests of details, the auditor shall project misstatements
found in the sample to the population. Sample
misstatement is the monetary misstatement detected in
the sample by performing tests of details.
Projected misstatement is the monetary misstatement that
the auditor estimates to be in the population, and is
calculated by adjusting the sample misstatement by an
allowance for sampling risk. An allowance for sampling risk
can only be calculated where the auditor has used
statistical sampling. The methods for calculating an
allowance for sampling risk and projecting the sample
error differ between classical variables sampling and
Monetary Unit Sampling (MUS). This is discussed below.
When a misstatement has been established as an anomaly,
it may be excluded when projecting misstatements to the
population.
Evaluate Sample Results and Reach an Overall Conclusion
Overall Conclusion for Tests of Controls

Occasionally the auditor might find a large number of


deviations in auditing the first part of a sample. As a
result, the auditor might believe that even if no additional
errors were to be discovered in the remainder of the
sample, the results of the sample would not support the
planned assessed level of control risk.

There are two generally accepted approaches for


evaluating the sample results for tests of controls:

Compare PDR to tolerable deviation rate. If the PDR <


tolerable deviation rate = the control is operating
effectively. If the PDR = or > tolerable deviation rate =
the control is not operating effectively as designed.

Compare SDR to expected deviation rate. If the SDR <


expected deviation rate = control is operating
effectively. If the SDR = or > expected deviation rate
= control is not operating effectively as designed.

Step 9: Evaluate the tests results

Overall Conclusion for Tests of Details

The auditor uses judgment in evaluating the results and


reaching an overall conclusion. In evaluating the sample
results, the auditor:

Considers the nature and causes of deviations and


misstatements,

Calculates and projects the sample deviations and


misstatements, and

Reaches an overall conclusion.

When the projected misstatement plus anomalous


misstatement, if any, exceeds tolerable misstatement, the
sample does not provide a reasonable basis for conclusions
about the population that has been tested. The closer the
projected misstatement plus anomalous misstatement is to
tolerable misstatement, the more likely that actual
misstatement in the population may exceed tolerable
misstatement.

Stopping the Test Before Completion

Nature and Cause of Deviations and Misstatements


The auditor shall investigate the nature and cause of any
deviations or misstatements identified, and evaluate their
possible effect on the purpose of the audit procedure and
on other areas of the audit.
In the extremely rare circumstances the auditor considers
a misstatement or deviation discovered in a sample to be
an anomaly (not representative of population). The auditor
shall obtain a high degree of certainty that such
misstatement or deviation is not representative of the
population. For example is an error that is found to be
caused by use of an incorrect formula in calculating all
inventory values at one particular branch.

If the auditor concludes that audit sampling has not


provided a reasonable basis for conclusions about the
population that has been tested, the auditor may:

Request management to investigate misstatements


identified and the potential for further misstatements
and to make any necessary adjustments; or
Tailor the nature, timing and extent of those further
audit procedures to best achieve the required
assurance.
Step 10: Document the Audit Sampling Performed
The auditor should document the sampling application and
related audit procedures.
Types of Statistical Sampling

Projecting Sample Deviations and Misstatements

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The two commonly used statistical sampling used in
auditing are:
1. Attributes samplinggenerally used for tests of controls

Tests rate of deviation from a prescribed control


procedure

Estimate frequency of errors in population based


on frequency in sample

Determine whether or not estimated error rate


indicates control is working effectively

Attribute a characteristic of control

Deviation absence of the attribute


2. Variables Samplinggenerally used for tests of details

Tests whether recorded account balances are fairly


stated

Estimate value of population based on value of


items in sample
Attributes Sampling
a. Traditional (Classical) attributes sampling

This has been already discussed above under the


steps of audit sampling.

Under traditional attribute sampling, sample size is


determined and sample tested to estimate error
rate in population
b. Stop-or-go (Sequential) sampling

Performed in stages

Auditor decides to stop or continue sampling after


each stage

Appropriate when expected deviation rate is low

Sample selected in steps

Each step is based on results of previous step

No fixed sample size and may result in lower


sample if few or no errors detected
c. Discovery sampling

Sample size is very small

Appropriate when expected deviation rate is


extremely low or zero

Sample large enough to detect at least one error if


it exists

Any errors in sample results in rejection


Variables Sampling
a. Traditional (Classical) variables sampling The
procedures the auditor follows to apply this sampling
have been discussed above under the steps of audit
sampling. There are three approaches to classical
variables sampling for auditing applications that differ
in the way the misstatement is projected to the
population are:

Mean-per-unit approach The auditor estimates a


total population amount by calculating an average

audited amount for all items in the sample and


multiplying that average amount by the number of
items constituting the population.
Difference approach The auditor calculates the
average difference between audited and recorded
amounts of the sample items and projects that
average difference to the population.
Ratio approach The auditor calculates the ratio
between the sum of the audited amounts and the
sum of the recorded amounts of the sample items
and projects this ratio to the population. The
auditor estimates the total population amount by
multiplying the total recorded amount for the
population by the same ratio.

Using normal distribution theory based on the


variability of the audited amounts in the sample, the
auditor also calculates an allowance for sampling risk.
b.

Monetary unit sampling (a.k.a., Probability Proportional


to Size (PPS) or Value-weighted selection)
Uses attributes sampling theory to express a
conclusion in amounts rather than as a rate of
occurrence.

Probability of selecting an item is proportional to


its recorded amount.

Automatically stratifies an audit population

Appropriate for testing for overstatement and few


or no errors are expected
Useful for testing assets and revenues

Advantages over classical variables sampling


o Items with larger amounts have a greater
probability of being selected
o An item that is individually material will
automatically be selected
o Sample size may be reduced as the same item
may be selected more than once
o The sample distribution does not have to be
close to the distribution in the population for
the sample to be valid
o Sampling can be initiated prior to year-end
more easily

Disadvantages of PPS

Understated items have a lower probability of


being selected

Items with zero or negative balances are not


generally included in the sample

A high frequency of misstatements results in


an increase in sample size
- done -

MULTIPLE CHOICE
Selecting Items for Testing
1. Evaluate whether each of the following statements
qualifies as sampling:
1.1 Test performed on 100% of the items within a
population
1.2 Selecting items over a certain amount
1.3 Selecting items for the total population on the
basis that was expected to be representative
a. 1.1, 1.2, 1.3 qualify
b. 1.1 and 1.2 qualify; 1.3 does not qualify
c. 1.1 and 1.2 do not qualify; 1.3 qualifies
d. 1.1, 1.2, 1.3 do not qualify
Basic Concepts of Audit Sampling
2. Audit sampling, which involves the application of audit
procedures to less than 100 percent of items within a
population of audit relevance such that all sampling

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units have a chance of selection, identifies two general


approaches to audit sampling. They are
a. Random and nonrandom
b. Statistical and nonstatistical
c. Precision and reliability
d. Risk and nonrisk
3. An advantage of statistical sampling over nonstatistical
sampling is that statistical sampling helps an auditor to
a. Minimize the failure to detect errors and
irregularities.
b. Eliminate the risk of nonsampling errors.
c. Reduce the level of audit risk and materiality to a
relatively low amount.
d. Mathematically measures sampling risk.
4. A nonstatistical sampling plan can:
a. Overstate the estimate of sampling risk

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b.
c.
d.

Misdirect an auditor to unreliable sampling units


Replicate the results of a statistical sampling plan
Understate the degree of audit assurance desired

5. The risk that the auditors conclusion based on a


sample may be different from the conclusion if the
entire population were subjected to the same audit
procedure
a. Sampling risk
b. Confidence levels
c. Statistical sampling
d. Tolerable rate and the expected rate of deviation
6. Which of the following best illustrates the concept of
sampling risk?
a. A randomly chosen sample may not be
representative of the population as a whole on the
characteristic of interest.
b. An auditor may select audit procedures that are
not appropriate to achieve the specific objective.
c. An auditor may fail to recognize errors in the
documents examined for the chosen sample.
d. The documents related to the chosen sample may
not be available for inspection.
7. At times a sample may indicate in the case of a test of
controls, that controls are more effective than they
actually are. This situation illustrates the risk of
a. Over-reliance.
c. Incorrect precision.
b. Under-reliance.
d. Incorrect rejection.
8. At times a sample may indicate in the case of a test of
details that a material misstatement does not exist
when in fact it does. This situation illustrates the risk
of
a. Incorrect rejection
c. Over reliance

b.

Incorrect acceptance

d.

Under reliance

9. The risk likelihood of assessing control risk too low


(risk of over reliance) and risk of incorrect acceptance
relate to the
a. Efficiency of the audit

b.
c.
d.

Effectiveness of the audit


Preliminary estimates of materiality levels
Allowable risk of tolerable misstatements

10. The risk that the auditor does not recognize


misstatements or deviations included in the sample for
what they are
a. Sampling risk
c. Statistical sampling
b. Confidence levels
d. Nonsampling risk
11. Which of the following is not an element of
nonsampling risk?
a. The auditor uses inappropriate procedures in
auditing accounts receivable
b. The use of unreasonable small sample size
c. Misinterpretations of audit evidence
d. Auditor fails to recognize the error in the sample
12. Which of the following would be an example of
sampling error?
a. The auditor chose a random sample, calculated a
sample error rate of 4%, and concluded that the
population error rate was 4%. The true population
error rate was 6%.
b. The auditor selected a non-random sample and
generalized the sample results to the population
using statistical methods.
c. The auditor chose a non-random sample to focus
on transactions for only 2 months of the year.
d. The auditor chose a random sample and divided
the number of errors in the sample by the number
of accounts in the sample to calculate the sample
error rate.

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Audit Sampling Process


13. Which of the following is not one of the basic phases in
audit sampling?
a. Planning the sample
b. Evaluating the results of the sample
c. Selecting the sample and performing the tests
d. Each of the above is a phase in audit sampling.
14. Sampling unit is
a. A process that divides population into subpopulations which have an identifying
characteristic and reduces the variability of items
within each stratum and allows sample size to be
reduced without increasing sampling risk
b. A selection that treats each sampling unit as the
individual monetary units that make up the
population.
c. The individual items constituting a population.
d. The entire set of data from which a sample is
selected and about which the auditor wishes to
draw conclusions.
Sample Size: Test of Controls
15. When sampling for attributes, which of the following
would decrease sample size?
a
b
c
d
Operating
Increase Decrease Increase Decrease
effectiveness
of controls
Tolerable rate Decrease Increase
Increase
Increase
of deviation
Expected
Increase Decrease Decrease Decrease
control
deviation
Risk of over Decrease Increase
Increase Decrease
reliance
16. To determine the sample size for a test of control, an
auditor should consider the tolerable rate of deviation,
the allowable risk of assessing control risk too low, and
the
a. Expected deviation rate

b.
c.
d.

Upper precision limit


Risk of incorrect acceptance
Risk of incorrect rejection

17. The tolerable rate of deviations for a


generally
a. Lower than the expected rate
related accounting population.
b. Higher than the expected rate
related accounting records.
c. Identical to the expected rate
related accounting records.
d. Unrelated to the expected rate
related accounting records.

test of controls is
of errors in the
of errors in the
of errors in the
of errors in the

18. Which of the following statements is correct concerning


statistical sampling in tests of controls?
a. The population size has little or no effect on
determining sample size except for very small
population.
b. The expected control deviation has little or no
effect on determining sample size except for very
small populations.
c. As the population size doubles, the sample size
also should double.
d. A large sample size should be selected as the
expected control deviation decreases.
19. Which of the following statements is correct concerning
statistical sampling in tests of controls?

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a.
b.
c.
d.

There is an inverse relationship between the


sample size and the expected control deviation
rate.
As the population size doubles, the sample size
should also double.
The qualitative aspects of deviations are not
considered by the auditor.
There is an inverse relationship between the
sample size and the tolerable rate of deviation.

Sample Size: Test of Details


20. In substantive testing, which of the following would
increase sample size?
Assessment
of control risk
Reliance
on
other
substantive
procedures
Tolerable
misstatement
Expected
amount
of
misstatement
Risk
of
incorrect
acceptance

a
Increase

b
Increase

c
Increase

Increase

Decrease

Decrease

Decrease

Increase

Decrease

Increase

Decrease

Increase

Decrease

Increase

Decrease

d
Decrease

27. An auditor is testing internal control procedures that


are evidenced on an entitys vouchers by matching
Increase
random numbers with voucher numbers. If a random
number matches the number of a voided voucher, that
voucher ordinarily should be replaced by another
voucher in the random sample if the voucher
Increase
a. Constitutes a deviation.
b. Has been properly voided.
Decrease
c. Cannot be located.
d. Represents an immaterial peso amount.
Increase

21. Determine which of the following would lead to a larger


sample size for substantive test of details of an
account balance. Assume all other factors being equal.
a. Smaller measure of tolerable misstatement
b. Greater reliance of analytical procedures
c. Greater reliance on internal controls
d. Smaller expected frequency of errors
Sample Selection Methods
22. Identify the sample selection method used, following
the same order:
I. Selecting items using a constant interval between
selections; the first interval having a random start.
II. Selecting items from the entire population with no
intention to include or exclude specific units
III. All items in the population or within each stratum
have a known chance of selection
a. Systematic, random, haphazard.
b. Systematic, haphazard, random.
c. Haphazard, systematic, random.
d. Random, systematic, haphazard.
23. An underlying feature of random-based selection of
items is that each
a. Stratum of the accounting population be given
equal representation in the sample.
b. Item in the accounting population be randomly
ordered.
c. Item in the accounting population should have an
opportunity to be selected.
d. Item must be systematically selected using
replacement.
24. If certain forms are not consecutively numbered
a. Selection of a random sample probably is not
possible.
b. Systematic sampling may be appropriate.
c. Stratified sampling should be used.
d. Random number tables cannot be used.
25. Which of the following statistical selection techniques is
least desirable for use by an auditor?
a. Systematic selection
c. Block selection
b. Stratified selection
d. Sequential selection
Nature and Cause of Error
26. An auditor plans to examine a sample of 20 purchase
orders for proper approvals as prescribed by the

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clients internal control procedures.


One of the
purchase orders in the chosen sample of 20 cannot be
found, and the auditor is unable to use alternative
procedures to test whether that purchase order was
properly approved. The auditor should
a. Chose another purchase order to replace the
missing purchase order in the sample.
b. Consider this test of control invalid and proceed
with substantive tests since internal control cannot
be relied upon.
c. Treat the missing purchase order as a deviation for
the purpose of evaluating the sample.
d. Select a completely new set of 20 purchase orders.

28. Anomalous error means


a. An error (deviation or misstatement) that arises
from an isolated event that has not recurred other
than on specifically identifiable occasions and is
therefore not representative of errors in the
population.
b. An deviation or misstatement (error) that the
auditor expects to be present in the population.
c. Rate of deviation from prescribed internal control
procedures set by the auditor in respect of which
the auditor seeks to obtain an appropriate level of
assurance that the rate of deviation set by the
auditor is not exceeded by the actual rate of
deviation in the population.
d. Monetary amount set by the auditor in respect of
which the auditor seeks to obtain an appropriate
level of assurance that the monetary amount set
by the auditor is not exceeded by the actual
misstatement in the population.
Attributes Sampling
29. Which of the following sampling methods is most
useful to auditors when performing tests of controls?
a. Discovery sampling.
b. Attribute estimation/sampling.
c. Variable sampling.
d. Unrestricted random sampling with replacement.
30. Which of the following statistical sampling plans does
not use a fixed sample size for tests of controls?
a. Ratio estimation sampling c. MUS sampling
b. Sequential sampling
d. Variables sampling
31. If the auditor is concerned that a population may
contain exceptions, the determination of a sample size
sufficient to include at least one such exception is a
characteristic of
a. Discovery sampling.
c. Random sampling.

b.

Variables sampling.

d.

PPS sampling.

32. An auditor desired to test credit approval on 10,000


sales invoices processed during the year. The auditor
designed a statistical sample that would provide 1%
risk of assessing control risk too low (99% confidence)
that not more than 7% of the sales invoices lacked
approval. The auditor estimated from previous
experience that about 2 % of the sales invoices
lacked approval. A sample of 200 invoices was
examined and 7 of them were lacking approval. The

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auditor then determined the achieved upper precision
limit to be 8%. The allowance for sampling risk was
a. 5 %
c. 3 %
b. 4 %
d. 1%
33. In the evaluation of this sample, the auditor decided to
increase the level of preliminary assessment of control
risk (CR is high) because the
a. Tolerable rate (7%) was less than the achieved
upper precision limit (8%).
b. Expected deviation rate (7%) was more than the
percentage of errors in the sample (3 %).
c. Achieved upper precision limit (8%) was more than
the percentage of error in the sample 3-1/2%).
d. Expected deviation rate (2 - %) was less than
the tolerable rate (7%).
34. An auditor who uses statistical sampling for attributes
in testing internal controls should increase the
assessed level of control risk (CR is high) when the
a. Sample rate of deviation is less than the expected
rate of deviation used in planning the sample.
b. Tolerable rate less the allowance for sampling risk
exceeds the sample rate of deviation.
c. Sample rate of deviation plus the allowance for
sampling risk exceeds the tolerable rate.
d. Sample rate of deviation plus the allowance for
sampling risk equals the tolerable rate.
Variables Sampling
35. Which of the following sampling methods would be
used to estimate a numerical measurement of a
population, such as a peso value?
a. Attributes sampling
c. Variables sampling
b. Stop-or-go sampling
d. Random sampling
36. The following are the classical variables techniques,
except:
a. Ratio estimation
c. Value weighted selection
b. MPU estimation
d. Difference estimation
37. Which of the following is not a problem with monetaryunit selection?
a. Population items with a zero recorded balance.
b. Population items that should have a zero balance
but do not.

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c. Accounts with negative balances.


d. Accounts with small recorded balances that are
significantly understated.
38. In statistical sampling methods used in substantive
testing, an auditor most likely would stratify a
population into meaningful groups if
a. Probability proportional to size (PPS) sampling is
used
b. The population has highly variable recorded
amounts
c. The auditors estimated tolerable misstatement is
extremely small.
d. The standard deviation of recorded amount is
relatively small.
39. An auditor is evaluating the results of a variables
sampling plan. Which of the following is not relevant to
the auditor's judgment about the sample?
a. Management's explanations for why errors in the
sample occurred.
b. Projecting the sample error to the population.
c. Considering the effects of sampling risk.
d. Qualitative information that lends insight into
errors found.
40. Using statistical sampling to assist in verifying the
year-end accounts payable balance, an auditor has
accumulated the following data:
Number
Book
Balance
of
balance
determined
accounts
by the
auditor
Population
4,100
P5,000,000
?
Sample
200
P 250,000
P300,000
Using the ratio estimation technique, the auditor's
estimate of year-end accounts payable balance would
be
a. P6,150,000
c. P5,125,000

b.

P6,000,000

d.

P6,025,000

- end of AT.114 -

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