15.5 Learning Objective 15-5
1) The risk which the auditor is willing to take in accepting a control as being effective when the
true population exception rate is greater than a tolerable rate is the
A) finite correction factor.
B) tolerable exception rate.
C) acceptable risk of overreliance.
D) estimated population exception rate.
2) The exception rate the auditor will permit in the population and still be willing to conclude
that the control is operating effectively is the
A) tolerable exception rate.
B) estimated population exception rate.
C) acceptable risk of overreliance.
D) sample exception rate.
3) If the auditor decides to assess control risk at the moderate level in a private company audit,
when in previous years the auditor set control risk at the maximum level, then tests of controls
for the current year would be
A) increased in number.
B) reduced in number.
C) not performed.
D) unchanged from prior planned settings.
4) When the computed upper exception rate (CUER) is greater than the tolerable exception rate
(TER), it is necessary for the auditor to take specific action. Which of the following courses of
action would be most difficult to justify?
A) Reduce the tolerable exception rate so as to accept the sample results.
B) Expand the sample size and perform more tests.
C) Revise the assessed control risk upward.
D) Write a letter to management which outlines the control deficiencies.
5) Which of the following would have the least impact in determining sample size?
A) acceptable risk of overreliance
B) risk of assessing control risk too low
C) tolerable exception rate
D) population size
6) Which of the following represents the best description of the tolerable exception rate?
A) the highest exception rate the auditor will permit in the control being tested and still conclude
it is operating effectively
B) the highest exception rate the auditor expects to find in the population
C) the number of exceptions found in the sample divided by the sample size
D) the highest estimated exception rate in a population at a given estimated population exception
rate.
7) When analyzing exceptions, the auditor should keep in mind that
A) all exceptions must be reported to management.
B) they should determine the breakdown in the internal controls that allowed the exceptions to
occur.
C) the nature of an exception and its causes have no effect on the qualitative evaluation of the
system.
D) exceptions do not need to be analyzed if it is too costly.
8) The exception rate that the auditor will permit in the population and still be willing to use the
preliminary control risk assessment is called the
A) acceptable exception rate.
B) estimated population exception rate.
C) sample exception rate.
D) tolerable exception rate.
9) Auditors often use the ________ to determine the estimated population exception rate.
A) current year’s audit results
B) tolerable exception rate
C) preceding year’s audit results
D) estimated computed by management
10) Place the following steps in their proper order:
1. Analyze exceptions.
2. Select the sample.
3. Define attributes and exception conditions.
4. State the objectives of the audit test.
5. Specify the tolerable exception rate.
A) 1, 3, 2, 4, 5.
B) 4, 3, 1, 2, 5.
C) 4, 3, 5, 2, 1.
D) 1, 2, 3, 4, 5.
11) If an auditor judgmentally selects a sample of one hundred items from a population and finds
two exceptions, the auditor
A) can conclude that the sample exception rate is 2%.
B) can conclude that the population exception rate is 2%.
C) can calculate the highest exception rate expected in the population.
D) cannot make any conclusions about either the sample or the population.
12) When planning the audit sample,
A) one objective of the tests of controls is to test the effectiveness of the controls.
B) audit sampling applies to analytical procedures.
C) audit sampling generally applies to automated controls.
D) the auditor must generalize from the sample to the population.
13) Which of the following is the exception rate that the auditor expects to find before testing?
A) sample exception rate
B) estimated population exception rate
C) computed exception rate
D) tolerable exception rate
14) Which of the following is not a term related to evaluating results in audit sampling until after
a sample is tested and evaluated?
A) sample exception rate
B) estimated population exception rate
C) computed upper exception rate
D) exception
15) The relationship of tolerable exception rate (TER) to sample size is
A) direct (larger TER = larger sample).
B) inverse (larger TER = smaller sample).
C) variable (sometimes larger, sometimes smaller).
D) not determinable.
16) Which of the following must be set prior to testing a sample?
A) sample exception rate
B) achieved upper precision limit
C) computed exception rate
D) tolerable exception rate
17) The acceptable risk of overreliance
A) is the risk that the auditor will erroneously conclude that the controls are less effective than
they actually are.
B) is less of a concern to the auditors than the risk of underreliance.
C) represents the auditor’s measure of sampling risk.
D) is determined by a statistical formula, and not by professional judgment.
18) The sample exception rate equals
A) the number of exceptions in the population divided by the sample size.
B) the number of items in the population multiplied by the number of exceptions in the sample.
C) the number of exceptions in the sample divided by the sample size.
D) the number of exceptions in the population divided by the population size.
19) When defining the population,
A) it may be necessary to define separate populations for different audit procedures.
B) the auditor may generalize only about the population that has been sampled.
C) auditors can define the population to include any items they want.
D) all of the above
20) One way to evaluate sampling risk when nonstatistical sampling is used is to
A) subtract the sample exception rate from the tolerable exception rate.
B) add the sample exception rate and the tolerable exception rate.
C) subtract the sample exception rate from the acceptable risk of overreliance.
D) add the sample exception rate and the acceptable risk of overreliance.
21) A danger in setting the acceptable risk of overreliance too low is
A)
The risk that the auditor is willing to
take of accepting a control as
ineffective when it is effective
The risk that the auditor is willing to
take of accepting a control as
effective when it is ineffective
Yes
Yes
B)
The risk that the auditor is willing to
take of accepting a control as
ineffective when it is effective
The risk that the auditor is willing to
take of accepting a control as
effective when it is ineffective
No
No
C)
The risk that the auditor is willing to
take of accepting a control as
ineffective when it is effective
The risk that the auditor is willing to
take of accepting a control as
effective when it is ineffective
Yes
No
D)
The risk that the auditor is willing to
take of accepting a control as
ineffective when it is effective
The risk that the auditor is willing to
take of accepting a control as
effective when it is ineffective
No
Yes
22) When using statistical sampling, the auditor would most likely require a smaller sample if the
A) population increases.
B) desired reliability decreases.
C) desired precision interval narrows.
D) expected exception rate increases.
23) Whenever auditors use sampling, they risk making incorrect conclusions about the
population. The risk that the auditor concludes that controls are more effective than they actually
are is known as the
A) risk of overreliance.
B) risk of underreliance.
C) risk that the sample is not representative of the population.
D) risk that the sample conclusions cannot be useful because of nonprobability sampling.
24) When choosing the appropriate acceptable risk of overreliance, the auditor needs to
A) rely on his/her professional judgment.
B) err on the side of conservatism.
C) consult the professional standards.
D) follow SEC guidelines.
25) When planning the audit sample, the ________ is (are) those items about which the auditor
wishes to generalize.
A) attributes
B) sampling unit
C) population
D) sample
26) If the result obtained from a particular sample for control and substantive tests of
transactions is critical to the formation of an audit opinion, which of the following is the most
important to the auditor in concluding of the appropriateness and sufficiency of evidence
gathered?
A) acceptable risk of overreliance
B) estimated population exception rate
C) tolerable exception rate
D) size of the population
27) There is a(n) ________ relationship between acceptable risk of overreliance and planned
sample size.
A) direct
B) inverse
C) proportional
D) exponential
28) Which of the following results in a larger sample size?
A) Decrease the estimated population exception rate and decrease the tolerable exception rate.
B) Increase the estimated population exception rate and decrease the tolerable exception rate.
C) Decrease the estimated population exception rate and increase the tolerable exception rate.
D) Increase the estimated population exception rate and increase the tolerable exception rate.
29) When determining tolerable exception rate (TER),
A) the auditor considers the degree of reliance to be placed on the control and the significance of
the control to the audit.
B) if only one internal control is used to support a low control risk assessment for an objective,
TER will be higher for the attribute than if multiple controls are used to support a low control
risk assessment for the same objective.
C) control deviations increase both the risk of material misstatements in the accounting record,
and will always result in misstatements.
D) a smaller sample size is needed for a low TER than for a high TER.
30) The acceptable risk of overreliance
A) is normally assessed at a high level when auditing an accelerated filer public company.
B) and the extent of tests of controls depends on assessed control risk for accelerated filer public
companies.
C) and the control risk will be assessed as low for audits where there is extensive reliance on
internal controls.
D) does not impact the effectiveness of the audit.
31) You are determining the appropriate sample size to test accounts receivable. What three
factors are the most important to consider?
32) Explain the effect on sample size of increasing each of the following: (1) tolerable exception
rate, (2) estimated population exception rate, (3) acceptable risk of overreliance, and (4)
population size.
33) The auditor must use the same TER and ARO levels for all attributes of an audit test.
34) The tolerable exception rate is the rate that the auditor will permit in the population and still
be willing to conclude a control is effective.
35) The only way to know with certainty whether a sample is representative is to subsequently
audit the entire population.
36) Acceptable risk of overreliance is the risk that the auditor is willing to take in accepting a
control as effective when the true population exception rate is greater than the estimated
population exception rate.
37) Acceptable risk of overreliance is normally lower for a public company audit than a private
company audit.
38) When the estimated population exception rate exceeds the sample exception rate, the auditor
can conclude that the sample results do not support the preliminary assessed control risk.
39) When the sample exception rate is greater than the tolerable exception rate in attributes
sampling, one possible appropriate course of action is to increase sample size.
40) Tolerable exception rate (TER) is inversely related to sample size.
41) When the sample exception rate (SER) exceeds the tolerable exception rate (TER), the
auditor should decide whether to increase sample size or to revise assessed control risk on the
basis of cost versus benefit.
42) In nonstatistical sampling, the calculated sampling error is the difference between the
tolerable exception rate and the sample exception rate.
43) The sampling unit is the physical unit that corresponds to the random numbers the auditor
generates.
44) The sum of the tolerable exception rate and the estimated population exception rate is the
precision of the initial sample estimate.
15.6 Learning Objective 15-6
1) Rodgers CPA believes that the rate of client billing errors is 4% and has established a
tolerable deviation rate of 6%. In auditing client invoices Rodgers should use
A) stratified sampling.
B) classical sampling.
C) proportional sampling.
D) attributes sampling.
2) Attributes sampling would be an appropriate method to use on which one of the following
procedures in an audit program?
A) Review sales transactions for large and unreasonable amounts.
B) Observe whether the duties of the accounts receivable clerk are separate from handling cash.
C) Examine a sample of duplicate sales invoices for credit approval by the credit manager.
D) Review the aged schedule of accounts receivable to determine if receivables from officers are
included.
3) Attributes sampling is based on the ________ distribution, in which each possible sample in
the population has one of two possible values, such as yes or no.
A) random
B) binomial
C) statistical
D) nonstatistical
4) For which of the following audit procedures would audit sampling not be appropriate?
A) Review sales transactions for large and unusual amounts.
B) Examine a sample of duplicate sales invoices for credit approval.
C) Compare the quantity on duplicate sales invoices with the quantity on related shipping
documents.
D) Audit sampling is appropriate for each of the above procedures.
5) Which of the following is one of the main differences between attributes sampling and
nonstatistical sampling?
A) the number of steps involved
B) the calculation of the initial sample sizes
C) determining the objectives of the audit test
D) defining the population
6) Which of the following is an accurate statement regarding sampling distribution?
A) A sampling distribution is a sample with characteristics the same as those of the population.
B) Sampling distributions allow the auditor to make probability statements about the likely
representativeness of any sample that is in the distribution.
C) Each population exception rate and sample size has the same sampling distribution.
D) Auditors cannot use sampling distributions to draw statistical conclusions about the unknown
population being sampled.
7) Auditors base their statistical inferences on sampling distributions.
15.7 Learning Objective 15-7
1) A principal advantage of statistical methods of attributes sampling over nonstatistical methods
is that they provide a quantifiable basis for establishing the
A) risk of assessing control risk too low.
B) tolerable exception rate.
C) expected population exception rate.
D) sample size.
2) In using sampling distribution for attributes, which one of the following must be known to
evaluate the sample results?
A) estimated dollar value of the population
B) standard exception of the values in the population
C) actual exception rate of the attribute in the population
D) sample size
3) When evaluating the results of attributes sampling,
A) the acceptable risk of overreliance (ARO) is set at high or low.
B) tables are used to compute the computed upper exception rate (CUER).
C) if the sample size is not equal to those provided for in the attributes sampling evaluation
tables, the tables cannot be used.
D) the true exception rate is computed from various tables.
4) When deciding the acceptability of the population,
A) the methodology for deciding the acceptability of the population for attributes differs from
determining the acceptability for nonstatistical sampling.
B) before the population can be considered acceptable, the CUER determined on the basis of the
actual sample results must be less than or equal to TER when both are based on the same ARO.
C) when the CUER is greater than the TER, the auditor must increase the sample size.
D) the CUER is compared with the TER in total, not for each attribute.
5) When planning the sample,
A) auditors using attributes sampling assign a low, medium, or high acceptable risk of
overreliance.
B) tables are used by the auditor in statistical sampling to determine initial sample size.
C) most auditors use attributes sampling for medium to small populations.
D) the tolerable exception rate does not need to be specified for statistical sampling.
6) As the auditor, you are assessing the proper sample size to use in testing controls. When using
attributes sampling, which of the following is most correct?
A) A 10% change in population size will have the least effect on sample size.
B) A 10% change in the tolerable deviation rate will have the least effect on sample size.
C) A 10% change in the expected deviation rate will have the least effect on sample size.
D) A 10% change in the tolerable will have the least effect on sample size.
7) In attributes sampling, an estimate of the expected population exception rate is necessary to
plan the sample size. The relationship of expected population exception rate (EPER) to sample
size is
A) direct (small EPER = small sample).
B) inverse (small EPER = large sample).
C) a variable (sometimes small, sometimes large) dependent on other factors present.
D) indeterminate.
8) There are 14 steps to attributes sampling, divided into three sections: plan the sample, select
the sample and perform the audit procedures, and evaluate the results. Discuss the three steps
that comprise the “evaluate the results” section.
9) Statistical sampling eliminates any professional judgment for the auditor.
10) Because attributes sampling is a statistical sampling approach, it allows the auditor to
quantify the allowance for sampling risk and the upper exception rate.
11) In selecting the sample, probabilistic methods must be used for both statistical and
nonstatistical sampling.