ASSIGNMENT
MULTIPLE CHOICE QUESTIONS FROM CPA AND CIA EXAMINATIONS
17-21 (OBJECTIVE 17-2) The following questions relate to determining sample size in tests of details of balances. For each one, select the best response.
a. Murray decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted random sampling is to
(1) reduce as much as possible the degree of variability in the overall population.
(2) give every element in the population an equal chance of being included in the sample.
(3) allow the person selecting the sample to use personal judgment in deciding which elements should be included in the sample.
(4) allow the auditor to emphasize larger items from the population.
b. How would increases in tolerable misstatement and assessed level of control risk affect the sample size in substantive tests of details?
Increase in Tolerable
Misstatement
Increase in Assessed Level of Control Risk
(1) Increase sample size Increase sample size
(2) Increase sample size Decrease sample size
(3) Decrease sample size Increase sample size
(4) Decrease sample size Decrease sample size
c. Which of the following sample planning factors will influence the sample size for a test of details of balances for a specific account?
Expected Amount of Misstatements
Measure of Tolerable
Misstatement
(1) No No
(2) Yes Yes
(3) No Yes
(4) Yes No
17-22 (OBJECTIVES 17-2, 17-3, 17-4) The following apply to evaluating results of audit sampling for tests of details of balances. For each one, select the best response.
a. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
(1) assessing control risk too high.
(2) assessing control risk too low.
(3) incorrect rejection.
(4) incorrect acceptance.
b. In an MUS sample with a sampling interval of $10,000, an auditor discovered that a selected accounts receivable with a recorded amount of $20,000 had an audit value of $16,000. If this is the only error discovered by the auditor, the projected error of the sample would be
(1) $1,000.
(2) $2,000.
(3) $4,000.
(4) $5,000.
c. The accounting department reports the accounts receivable balance as $175,000. You are willing to accept that balance if it is within $15,000 of the actual balance. Using a variables sampling plan, you compute a 95 percent confidence interval of $173,000 to $187,000. You would therefore
(1) find it impossible to determine the acceptability of the balance.
(2) accept the balance but with a lower level of confidence.
(3) take a larger sample before rejecting the sample and requiring adjustments.
(4) accept the $175,000 balance because the confidence interval is within the materiality limits.
17-23 (OBJECTIVES 17-3, 17-4, 17-5) The following relate to the use of statistical sampling for
tests of details of balances. For each one, select the best response.
a. When the auditor uses monetary unit statistical sampling to examine the total dollar value of invoices, each invoice
(1) has an equal probability of being selected.
(2) can be represented by no more than one monetary unit.
(3) has an unknown probability of being selected.
(4) has a probability proportional to its dollar value of being selected.
b. In applying variables sampling, an auditor attempts to
(1) estimate a qualitative characteristic of interest.
(2) determine various rates of occurrence for specified attributes.
(3) discover at least one instance of a critical deviation.
(4) predict a monetary population value within a range of precision.
c. Which of the following would be an advantage of using variables sampling rather than probability-proportional-to-size (PPS) sampling?
(1) An estimate of the standard deviation of the population’s recorded amount is not required.
(2) The auditor rarely needs the assistance of a computer program to design an efficient sample.
(3) The inclusion of zero and negative balances usually does not require special design considerations.
(4) Any amount that is individually significant is automatically identified and selected.
MULTIPLE CHOICE QUESTIONS FROM BECKER CPA EXAM REVIEW
17-24 (OBJECTIVES 17-2, 17-3) The following questions relate to nonstatistical and monetary unit sampling. Choose the best response.
a. A number of factors influence 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?
(1) Greater reliance on internal control
(2) Greater reliance on substantive analytical procedures
(3) Smaller expected frequency of errors
(4) Smaller measure of tolerable misstatement
b. The risk of incorrect acceptance relates to
(1) substantive tests and affects audit efficiency.
(2) substantive tests and affects audit effectiveness.
(3) tests of controls and affects audit efficiency.
(4) tests of controls and affects audit effectiveness.
c. In a probability-proportional-to-size sample with a sampling interval of $3,000, which of the following is true?
I. An overstatement error of $200 in an item recorded at $300 will result in a projected error of $2,000.
II. An overstatement error of $700 in an item recorded at $3,500 will result in a projected error of $600.
(1) I only
(2) II only
(3) Both I and II
(4) Neither I nor II
DISCUSSION QUESTIONS AND PROBLEMS
17-25 (OBJECTIVE 17-2) You are planning to use nonstatistical sampling to evaluate the results of accounts receivable confirmation for the Meridian Company. You have already performed tests of controls for sales, sales returns and allowances, and cash receipts, and they are considered excellent. Because of the quality of the controls, you decide to use an acceptable risk of incorrect acceptance of 10 percent, rather than a lower percentage.
There are 3,300 accounts receivable with a gross value of $8,100,000. The accounts are similar in size and will be treated as a single stratum. Tolerable misstatement for this test of accounts receivable confirmations is $200,000.
a. Calculate the required sample size. Assume your firm uses the following nonstatistical formula to determine sample size:
Sample size = Population Recorded Amount * Confidence Factor
Tolerable Misstatement
A confidence factor of 2 is used for a 10 percent ARIA.
b. Assume that instead of good results, poor results were obtained for tests of controls and substantive tests of transactions for sales, sales returns and allowances, and cash receipts. How will this affect your required sample size? How will you use this information in your sample size determination?
c. Regardless of your answer to part a., assume you decide to select a sample of 100 accounts for testing. Indicate how you will select the accounts for testing using systematic selection.
d. Assume a total book value of $380,000 for the 100 accounts selected for testing. You uncover three overstatements totaling $3,700 in the sample. Evaluate whether the population is fairly stated.
17-26 (OBJECTIVE 17-2) You are evaluating the results of a nonstatistical sample of 85 accounts receivable confirmations for the Bohrer Company. Information on the sample and population are included below. Tolerable misstatement for accounts receivable confirmation sampling is $100,000.
Sample Population
Stratum
# of
Accounts
Recorded
Value
# of
Accounts
Recorded
Value
1 > $75,000 8 $1,287,643 8 $1,287,643
2 +10,000 – +74,999 40 1,349,678 257 4,348,268
3 < $10,000 25 94,637 712 947,682
73 $2,731,958 977 $6,583,593
The confirmation responses were received without exception, other than the following items:
Acct.
No.
Recorded
Value
Confirmation
Response Auditor Follow-Up
147 $ 24,692 $ 22,486 Customer was charged the wrong price.
228 183,219 157,216 $26,003 shipment recorded on December 30; goods were not shipped until January 3.
278 7,546 5,546 Customer sent $2,000 payment on December 29; received on January 2.
497 15,319 0 $17,443 shipment made on December 30; goods were received by the customer on January 2.
Required
Acct.
No.
Recorded
Value
Confirmation
Response Auditor Follow-Up
564 8,397 7,858 Customer received less than the full quantity ordered.
653 32,687 19,328 $13,359 shipment recorded on December 30; goods were not shipped until January 2.
830 5,286 0 $5,286 shipment recorded on December 30; goods were not shipped until January 3.
Sample
Size Interval
Number of
Misstatements
Dollar Amount
of Actual
Misstatements
Projected
Misstatement
Upper
Bound
Nature of
Misstatements
1. 54 36,450 1 20,000 20,000 104,200 Improper contract price applied
2. 46 43,290 3 425 4,731 106,979 Various pricing and quantity errors
3. 54 36,450 8 20,400 110,568 241,468 Incorrect shipments, cutoff errors, and pricing errors
4. 33 60,385 1 4,000 12,077 114,007 Incorrect currency translation on foreign shipment
5. 72 27,500 1 400 7,333 95,333 Incorrect product shipped
6. 44 44,845 2 2,500 29,897 112,934 Duplicate shipment, incorrect price
a. Evaluate each of the confirmation exceptions to determine whether they represent misstatements.
b. Estimate the total amount of misstatement in the accounts receivable population. Ignore sampling risk in the calculation.
c. Is the population acceptable? If not, indicate what follow-up action(s) you consider appropriate in the circumstances.
17-27 (OBJECTIVES 17-2, 17-3) Assume you performed sampling for an accounts receivable population with a recorded population amount of $2,000,000. Tolerable misstatement is set at $100,000 for the test, and there are no individually significant accounts greater than $100,000. Several different sampling results for this population are presented below; the upper bound is the projected misstatement plus an allowance for sampling risk. The results presented are for an MUS sample, but the decision as to how to resolve the projected misstatement, including consideration of sampling risk, also applies to nonstatistical sampling. The differences in sample size reflect differences in confidence levels and expected misstatement used in designing the sample.
You are to make a recommendation as to the appropriate action to take given the sample results. Assume that the client is willing to record an audit adjustment for actual misstatements detected in your testing, but is unwilling to record an adjustment for projected errors. Issuing a qualified or adverse opinion is not included as an option. Because the audited financial statements are required under the terms of a loan agreement, the client will agree to additional testing or will correct the population if needed to receive an unmodified opinion.
Required
In-class
Discussion
For each of the sampling results 1 through 6, recommend the appropriate response(s) from the options listed below. Explain the reason for your decision.
a. Accept the population as fairly stated.
b. Request the client to record an adjustment for the actual misstatements.
c. Expand the sample size.
d. Request the client to fix the population, which will then be reaudited.
e. Treat the misstatement as an anomaly that is an isolated occurrence that should not be projected to the population.
17-28 (OBJECTIVE 17-3) The accounts receivable population for Jake’s Bookbinding Company follows, and it is also available in electronic form on the textbook website. This table is the same as Table 17-1 on page 578, except that cumulative amounts are included to assist you in completing the problem. The population is smaller than is ordinarily the case for statistical sampling, but an entire population is useful to show how to select PPS samples.
a. Select a random PPS sample of 10 items, using computer software.
b. Select a sample of 10 items using systematic PPS sampling. Use a starting point of 1857. Identify the physical units associated with the sample dollars.
c. Which sample items will always be included in the systematic PPS sample regardless of the starting point? Will that also be true of random PPS sampling?
d. Which method is preferable in terms of ease of selection in this case?
e. Why will an auditor use MUS?
Population
Item
Recorded
Amount
Cumulative
Amount
Population
Item (cont.)
Recorded
Amount (cont.)
Cumulative
Amount (cont.)
1 $ 1,410 $ 1,410 21 $ 4,865 $117,385
2 9,130 10,540 22 770 118,155
3 660 11,200 23 2,305 120,460
4 3,355 14,555 24 2,665 123,125
5 5,725 20,280 25 1,000 124,125
6 8,210 28,490 26 6,225 130,350
7 580 29,070 27 3,675 134,025
8 44,110 73,180 28 6,250 140,275
9 825 74,005 29 1,890 142,165
10 1,155 75,160 30 27,705 169,870
11 2,270 77,430 31 935 170,805
12 50 77,480 32 5,595 176,400
13 5,785 83,265 33 930 177,330
14 940 84,205 34 4,045 181,375
15 1,820 86,025 35 9,480 190,855
16 3,380 89,405 36 360 191,215
17 530 89,935 37 1,145 192,360
18 955 90,890 38 6,400 198,760
19 4,490 95,380 39 100 198,860
20 17,140 112,520 40 8,435 207,295
17-29 (OBJECTIVE 17-3) In the audit of Price Seed Company for the year ended September 30, the auditor set a tolerable misstatement of $50,000 at an ARIA of 10 percent. A PPS sample of 100 was selected from an accounts receivable population that had a recorded balance of $1,975,000. The following table shows the differences uncovered in the confirmation process:
Required
Required
Accounts
Receivable
per Records
Accounts
Receivable
per Confirmation Follow-Up Comments by Auditor
1. $2,728.00 $2,498.00 Pricing error on two invoices.
2. $5,125.00 -0- Customer mailed check September 26; company received check October 3.
3. $3,890.00 $1,190.00 Merchandise returned September 30 and counted in inventory; credit was issued October 6.
4. $ 815.00 $ 785.00 Footing error on an invoice.
5. $ 548.00 -0- Goods were shipped September 28; customer received goods on October 2; sale was recorded on September 28.
6. $3,215.00 $3,190.00 Pricing error on a credit memorandum.
7. $1,540.00 -0- Goods were shipped on September 29; customer received goods October 3; sale was recorded on September 30.
a. Calculate the upper misstatement bound on the basis of the client misstatements in the sample.
b. Is the population acceptable as stated? If not, what options are available to the auditor at this point? Which option should the auditor select? Explain.
17-30 (OBJECTIVE 17-3) You intend to use MUS as a part of the audit of several accounts for Roynpower Manufacturing Company. You have done the audit for the past several years, and there has rarely been an adjusting entry of any kind. Your audit tests of all tests of controls and substantive tests of transactions cycles were completed at an interim date, and control risk has been assessed as low. You therefore decide to use an ARIA of 10 percent and a ratio of expected misstatement to tolerable misstatement of 0 percent for all tests of details of balances.
You intend to use MUS in the audit of the three most material asset balance sheet account balances: accounts receivable, inventory, and marketable securities. You feel justified in using the same ARIA for each audit area because of the low assessed control risk.
The recorded balances and related information for the three accounts are as follows:
Recorded Value
Accounts receivable $3,600,000
Inventory 4,800,000
Marketable securities 1,600,000
$10,000,000
Net earnings before taxes for Roynpower are $2,000,000. You decide that a combined misstatement of $100,000 is allowable for the client.
The audit approach to be followed will be to determine the total sample size needed for all three accounts. A sample will be selected from all $10 million, and the appropriate testing for a sample item will depend on whether the item is a receivable, inventory, or marketable security.
The audit conclusions will pertain to the entire $10 million, and no conclusion will be made about the three individual accounts unless significant misstatements are found in the sample.
a. Evaluate the audit approach of testing all three account balances in one sample.
b. Calculate the required sample size for a combined sample of all three accounts. Use $100,000 as the measure of tolerable misstatement for the combined test.
c. Calculate the required sample size for each of the three accounts, assuming you decide that the tolerable misstatement in each account is $100,000.
d. Assume that you select the random sample using computer software. How will you identify which sample item in the population to audit for the number 4,627,871?
What audit procedures will be performed?
Required
Required
e. Assume that you select a sample of 200 sample items for testing and you find one misstatement in inventory. The recorded value is $987.12 and the audit value is $887.12.
Calculate the misstatement bounds for the three combined accounts and reach appropriate audit conclusions.
17-31 (OBJECTIVES 17-2, 17-3, 17-4) An audit partner is developing an office training program to familiarize her professional staff with audit sampling decision models applicable to the audit of dollar-value balances. She wishes to demonstrate the relationship of sample sizes to population size and estimated population misstatement rate and the auditor’s specifications as to tolerable misstatement and ARIA. The partner prepared the following table to show comparative population characteristics and audit specifications of the two populations:
Characteristics of Population 1
Relative to Population 2
Audit Specifications as to a
Sample from Population 1
Relative to a Sample From Population 2
Size
Estimated Population
Misstatement Rate
Tolerable
Misstatement ARIA
Case 1 Equal Larger Larger Equal
Case 2 Larger Equal Equal Lower
Case 3 Smaller Smaller Equal Higher
Case 4 Larger Equal Smaller Higher
Case 5 Equal Equal Equal Lower
In items (1) through (5) you are to indicate for the specific case from the table the required sample size to be selected from population 1 relative to the sample from population 2.
1. In case 1, the required sample size from population 1 is ____.
2. In case 2, the required sample size from population 1 is ____.
3. In case 3, the required sample size from population 1 is ____.
4. In case 4, the required sample size from population 1 is ____.
5. In case 5, the required sample size from population 1 is ____.
Your answer choice should be selected from the following responses:
a. Larger than the required sample size from population 2.
b. Equal to the required sample size from population 2.
c. Smaller than the required sample size from population 2.
d. Indeterminate relative to the required sample size from population 2.
17-32 (OBJECTIVE 17-5) In auditing the valuation of inventory, the auditor, Claudette Perrier, decided to use difference estimation. She decided to select an unrestricted random sample of 80 inventory items from a population of 1,840 that had a book value of $175,820. Perrier decided in advance that she was willing to accept a maximum misstatement in the population of $6,000 at an ARIA of 5 percent. There were eight misstatements in the sample, which were as follows:
Audit Value Book Value Sample Misstatements
$ 812.50 $ 740.50 $(72.00)
12.50 78.20 65.70
10.00 51.10 41.10
25.40 61.50 36.10
600.10 651.90 51.80
.12 0 (.12)
51.06 81.06 30.00
83.11 104.22 21.11
Total $1,594.79 $1,768.48 $173.69
Required
Based on AICPA question paper, American Institute of Certified Public Accountants.
