You are on page 1of 11

Chapter 10 Statistical Sampling for Substantive Testing 160

Statistical Sampling for Substantive Testing

MULTIPLE CHOICE:

1. In applying variables sampling, an auditor attempts to


a. Estimate a qualitative characteristic of interest.
b. Determine various rates of occurrence for specified
attributes.
c. Discover at least one instance of a critical error.
d. Predict a monetary population value within a range of
precision. d

2. The measure of variability of a statistical sample that


serves as an estimate of the population variability is
the
a. Basic precision.
b. Range.
c. Standard deviation.
d. Interval. c

3. An auditor selects a statistical sample from a large


inventory of replacement parts. Which of the following
audit objectives would be most appropriate if the
sampling method used is probability proportional to size
(PPS)?
a. The auditor plans to estimate the total dollar value of
the inventory when a recorded book value does not
exist.
b. The auditor plans to make a statement concerning the
total dollar amount of error in the population from the
recorded book value.
c. The auditor wishes to accept or reject the hypothesis
that the proportion of defective parts in the
population is less than 5%.
d. The auditor wishes to estimate the proportion of
defective parts in the population. b

4. Precision is defined as the range (plus or minus) within


which the true answer most likely falls. Reliability, also
referred to as the confidence level, is the likelihood that the
sample range contains the true value. Of the following
statements concerning precision and reliability, which one is not
true?
a. Precision is set by the auditor and is a function of
materiality and risk.
b. The narrower the range of precision, the smaller the sample
size.
c. An increase in control risk, other parameters remaining
161 Chapter 10 Statistical Sampling for Substantive Testing

unchanged, causes a narrowing of the precision range.


d. Overall audit risk is the complement of reliability. b

5. In an application of mean per unit sampling, the following


information has been obtained:
Reported book value $600,000
Point estimate (estimated total value) 591,000
Allowance for sampling risk (precision) +- 22,000
Tolerable error +- 45,000
The appropriate conclusion would be that the reported book
value is
a. Acceptable only if the risk of incorrect rejection is
at least twice the risk of incorrect acceptance.
b. Acceptable.
c. Not acceptable.
d. Acceptable only if the risk of incorrect acceptance is
at least twice the risk of incorrect rejection. b

6. Sampling risk refers to the possibility that:


a. The auditor may use a less than optimal statistical
method for the circumstances, e.g. difference
estimation instead of ratio estimation.
b. The auditor may fail to recognize an error that is
included in the sample.
c. Even though a sample is properly chosen, it may not be
representative of the population.
d. The confidence level and/or precision established by
the auditor are not appropriate. c

7. The primary reason for an auditor to use statistical


sampling is to
a. Obtain a smaller sample than would be required by
non-statistical sampling techniques.
b. Obtain a sample more representative of the population
than would be obtained by non-statistical sampling
techniques.
c. Allow the auditor to quantify, and therefore control,
the risk of making an incorrect decision based on
sample evidence.
d. Meet requirements of Statements on Auditing
Standards. c

8. The variability of a population, as measured by the standard


deviation, is the
a. Extent to which the individual values of the items in
the population are spread about the mean.
b. Degree of asymmetry of a distribution.
c. Tendency of the means of large samples (at least 30
Chapter 10 Statistical Sampling for Substantive Testing 162

items) to be normally distributed.


d. Measure of the closeness of a sample estimate to a
corresponding population characteristic. a

9. Management has asked the internal auditing staff to evaluate


the efficiency of the accounts payable system, particularly
whether it would be economically feasible to reduce the
number of discounts lost through slow payment. The
audit staff decides that it needs to determine the
amount currently being lost and can do so by taking
a sample from payments made in the last six months, examining
each, and recording the amount, if any, of the discount
lost. This information can be used to project the total
amount of discounts lost for the period. This proposed
plan is an example of
a. Attribute sampling.
b. Acceptance sampling.
c. Variables sampling.
d. Discovery sampling. c

10. During an audit involving testing of accounts receivable


balances, an auditor decides to specify a precision interval
of $100,000 instead of the $200,000 precision interval that
was called for in the sampling plan contained in the audit
program. Which of the following would be a result of
the auditor's decision to narrow the precision interval?
a. An increase in the required sample size.
b. A decrease in the required sample size.
c. An increase in the population standard deviation.
d. A decrease in the population standard deviation. a

11. To determine the number of items to be selected in a sample


for a particular substantive test of details, the auditor
should consider all of the following except
a. Tolerable error.
b. Expected error.
c. Allowable risk of incorrect acceptance.
d. Characteristics of the population. d

12. Sample size


a. Increases with the use of higher confidence levels.
b. Decreases with the use of higher confidence levels.
c. Remains unchanged with changes in confidence levels.
d. Increases with the use of lower confidence levels. a

13. In sampling for variables, which of the following must be


known in order to estimate the appropriate sample size
required to meet the auditor's needs in a given
163 Chapter 10 Statistical Sampling for Substantive Testing

situation?
a. The total amount of the population.
b. The desired standard deviation.
c. The desired confidence level.
d. The estimated rate of error in the population. c

14. In a variables sampling application, which of the following


will result when the confidence level is changed from 90% to
95%?
a. Standard error of the mean will not be affected.
b. Non-sampling error will decrease.
c. Sample size will increase.
d. Point estimate of the arithmetic mean will increase. c

15. An auditor wishes to estimate inventory shrinkage by


weighing a sample of inventory items. From past
experience, the auditor knows that a few specific
items are subject to unusually large amounts of shrinkage.
In using statistical sampling, the auditor's best course of
action is to
a. Eliminate any of the items known to be subject to
unusually large amounts of shrinkage.
b. Increase the sample size to lessen the effect of the
items subject to unusually large amounts of shrinkage.
c. Stratify the inventory population so that items subject
to unusually large amounts of shrinkage are reviewed
separately.
d. Continue to draw new samples until a sample is drawn
which includes none of the items known to be subject to
large amounts of shrinkage. c

16. In conducting a substantive test of an account balance, an


auditor hypothesizes that no material error exists. The
risk that sample results will support the hypothesis
when a material error actually does exist is the risk of
a. Incorrect rejection.
b. Alpha error.
c. Incorrect acceptance.
d. Type I error. c

17. 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
Chapter 10 Statistical Sampling for Substantive Testing 164

documents examined for the chosen sample.


d. The documents related to the chosen sample may not be
available for inspection. a

18. Using the following results from a variables sample, compute


the achieved precision:

Population size = 10,000


Sample size = 144
Sample standard deviation = $24.00
Confidence level = 90% (Z = 1.65)
Mean = $84.00
a. $5,702
b. $33,000
c. $20,000
d. $16,500 b

19. Which of the following sampling plans would be designed to


estimate a numerical measurement of a population, such as a
dollar value?
a. Discovery sampling.
b. Numerical sampling.
c. Sampling for variables.
d. Sampling for attributes. c

20. An auditor is using the mean-per-unit method of variables


sampling to estimate the correct total value of a group of
inventory items. Based on the sample, the auditor estimates
with precision of +-4% and confidence of 90% that the
correct total is $800,000. This means that:
a. There is a 4% chance that the actual correct total is
less than $720,000 or more than $880,000.
b. There is a 10% chance that the actual correct total is
less than $768,000 or more than $832,000.
c. The probability that the inventory is not significantly
overstated is between 6% and 14%.
d. The inventory is not likely to be overstated by more than
4.4% ($35,200) nor understated by more than 3.6%($28,800). b

21. Which of the following statements is correct concerning the


auditor's use of statistical sampling?
a. An auditor needs to estimate the dollar amount of the
standard deviation of the population to use classical
variables sampling.
b. An assumption of PPS sampling is that the underlying
accounting population is normally distributed.
c. A classical variables sample needs to be designed with
special considerations to include negative balances
165 Chapter 10 Statistical Sampling for Substantive Testing

in the sample.
d. The selection of zero balances usually does not require
special sample design considerations when using PPS
sampling. a

22. Which of the following statements concerning alpha and beta


risk is true?
a. As alpha risk increases, beta risk decreases.
b. As inherent risk and/or control risk increase, beta risk
should also increase.
c. As inherent risk and/or control risk increase, beta risk
should decrease.
d. As a "rule of thumb," the auditor generally sets beta risk
equal to or less than 10%, inasmuch as it is the basis for the
audit opinion. c

23. Statistical samples as compared to non-statistical samples


permit the auditor to
a. Quantify and control sampling risk.
b. Eliminate non-sampling errors of every type.
c. Obtain smaller sample sizes in all cases.
d. Use less complex formulas than those required to
evaluate non-statistical samples. a

24. Probability-proportional-to-size (PPS) sampling is less


efficient if
a. Computerized account balances are being audited.
b. Statistical inferences are to be made.
c. The audit objective is oriented to understatements.
d. The account contains a large number of transactions. c

25. A number of factors influences the sample size for a


substantive test of details of an account balance. All
other factors being equal, which of the following would
lead to a larger sample size?
a. Lowering of assessed level of control risk.
b. Lowering of assessed inherent risk through use of
analytical review procedures.
c. Smaller expected frequency of errors.
d. Smaller measure of tolerable error. d

26. For variables sampling purposes, changes in certain


parameters affect sample size positively while changes in others
have a negative effect. In this regard, which of the following
statements is true?
a. An increase in beta risk reduces sample size.
b. Population size affects sample size inversely, i.e., as
population size increases, sample size decreases.
Chapter 10 Statistical Sampling for Substantive Testing 166

c. An increase in alpha risk increases sample size.


d. As materiality (M) increases, sample size increases. a

27. A population that is physically separated into two or more


groups based on the sample variation being less than that
for the entire population is called a
a. Systematic sample.
b. Judgment sample.
c. Simple random sample.
d. Stratified sample. d

28. The standard deviation of a sample will usually decrease


with
a. A decrease in sample size.
b. The use of stratification.
c. An increase in desired precision.
d. An increase in confidence level. b

29. An auditor is primarily concerned with substantial


overstatements of accounts receivable balances and
expects few, if any, errors. In an effort to concentrate
on the large dollar values, the auditor would logically
employ
a. Ratio estimation.
b. Probability proportional to size sampling
c. Discovery sampling.
d. Mean per unit sampling. b

30. Consider the following sampling plan: An auditor took a


sample of 30 receiving reports completed in the last 12
months. The receiving reports were filed along with
their corresponding requisitions and purchase orders by
the date on which the goods were moved from the receiving
department to their storage area in the warehouse. Sampling
from a five-place random digit table, the first two
digits were used to determine the month (from 1 to 12)
and the next two digits to determine the day of the month
(from 1 to 31). The auditor discarded random numbers for
which corresponding dates did not exist or on which the
warehouse was closed. For each selected date the auditor
then took as the sample item the second report in the file for
that day. Can the auditor rely on the statistical
inference of this test?
a. Yes, because the plan eliminated any possible
deliberate or unconscious bias in the auditor's
selection of the sample items.
b. Yes, because a random number table was used to make the
selection.
167 Chapter 10 Statistical Sampling for Substantive Testing

c. No, because the auditor sampled without replacement.


d. No, because all items do not have an equal chance of
being selected. d

31. In testing accounts receivable, an auditor sends out


positive confirmation requests to 100 randomly
selected customers. A customer returns the confirmation
indicating that the balance is correct when, in fact, the
balance is overstated. This is an example of
a. Tainting.
b. Sampling error.
c. Standard error.
d. Non-sampling error. d

32. An auditor wishes to use stratified sampling to estimate the


book value of a large accounts receivable file. The auditor
has a complete listing of the file in account number order.
The listing is several pages long and includes the account
balance of each customer. Several customers have very
large account balances while most balances are small. Which
of the following would be the most appropriate means of
classifying members of this population into
strata?
a. Account balance.
b. Account number.
c. Alphabetically by name.
d. Numerically by pages of the listing. a

33. Auditors who prefer statistical to non-statistical sampling


believe that the principal advantage of statistical sampling
flows from its unique ability to
a. Define the precision required to provide adequate
satisfaction.
b. Provide a mathematical measurement of risk.
c. Establish conclusive audit evidence with decreased
audit effort.
d. Promote a more legally defensible procedural approach. b

34. In a probability-proportional-to-size sample with a sampling


interval of $10,000, an auditor discovered that a selected
account receivable with a recorded amount of $5,000 had an
audit amount of $2,000. The projected error of this
sample was
a. $3,000
b. $4,000
c. $6,000
d. $8,000 c
Chapter 10 Statistical Sampling for Substantive Testing 168

35. An auditor selects a preliminary sample of 100 items out of


a population of 1,000 items. The sample statistics generate an
arithmetic mean of $60, a standard deviation of $6, and a
standard error of the mean of $.60. If the sample was
adequate for the auditor's purposes and the auditor's desired
precision was plus or minus $1,000, the minimum acceptable dollar
value of the population would be
a. $61,000.
b. $60,000.
c. $59,000.
d. $58,800. c

36. During the audit of inventories an external auditor


specified a precision of five percent instead of the
four percent contained in the preliminary audit
program. What would be the impact of the change in
precision?
a. A decrease in population standard deviation.
b. An increase in population standard deviation.
c. A decrease in required sample size.
d. An increase in required sample size. c

37. The inventory of a subsidiary consists of 12,980 items


valued at $19,625,000. The inventory data are not
available in computer readable form, but are contained in
217 pages of printout with 60 lines per page. Each page has a
page total. Based on the last audit, the auditor
expects there to be a few errors of overstatement. The most
efficient
sampling technique to test the reasonableness of the stated
value is
a. Stratified mean-per-unit estimation.
b. Probability proportional to size sampling (PPS)
c. Difference estimation.
d. Ratio estimation. b

38. Statistical sampling would be appropriate to estimate the


value of an auto dealer's 3,000 line-item inventory
because statistical sampling is:
a. Reliable and objective.
b. Thorough and complete.
c. Thorough and accurate.
d. Complete and precise. a

39. In a variables estimation application involving a book value


of $550,000, with a tolerable error of specified precision
limits of plus or minus $50,000, the auditor has
169 Chapter 10 Statistical Sampling for Substantive Testing

calculated a point estimate of the population value to be


$490,000. At the 95% reliability level, sample results indicate
an achieved precision of plus or minus $50,000.
Based on these data, the auditor would
a. Conclude that the book value is acceptable at the 95%
reliability level.
b. Reject the book value and extend control testing.
c. Conclude that the book value is acceptable at a
level of reliability higher than 95%.
d. Extend substantive testing. d

40. What effect does an increase in the standard deviation have


on the required sample size of mean-per-unit estimation and
probability proportional to size sampling? Assume no change in
any of the other characteristics of the population and no change
in desired precision and confidence.
Mean-per-unit Estimation PPS

a. Decrease in sample size No change in sample size


b. No change in sample size Decrease in sample size
c. Increase in sample size No change in sample size
d. No change in sample size Increase in sample size c

41. Use of the difference estimation sampling technique to


estimate dollar amounts is inappropriate when
a. The total book value is known and corresponds to the
sum of all the individual book values.
b. A book value for each sample item is unknown.
c. There are some observed differences between audited
values and book values.
d. The audited values are nearly proportional to the book
value. b

42. Select the description which illustrates sampling risk.


a. Applying audit procedures which are inappropriate for
the audit objectives.
b. Failing to recognize errors or deviations in the
documents examined.
c. Arriving at incorrect statistical conclusions due to
computational errors.
d. Choosing a sample which has proportionately more errors
than the population.d

43. A bank auditor is interested in estimating the average


account balance of its depositors based on a sample.
This substantive test is an example of
a. Attribute sampling.
b. Discovery sampling.
Chapter 10 Statistical Sampling for Substantive Testing 170

c. Acceptance sampling.
d. Variables sampling.d