Auditing A Practical Approach Canadian 3rd Edition Moroney Test Bank

Auditing A Practical Approach
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CHAPTER 6
SAMPLING AND OVERVIEW OF THE RISK RESPONSE
PHASE OF THE AUDIT
CHAPTER LEARNING OBJECTIVES
1. Explain how audit sampling is used in an audit.

When creating an audit plan and designing audit procedures, an auditor also decides how to
select appropriate items for testing. When there are numerous transactions or items within an
account balance available for testing, an auditor must decide how best to select a sample that is
representative of the entire population of items available for testing.
2. Understand the difference between sampling and non-sampling risk.

Sampling risk is the risk that the sample chosen by the auditor is not representative of the
population of transactions or items within an account balance available for testing and, as a
consequence, the auditor arrives at an inappropriate conclusion. Non-sampling risk is the risk
that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues,
such as using an inappropriate audit procedure.
3. Differentiate between statistical and non-statistical sampling.

Statistical sampling involves random selection and probability theory to evaluate the results.
Non-statistical sampling is any sample selection method that does not have these
characteristics.
4. Describe sampling methods and the factors to be considered when choosing a

sample.
Sampling methods include random selection, systematic selection, haphazard selection, block
selection, and judgemental selection. Before selecting a sample, an auditor will set parameters
pertaining to control and detection risk, planning materiality, population, tolerable error rate, and
the required level of confidence. Once these parameters are set, an auditor may select a
sample using a statistical or non-statistical sampling technique.
5. Determine the factors that influence the sample size when testing controls.
When testing controls, the factors that influence the sample size include the extent to which the
risk of material misstatement is reduced by the operating effectiveness of controls, the rate of
deviation from the prescribed control activity that the auditor is willing to accept, the rate of
deviation from the prescribed control activity that the auditor expects to find in the population,
the auditor’s required confidence level, and the number of sampling units in the population.
6. Determine the factors that influence the sample size when doing substantive testing
and consider techniques used to perform substantive tests.
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6-2 Auditing: A Practical Approach, Third Canadian Edition
When conducting substantive testing of transactions and balances, the factors that influence the
sample size include the auditor’s assessment of the risk of material misstatement, the use of
other substantive procedures directed at the same assertion, the auditor’s required confidence
level, the tolerable error, the amount of error the auditor expects to find in the population, the
stratification of the population, and the number of sampling units in the population.
Two main techniques are applied when the auditor is performing substantive tests and deciding
how much of a balance to test. These are (1) key item testing, and (2) representative sampling.
7. Outline how to evaluate the results of tests conducted on a sample.

When testing controls, the auditor will compare the rate of deviation with the tolerable rate of
deviation and determine whether they believe that the control tested is effective in preventing
and/or detecting a material misstatement. When testing transactions and balances, the error in
the sample will be projected onto the population and then compared to the tolerable error rate.
The auditor will then determine whether the class of transactions or account balance being
tested appears to be materially misstated.
8. Understand the difference between tests of controls and substantive tests.

The purpose of tests of controls is to assess the effectiveness of a client’s system of internal
controls throughout the accounting period being audited. The purpose of substantive testing is
to gather direct evidence that the financial statements are free from material misstatement.
9. Explain the factors that impact the nature, timing, and extent of audit testing.
The nature of audit testing refers to the purpose of the test and the procedure used. The timing
of audit testing refers to the stage of the audit when procedures are performed and the date,
such as within or outside the accounting period, that audit evidence relates to. The extent of
audit testing refers to the amount of audit evidence gathered when testing controls and
conducting detailed substantive procedures.
Sampling and Overview of the Risk Response Phase of the Audit 6-3
TRUE-FALSE STATEMENTS
1. Sampling is required when an audit procedure is tested on an entire group of transactions or

all items within an account balance.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Explain how audit sampling is used in an audit.
Section Reference: 6.1 Audit sampling
CPA Competency: Auditing and Assurance
AACSB: Analytic
2. Sampling risk is the risk that the sample chosen by the auditor is not representative of the
population available for testing.
Answer: True
Difficulty: Medium
Learning Objective: Understand the difference between sampling and non-sampling risk.
Section Reference: 6.2 Sampling and non-sampling risk
AACSB: Analytic
3. The risk that the auditor concludes that a material misstatement exists when it does not is
likely to result in an increase in audit effort when it is not required.
Answer: True
Difficulty: Medium
AACSB: Analytic
4. Non-statistical sampling involves random selection and probability theory to evaluate the
results.
Answer: False
Difficulty: Medium
Learning Objective: Differentiate between statistical and non-statistical sampling.
Section Reference: 6.3 Statistical and non-statistical sampling

AACSB: Analytic
5. Stratification is when an auditor selects a sample for testing by dividing the number of
population items by the sample size, resulting in the sampling interval.
Answer: False
Difficulty: Medium
Learning Objective: Describe sampling methods and the factors to be considered when
choosing a sample.
Section Reference: 6.4 Sampling techniques and factors affecting sampling
AACSB: Analytic
6. Block selection involves the selection of items that are grouped together within the population
of items available.
Answer: True
Difficulty: Medium
choosing a sample.
AACSB: Analytic
7. Tolerable error is the minimum error an auditor is willing to accept within the population
tested.
Answer: False
Difficulty: Medium
choosing a sample.
AACSB: Analytic
8. Stratification of the population will result in less efficient sampling and increase the sample
size required.
Answer: False
Difficulty: Medium
choosing a sample.
AACSB: Analytic
9. An increase in the number of sampling units in the population will result in a decrease in the
sample size.
Answer: False
Difficulty: Medium
Learning Objective: Determine the factors that influence the sample size when testing controls.
Section Reference: 6.5 Factors that influence the sample size—testing controls
AACSB: Analytic
10. When auditors conclude that an internal control is effective, they will rely on the control to
prevent and detect a material misstatement and reduce their detailed substantive procedures.
Answer: True
Difficulty: Easy
Learning Objective: Determine the factors that influence the sample size when substantive
testing and consider techniques used to perform substantive tests.
Section Reference: 6.6 Factors that influence the sample size—substantive testing
AACSB: Analytic
11. When conducting substantive testing, an increase in the auditor's assessment of the risk of
material misstatement will result in an increase in the size of the sample.
Answer: True
Difficulty: Medium
AACSB: Analytic
12. Projected error refers to the extrapolation of the errors detected when testing a sample to
the population from which the sample was drawn.
Answer: True
Difficulty: Medium
Learning Objective: Outline how to evaluate the results of tests conducted on a sample.
Section Reference: 6.7 Evaluating sample test results
AACSB: Analytic
13. An audit plan includes the audit procedures to be used when testing controls and when
conducting detailed substantive audit procedures.
Answer: True
Difficulty: Easy
Learning Objective: Understand the difference between tests of controls and substantive tests.
Section Reference: 6.8 Tests of controls and substantive procedures
AACSB: Analytic
14. Tests of controls are audit procedures designed to detect material misstatements at the
assertion level.
Answer: True
Difficulty: Medium
AACSB: Analytic
15. The timing of audit testing refers to the stage of the audit when procedures are performed
and the date that audit evidence relates to.
Answer: False
Difficulty: Medium
Learning Objective: Explain the factors that impact the nature, timing, and extent of audit
testing.
Section Reference: 6.9 Nature, timing, and extent of audit testing
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
16. Sampling is not required when
a) it is the first year that the auditor has done the audit for a client.
b) the auditor is conducting tests of controls.
c) an audit procedure is conducted on an entire group of transactions.
d) the client requests the auditor not to collect samples of certain transactions.
Answer: c
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Explain how audit sampling is used in an audit.
Section Reference: 6.1 Audit sampling
AACSB: Analytic
17. Walter Polonia was explaining to his junior staff the implications of sampling risk when
conducting substantive testing. He made the following two statements:
(i) “If we conclude that a material misstatement does not exist when it does, then we
have an increased control risk.”
(ii) “If we conclude that a material misstatement exists when it does not we have an
inefficient audit.”
Which statements, if any, were true?
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) or (ii)
Answer: b
Difficulty: Medium
AACSB: Analytic
18. Non-sampling risk arises when an auditor
a) does not use sampling.

b) uses an inappropriate audit procedure.
c) tests all of the items in a population.
d) spends too much time testing the accounts most at risk of material misstatement.
Answer: b
Difficulty: Medium
AACSB: Analytic
19. Sampling risk for tests of controls is when
a) audit risk is reduced.

b) an auditor concludes that the audit client’s internal control system is effective when it is not.
c) an auditor concludes that material misstatements exist when they do not.
d) audit risk is increased.
Answer: b
Difficulty: Hard
AACSB: Analytic
20. Non-sampling risk is the risk that
a) an auditor selects an inappropriate method to select a sample.

b) an auditor reaches an inappropriate conclusion for any reason not related to sampling risk.
c) the sample chosen is not representative of the whole population.
d) none of the above
Answer: b
Difficulty: Medium
AACSB: Analytic
21. The risk that an auditor concludes that a material misstatement does not exist when it does
will result in an
a) increased risk that the audit will not be effective.

b) increased risk that the audit will be inefficient.
c) increase in the auditor’s assessment of the risk of material misstatement.
Answer: a
Difficulty: Hard
AACSB: Analytic
22. When testing controls, non-sampling risk is the risk that an auditor
a) designs tests that are ineffective.

b) does not select a sample.
c) both a and b
Answer: a
Difficulty: Medium
AACSB: Analytic
23. When testing controls, sampling risk is the risk that the auditor
a) concludes that their client's internal controls are ineffective when they are effective.
b) concludes that their client's internal controls are effective when they are ineffective.
c) both a and b
Answer: c
Difficulty: Medium
AACSB: Analytic
24. Which of the following statements regarding statistical sampling is correct?
a) It is easier to use than non-statistical sampling.

b) It involves haphazard selection.
c) It is generally used for low risk accounts.
6 - 10 Auditing: A Practical Approach, Third Canadian Edition
d) It involves random selection.
Answer: d
Difficulty: Medium
AACSB: Analytic
25. Which of the following is not an advantage of non-statistical sampling?
a) It allows an auditor to select a sample that they believe is appropriate.

b) It allows an auditor to measure sampling risk.
c) It is lower cost than statistical sampling.
d) It requires less staff training.
Answer: b
Difficulty: Medium
AACSB: Analytic
26. Which of the following statements about statistical sampling is correct?
a) Statistical sampling involves the use of random selection.

b) Statistical sampling uses probability theory to evaluate results.
c) Statistical sampling allows for the measurement of sampling risk.
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
27. Which of the following best describes the concept of key item testing?
a) the selection of items that are grouped together within the population of items available
b) the proportion of items tested that did not conform to the client’s prescribed control procedure
c) focus is on selecting the largest transactions within a balance to obtain coverage of the total
Sampling and Overview of the Risk Response Phase of the Audit 6 - 11
d) the selection of items that an auditor believes should be included in the sample for testing
Answer: c
Difficulty: Medium
AACSB: Analytic
28. Daniel Beauchamp did not perform a true sample when he went to his client to examine
sales invoices. He did not use any specific method for choosing the invoices. He let his eye
catch the items he thought might make up his sample. What technique did he use?
a) random selection
b) block selection
c) haphazard selection
d) stratified sample selection
Answer: c
Difficulty: Medium
choosing a sample.
AACSB: Analytic
29. George Melkonian wanted to determine whether his auditing class knew how different
factors influence sample size. He made two statements:
(i) “An increase in the expected rate of deviation of the population to be tested will
decrease sample size.”
(ii) “An increase in the tolerable rate of deviation will decrease sample size.”
George asked his class to indicate which of the statements, if any, were false.
a) (i) only
b) (ii) only
d) neither (i) nor (ii)
Answer: a
Difficulty: Medium
choosing a sample.

AACSB: Analytic
30. Random selection involves
a) dividing a population into groups of sampling units with similar characteristics.

b) the selection of a sample without the use of a methodical technique.
c) the selection of a sample that is free from bias and where each item in a population has an
equal chance of selection.
d) the selection of items that an auditor believes should be included in their sample for testing.
Answer: c
Difficulty: Easy
choosing a sample.
AACSB: Analytic
31. Which sampling method involves the selection of items that are grouped together within the
population of items available?
a) systematic selection
b) haphazard selection
c) random selection
d) block selection
Answer: d
Difficulty: Easy
choosing a sample.
AACSB: Analytic
32. When testing controls, the tolerable error is
a) the tolerable rate of deviation that an auditor will accept before concluding that a control is
effective.
b) the minimum rate of deviation that an auditor will accept.
c) the tolerable rate of deviation that an auditor will accept before concluding that a control is
ineffective.
d) the maximum amount of error in an account balance that an auditor will accept before
concluding that an account is materially misstated.
Answer: c
Difficulty: Medium
choosing a sample.
AACSB: Analytic
33. Which of the following statements is incorrect?
a) When detection risk is set as high, an auditor will require a high level of confidence that the
transactions and accounts are not materially misstated.
b) An auditor may decide to stratify the population before selecting a sample from it.
c) An auditor will use professional judgment to determine the tolerable error and required level
of confidence.
d) An auditor will use professional judgment when considering what would be considered an
error within the population tested.
Answer: a
Difficulty: Medium
choosing a sample.
AACSB: Analytic
34. Before selecting a sample, an auditor will use professional judgment to
a) set the required level of confidence.

b) set the tolerable error rate.
c) select an appropriate population for testing.
d) all of the above
Answer: d
Difficulty: Medium
choosing a sample.
AACSB: Analytic
35. Which of the following is a factor that influences the sample size when testing controls?
a) an increase in the auditor's assessment of the risk of material misstatement

b) an increase in the tolerable rate of deviation
c) stratification of the population when appropriate
d) an increase in tolerable misstatement
Answer: b
Difficulty: Medium
AACSB: Analytic
36. When testing controls, a decrease in the sample size will occur when there is
a) an increase in the tolerable rate of deviation.

b) a decrease in the tolerable rate of deviation.
c) an increase in the extent to which the auditor's risk assessment takes into account relevant
controls.
d) an increase in the number of sampling units in the population.
Answer: a
Difficulty: Medium
AACSB: Analytic
37. What impact will there be on sample size when there is an increase in the number of
sampling units in the population?
a) increase
b) decrease
c) negligible
Answer: c
Difficulty: Medium

AACSB: Analytic
38. Which of the following factors decreases sample size in tests of controls?
a) an increase in the expected deviation rate in the population

b) an increase in the extent to which an auditor’s risk assessment takes into account internal
controls
c) an increase in the number of sampling units in the population
d) an increase in the tolerable deviation rate
Answer: d
Difficulty: Medium
AACSB: Analytic
39. When conducting substantive testing, which of the following is not a factor that influences
the sample size?
a) an increase in the tolerable rate of deviation

b) an increase in the auditor's assessment of the risk of material misstatement
c) stratification of the population when appropriate
d) an increase in tolerable misstatement
Answer: a
Difficulty: Medium
AACSB: Analytic
40. What impact will there be on sample size for substantive testing when there is an increase in
the tolerable misstatement?
a) decrease
b) negligible
c) increase
Answer: a
Difficulty: Medium
AACSB: Analytic
41. An account is at a higher risk of misstatement when it requires
a) complex calculations.
b) estimation.
c) both a and b
d) simple valuation techniques.
Answer: c
Difficulty: Easy
AACSB: Analytic
42. When evaluating sample test results, which of the following statements is incorrect?
a) If an auditor discovers errors when testing transactions or account balances, they will need to
project the error to the population being tested.
b) An auditor will not consider whether the population was stratified before being sampled.
c) If an error is considered to be unique it will be removed before projecting remaining errors to
the population.
d) If the rate of deviation exceeds the tolerable rate the auditor will extend their testing.
Answer: b
Difficulty: Medium
AACSB: Analytic
43. If the total projected error in an account balance was $3,248 and the tolerable error was set
at $10,000, the auditor would
a) conclude that the errors uncovered are material.

b) decide that further audit work was required.
c) conclude that the errors detected are not material.
d) conduct other tests aimed at the assertion being tested.
Answer: c
Difficulty: Medium
AACSB: Analytic
44. Where an auditor concludes that the audit client’s systems of internal controls are
ineffective, he/she will
a) conclude that the client’s system of internal controls can be relied upon to detect potential
material misstatements.
b) conclude that the client’s system of internal controls cannot be relied upon to detect potential
material misstatements.
c) reduce the amount of reliance to be placed on substantive tests.
d) project the misstatements to the entire population.
Answer: b
Difficulty: Medium
AACSB: Analytic
45. When errors are discovered upon testing transactions or account balances, the auditor will
a) project the error to the entire population, if possible.

b) assess if the errors constitute an isolated event.
c) consider the impact of the errors.
d) all of the above
Answer: d
Difficulty: Medium
AACSB: Analytic
46. Vita Zitkauskas, the senior on the audit of Magna International, was explaining how audit
strategy and audit plans have an impact on tests of controls and substantive procedures. She
made two statements:

(i) Audit strategy details the audit procedures to be used when testing controls and
when conducting detailed substantive audit procedures.
(ii) The audit plan provides the basis for developing an audit strategy.
Which statements were true, if any?
a) (i) only
b) (ii) only
d) neither (i) or (ii)
Answer: d
Difficulty: Medium
AACSB: Analytic
47. Henrietta Lombardi assessed control risk to be low. What is the appropriate audit strategy to
adopt?
a) substantive audit approach

b) control testing strategy
c) combined audit strategy
d) substantive year end testing
Answer: c
Difficulty: Easy
AACSB: Analytic
48. Oliver DiPietro was testing the controls of Blue Coast Wholesale Fish Market. When testing
controls, which one of the following evidence gathering procedures is used?
a) vouching of transactions
b) confirmations of accounts receivable
c) tracing of transactions to source documents
d) enquiry of client personnel
Answer: d
Difficulty: Easy
AACSB: Analytic
49. Michael Fernandez has decided to perform substantive procedures at a major retailer.
Which one of the following is not a substantive procedure?
a) re-performing control procedures to test their effectiveness

b) inspecting documents to verify the dates of the transactions
c) bank confirmations regarding interest rates on borrowings by client
d) recalculating an interest expense using confirmed interest rates
Answer: a
Difficulty: Medium
AACSB: Analytic
50. Kenneth Beach wanted to ensure that all the transactions at his client were recorded.
For which assertion was he conducting these detailed substantive procedures?
a) occurrence
b) completeness
c) cut-off
Answer: b
Difficulty: Easy
AACSB: Analytic
51. Milushka Icaza, who was representing her CPA firm at a conference, made the following
statement about assertions: When our auditors conduct substantive procedures, we search for
evidence that recorded accounts exist and that all accounts that should have been recorded,
indeed have been recorded. Which assertions was she talking about?
a) rights and obligations

b) accuracy, valuation, and allocation
c) occurrence and completeness
Answer: c
Difficulty: Medium
AACSB: Analytic
52. Corey Hill used analytical procedures at his client, Ultimate Vacations. Which one of
these is not an analytical procedure?
a) Send confirmations to major customers.

b) Estimate revenue for Ultimate Vacations by multiplying trips sold by average price of vacation
packages.
c) Discuss unusual fluctuations with client personnel.
d) Compare wages month by month for this year and last year.
Answer: a
Difficulty: Easy
AACSB: Analytic
53. David Killbear has been involved in testing controls at Highbridge Falls. Which of these
control tests would be deemed ineffective?
a) reading a client’s policy manual

b) entering invalid passwords to see whether access is denied
c) both a and b
d) none of the above are effective controls
Answer: a
Difficulty: Medium
AACSB: Analytic
54. Olivia Peralta was training a team of new auditors and delivered some interesting rules of
thumb about control risk and detection risk:
(i) “The required level of confidence is a function of control risk when testing controls
and detection risk when conducting substantive tests.”
(ii) “When detection risk is determined to be low, an auditor will require a low level of
confidence that the transactions and accounts are not materially misstated.
Which of the above two statements are true?
a) (i) only
b) (ii) only
d) neither (i) nor (ii)
Answer: a
Difficulty: Medium
AACSB: Analytic
55. Control risk is the risk that:
a) an auditor expresses an inappropriate audit opinion when a financial statement is materially

misstated.
b) an auditor's substantive procedures will not detect material misstatements.
c) a client's system of internal controls will not prevent or detect a material misstatement.
Answer: c
Difficulty: Easy
AACSB: Analytic
56. Tests of controls are conducted to establish that
a) controls operate consistently throughout the period.

b) there are no material misstatements in the financial statements.
c) controls operate effectively.
d) both a and c
Answer: d
Difficulty: Medium
AACSB: Analytic
57. When conducting detailed substantive procedures, auditors search for evidence that
a) the client's internal control system is operating effectively.

b) all transactions have been recorded in the correct accounts.
c) no fraud has occurred during the year.
d) they have remained independent of their clients.
Answer: b
Difficulty: Medium
AACSB: Analytic
58. Substantive audit procedures include
a) detailed tests of balances.

b) analytical procedures.
c) detailed tests of transactions.
d) all of the above
Answer: d
Difficulty: Easy
AACSB: Analytic
59. When control risk is high, the audit strategy is to
a) do little or no tests of controls and increase reliance on substantive testing of transactions

and account balances.
b) assume the client's management is dishonest and immediately report them to the Canada
Revenue Agency (CRA).
c) increase reliance on tests of controls and reduce reliance on substantive testing of
transactions and account balances.
d) refuse to continue with the remainder of the audit due to the high risk of fraud.
Answer: a
Difficulty: Medium
AACSB: Analytic
60. Tests of controls are conducted to
a) make an assessment of detection risk.

b) assess if controls are operating effectively and efficiently throughout the year.
c) determine how the internal controls operate.
d) gain knowledge of the methods and procedures the entity uses to record transactions.
Answer: b
Difficulty: Easy
AACSB: Analytic
61. Which assertion does the objective that transactions and events have been recorded in the
correct accounting period relate to?
a) cut-off
b) completeness
c) accuracy
d) classification
Answer: a
Difficulty: Easy
AACSB: Analytic
62. Which audit objective does the recalculation of the wages payable amount address?
a) rights and obligations

b) completeness
c) accuracy
d) occurrence
Answer: d
Difficulty: Medium
AACSB: Analytic
63. Which audit assertion does the audit procedure of obtaining a confirmation from selected
accounts receivable of amounts owed to the audit client relate to?
a) existence
b) classification
c) accuracy
d) completeness
Answer: a
Difficulty: Medium
AACSB: Analytic
64. Substantive procedures or tests can be described as
a) procedures to detect errors in the accounts.

b) audit procedures to detect material misstatements at the assertion level.
c) procedures to assess audit risk.
d) audit procedures to evaluate the operating effectiveness of internal controls.
Answer: b
Difficulty: Medium
AACSB: Analytic
65. For high-risk accounts, the timing of most audit procedures will be
a) whenever the client says it is most convenient for them to be conducted.

b) at, or after, year-end.
c) before year end.
d) during the interim audit testing stage.
Answer: b
Difficulty: Medium
testing.
AACSB: Analytic
SHORT ANSWER QUESTIONS
66. Explain sampling risk as it relates to both tests of controls and substantive procedures.
Answer: Sampling risk is the risk that the sample chosen by the auditor is not representative of
the population of transactions or items within an account balance available for testing and, as a
consequence, the auditor arrives at an inappropriate conclusion. When testing controls,
sampling risk is the risk that an auditor relies on their client's system of internal controls when
they should not do so (that is, the auditor concludes that their client's internal controls are
effective when they are ineffective), and the risk that an auditor concludes that their client's
internal controls are less reliable than they really are (that is, the auditor concludes that their
client's internal controls are ineffective when they are effective). When conducting substantive
tests, sampling risk is the risk that an auditor concludes that a material misstatement does not
exist when it does or an auditor concludes that a material misstatement exists when it does not.
Bloomcode: Application
Difficulty: Medium
AACSB: Analytic
67. Indicate whether you agree or disagree with the following statements and explain your
reasoning.
a) Helen Holt was explaining to her group partner that the completeness assertion implies that
transactions and events that have been recorded have occurred and pertain to the entity.
b) Keith Lake was explaining to Ben Fitz how sampling risk works for the audit team:
“Sampling risk is the risk that as auditors we will arrive at a conclusion that has nothing to
do with sampling issues.”
c) Larry Baneiro was vehemently arguing about the benefits of using non-statistical versus
statistical sampling methods for a client in the excavation business. Here is what he had to
say about non-statistical sampling: “Non-statistical sampling is easier to use than statistical
sampling, it requires less staff training, it has lower cost, and it allows an auditor to make a
sample choice that they believe is appropriate.”
d) Georgia Walters has started her sample selection of sales transactions for a gemstone
conglomerate. She believes that she can improve audit efficiency by stratifying the sample.
Answer:
a) Disagree. The occurrence assertion implies that transactions and events that have been
recorded have occurred and pertain to the entity. The completeness objective infers that all
transactions that should have been recorded, indeed have been recorded.
b) Disagree. Keith Lake was describing non-sampling risk. Sampling risk is the risk that an
auditor will conclude that a material misstatement exists when it does not or a material
misstatement does not exist when it does.
c) Agree. All the elements Larry brings up are generally true. Statistical sampling can have the
disadvantage of the cost involved in using it. Most audit firms use a combination of
statistical and non-statistical sampling as both methods provide appropriate audit evidence
and allow the auditor to form a conclusion on the items being tested.
d) Agree. Stratification can be used ahead of random selection to improve audit efficiency.
This means that an auditor partitions a population ahead of sampling, by identifying sub
populations with similar characteristics. For example, for accounts receivable, the auditor
may stratify high dollar items or balances that are overdue. After stratifying a population,
items can be randomly selected within each stratum. Thus, stratification can be used to
ensure the sample includes items that have the characteristics required by the auditor, such
as the inclusion of material or risky items in the sample, while remaining a statistical
sampling technique, when items are randomly selected.
Difficulty: Medium
choosing a sample.
AACSB: Analytic
68. Describe the major types of sampling techniques available to auditors.
Answer: There are a range of sampling techniques available to auditors which include random
selection, systematic selection, haphazard selection, block selection and judgment selection.
Random selection requires that the person selecting the sample does not influence the choice
of items selected. The resulting sample is then free from bias and each item within the
population has an equal chance of being selected for testing. Random number generators can
be used to select a sample. Systematic selection involves the selection of a sample for testing
by dividing the number of items in a population by the sample size, resulting in the sampling
interval (n). Once the sampling interval has been determined a starting point is selected, which
is an item in the population below the sampling interval, and then the sample is selected by
selecting the first item and then every nth item after that. Haphazard selection involves the
selection of a sample by an auditor without using a methodical technique. Block selection
involves the selection of items that are grouped together within the population of items available.
Judgmental selection involves the selection of items that an auditor believes should be included
in their sample for testing. When testing controls, judgment may be used to ensure that
transactions processed when a new computer is installed are included in the sample. When
conducting substantive testing, judgment may be used to include in the sample large or unusual
items.
Difficulty: Medium
choosing a sample.
AACSB: Analytic
69. Identify and explain the factors that influence the sample size for tests of controls.
Answer: There are a number of factors that will influence the sample size when testing controls.
The first factor is an increase in the extent to which the risk of material misstatement is reduced
by the operating effectiveness of controls. If an auditor believes that a control will be effective in
reducing an identified risk of material misstatement, their audit strategy will be to increase
testing of that control to ensure it is effective. When concluding that a control is effective, an
auditor will rely on that control to prevent and detect a material misstatement, and reduce their
detailed substantive procedures. The second factor is an increase in the rate of deviation from
the prescribed control activity that the auditor is willing to accept. There is an inverse
relationship between the tolerable rate of deviation and sample size. If an auditor intends to rely
on a control to prevent and detect a material misstatement, a lower tolerable error rate will be
set and the sample size will be increased to provide the auditor with the evidence required to
demonstrate that the control is effective. If an auditor expects to place relatively more reliance
on their substantive procedures and reduce their reliance on an internal control, they will
increase the tolerable rate of deviation and reduce the sample size when testing the control.
The third factor is an increase in the rate of deviation from the prescribed control activity that the
auditor expects to find in the population. If an auditor believes that the rate of deviation has
increased when compared to prior audits, they will increase the sample size to accurately
evaluate the impact of the changed circumstances. The fourth factor is an increase in the
auditor's required confidence level. When control risk is assessed as low for a risk factor, an
auditor's required level of confidence in the effectiveness of their client's internal control is
higher than when control risk is assessed as medium to high. If an auditor is to rely on their
client's internal control procedures to prevent or detect an identified material misstatement, their
required confidence level in that control increases and they will increase the sample size when
testing that control. The fifth and final factor is an increase in the number of sampling units in the
population. When a population is large and fairly homogenous, there is little benefit from
continuing to increase the sample size as the results from continued testing should confirm early
findings.
Difficulty: Medium
AACSB: Analytic
70. Explain how auditors evaluate the results of tests of controls conducted on a sample.
Answer: After an auditor has completed their audit testing, the next stage is to evaluate the
results. When testing controls, an auditor will consider whether the results of their tests applied
to a sample provide evidence that the control tested is effective within the entire population. If
an auditor discovers departures from prescribed controls when testing controls, a deviation rate
will be calculated. The deviation rate is the proportion of departures within the sample. If the
sample is representative of the population, the auditor will compare this deviation rate with their
tolerable rate of deviation. If the rate of deviation exceeds the tolerable rate, the auditor will
extend their testing and gather further evidence of other controls that may be aimed at reducing
the identified risk of material misstatement. If after conducting more testing the auditor finds that
the rate of deviation remains consistent with their initial findings and other controls are similarly
ineffective, the auditor will conclude that the client's system of internal controls cannot be relied
upon to prevent or detect a potential material misstatement and the auditor will increase their
reliance on their substantive tests of the account tested.
Difficulty: Medium
AACSB: Analytic
71. Explain the differences between the main objectives of tests of controls and substantive
procedures.
Answer: Tests of controls are conducted to establish that controls: operate effectively, meaning
that the rate of deviation from prescribed control procedures are minimized and controls
effectively prevent and detect material misstatements, and operate consistently throughout the
accounting period.
When conducting detailed substantive procedures, an auditor searches for evidence that
recorded transactions occurred and relate to the client (occurrence assertion), that all
transactions have been recorded (completeness assertion), that all transactions have been
recorded at appropriate carrying amounts (accuracy assertion), that all transactions have been
recorded in the correct accounting period (cut-off assertion) and that all transactions have been
recorded in the correct accounts (classification assertion). Detailed substantive procedures also
involve an auditor searching for evidence that recorded accounts such as assets, liabilities and
equity accounts exist (existence assertion), that all accounts that should have been recorded
have been recorded (completeness assertion), that recorded accounts represent items owned
by the client or amounts owed by the client to third parties (rights and obligations assertion) and
that recorded accounts appear at appropriate carrying amounts(accuracy, valuation and
allocation assertion).
Difficulty: Medium
AACSB: Analytic
72. CGA-CANADA AUDITING 1 EXAMINATION Dec 2001 — Question 2
Explain the differences between attribute sampling and sampling for substantive testing
purposes, in terms of the auditor’s purpose, the definition of exceptions, and the relevance of
materiality to the techniques.
Answer:
Attribute Sampling Substantive Testing
Sampling
Auditor purpose It confirms whether or not It provides direct substantive

control objectives are met in evidence for financial
order to assess control risk, statement
but provides no direct assertions
evidence about financial
statements
Definition of exceptions An error is the failure to apply An error is where a

a control procedure. It is a transaction is recorded in the
“yes or no” determination that wrong amount or to the
results in wrong account. It can
an exception rate. be quantified in monetary
terms.
It is often described with
reference to materiality.
Materiality Materiality is not relevant. It The aggregate and projected

is the tolerable deviation rate monetary errors must be
that is used to evaluate considered in light of
results. materiality (as both
quantitatively and
qualitatively defined). They
may be quantified as a
“tolerable misstatement.”
Source: Question 2, CGA-CANADA AUDITING 1 EXAMINATION, Dec 2001. ©2015 CPA

Canada. This item is reproduced here for your use with the permission of the Chartered
Professional Accountants of Canada. It should not be copied or distributed in any form as this
would cause an infringement of Chartered Professional Accountants of Canada's copyright.
Difficulty: Medium
AACSB: Analytic
ESSAY QUESTIONS
73. A range of sampling techniques are available to auditors. Evaluate the advantages and
disadvantages of the major techniques.
Answer: Answers may vary.
Difficulty: Medium
choosing a sample.
AACSB: Analytic
74. The most common statistical sample selection method according to the study by Hall et al
(2002) is dollar-unit sampling. Explain in detail how this method operates and evaluate the
advantages and disadvantages of using it.
Difficulty: Medium
choosing a sample.
AACSB: Analytic
75. An auditor uses professional judgment when determining the nature, timing and extent of
audit procedures to use for each audit. Explain why the nature, timing and extent of audit testing
are crucial factors in every audit.
Difficulty: Medium
testing.
AACSB: Analytic
CASE QUESTION
76. Joe Jones walked out of the Old Rock Bakery operation and chewed on a Cheese Danish.
He had chosen random selection to test for proper authorization of purchasing transactions. He
had just completed the initial audit testing of the purchasing transactions and had evaluated the
results. His conclusion was that the deviation rate of 12 exceptions in a sample of 80 transactions
was relatively high.
In addition, Joe was preparing to start the audit of another client, Rohr Industries, an airplane
component manufacturer. He had discussed sampling methodology with his audit team and it
had been determined that the Rohr Industries systems did not lend themselves easily to
statistical sampling techniques. The audit team would have to employ non-statistical sampling.
Required:
a) What is the procedure that Joe Jones would follow when his initial testing showed a
relatively high deviation rate for the Old Rock Bakery transactions?
b) What is non-statistical sampling?
c) Describe the non-statistical sampling methods that were open to Joe and his team for the
Rohr Industries audit.
d) Which of Joe’s two clients’ systems would lend themselves to stratification?
Answer:
a) After discovering the high deviation rate, Joe would perform the following:
1. Compare the deviation rate with the tolerable rate of deviation.
2. If the rate of deviation exceeds the tolerable rate, then Joe would extend testing and
gather further evidence of other controls that may be aimed at reducing the identified
risk of material misstatement.
3. If after conducting more testing Joe finds that the rate of deviation remains consistent
with his initial findings and other controls are similarly ineffective, Joe would conclude
that the client's system of internal controls cannot be relied upon to prevent or detect a
potential material misstatement.
4. Joe would then increase his reliance on substantive tests of the account being tested.
b) Non-statistical sampling is any sample selection method that does not have the
characteristics of statistical sampling. It is generally easier to use, and requires less
resources and training.
c) Haphazard selection involves the selection of a sample by an auditor without using a

methodical technique. There is a risk that an auditor will avoid selecting some items or
ensure other items are included in the sample. For example, an item that is going to be
difficult to test because the documentation is held in another location may be deliberately
excluded by the auditor, while an item that looks large or unusual and catches the auditor's
eye may be included. This is a non-statistical technique as human bias may impact the
sample selected, and therefore prevent the sample from being a true random sample.
Block selection involves the selection of items that are grouped together within the popu-
lation of items available. This is a non-statistical technique as many populations of items
are sorted in a sequence, which makes the selection of groups of items in a block inap-
propriate. For example, transactions are generally grouped in date order; by using block
selection the items selected will not be representative of transactions made throughout the
year.
Judgmental selection involves the selection of items that an auditor believes should be
included in their sample for testing. When testing controls, judgment may be used to ensure
that transactions processed when a new computer is installed are included in the sample.
When conducting substantive testing, judgment may be used to include in the sample large
or unusual items. This is a non-statistical sampling technique.
d) Stratification consists of the process of dividing a population into groups of sampling units
with similar characteristics.
This means that if Joe’s audit team can partition a population of transactions into sub
populations that have similar characteristics, such as high dollar values, there will be audit
efficiencies.
Stratification is usually performed ahead of random selection. There is an indication that the
Rohr Industries systems do not lend themselves easily to statistical sampling techniques
and that the audit team has decided to employ non-statistical sampling. Hence, stratification
will be more practicable for the Old Rock Bakery audit as it is already using random
sampling techniques.
Difficulty: Medium
choosing a sample.
AACSB: Analytic
LEGAL NOTICE
Copyright © 2018 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished
under license and may be used only in accordance with the terms of such license.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
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Auditing A Practical Approach

Canadian 3rd Edition Moroney Test

1. Explain how audit sampling is used in an audit.

2. Understand the difference between sampling and non-sampling risk.

3. Differentiate between statistical and non-statistical sampling.

4. Describe sampling methods and the factors to be considered when choosing a

7. Outline how to evaluate the results of tests conducted on a sample.

8. Understand the difference between tests of controls and substantive tests.

1. Sampling is required when an audit procedure is tested on an entire group of transactions or

Section Reference: 6.3 Statistical and non-statistical sampling

MULTIPLE CHOICE QUESTIONS

16. Sampling is not required when

Which statements, if any, were true?

18. Non-sampling risk arises when an auditor

a) does not use sampling.

19. Sampling risk for tests of controls is when

a) audit risk is reduced.

20. Non-sampling risk is the risk that

a) an auditor selects an inappropriate method to select a sample.

a) increased risk that the audit will not be effective.

d) none of the above

a) designs tests that are ineffective.

24. Which of the following statements regarding statistical sampling is correct?

a) It is easier to use than non-statistical sampling.

d) It involves random selection.

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

a) It allows an auditor to select a sample that they believe is appropriate.

26. Which of the following statements about statistical sampling is correct?

a) Statistical sampling involves the use of random selection.

Section Reference: 6.4 Sampling techniques and factors affecting sampling

30. Random selection involves

a) dividing a population into groups of sampling units with similar characteristics.

32. When testing controls, the tolerable error is

33. Which of the following statements is incorrect?

34. Before selecting a sample, an auditor will use professional judgment to

a) set the required level of confidence.

a) an increase in the auditor's assessment of the risk of material misstatement

a) an increase in the tolerable rate of deviation.

CPA Competency: Auditing and Assurance

a) an increase in the expected deviation rate in the population

a) an increase in the tolerable rate of deviation

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

a) conclude that the errors uncovered are material.

d) conduct other tests aimed at the assertion being tested.

a) project the error to the entire population, if possible.

made two statements:

Which statements were true, if any?

a) substantive audit approach

a) re-performing control procedures to test their effectiveness

a) rights and obligations

d) none of the above

a) Send confirmations to major customers.

a) reading a client’s policy manual

Which of the above two statements are true?

55. Control risk is the risk that:

a) an auditor expresses an inappropriate audit opinion when a financial statement is materially

56. Tests of controls are conducted to establish that

a) controls operate consistently throughout the period.

a) the client's internal control system is operating effectively.

58. Substantive audit procedures include

a) detailed tests of balances.

59. When control risk is high, the audit strategy is to

a) do little or no tests of controls and increase reliance on substantive testing of transactions