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.
ANSWER:

2.

The measure of variability of a statistical sample that

serves as an estimate of the population variability is

the
a.
b.
c.
d.

Basic precision.
Range.
Standard deviation.
Interval.

ANSWER:

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.
ANSWER:
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

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Chapter 10 Statistical Sampling for Substantive Testing

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
unchanged, causes a narrowing of the precision range.
d.
Overall audit risk is the complement of reliability.
ANSWER:

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.
ANSWER:

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.
ANSWER:

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

Chapter 10 Statistical Sampling for Substantive Testing

c.
d.

than would be obtained by non-statistical sampling

techniques.
Allow the auditor to quantify, and therefore control,
the risk of making an incorrect decision based on
sample evidence.
Meet requirements of Statements on Auditing
Standards.

ANSWER:
8.

162

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
items) to be normally distributed.
d.
Measure of the closeness of a sample estimate to a
corresponding population characteristic.
ANSWER:

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.
ANSWER:
10.

the

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
auditor's decision to narrow the precision interval?

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Chapter 10 Statistical Sampling for Substantive Testing

a.
b.
c.
d.

An increase in the required sample size.

A decrease in the required sample size.
An increase in the population standard deviation.
A decrease in the population standard deviation.

ANSWER:
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.
ANSWER:

12.

Sample size
a.
Increases with the use
b.
Decreases with the use
c.
Remains unchanged with
d.
Increases with the use
ANSWER:

of higher confidence levels.

of higher confidence levels.
changes in confidence levels.
of lower confidence levels.

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
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.
ANSWER:
14.

In a
will
95%?
a.
b.
c.
d.

variables sampling application, which of the following

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

ANSWER:

Chapter 10 Statistical Sampling for Substantive Testing

164

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.
ANSWER:

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.
ANSWER:
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
documents examined for the chosen sample.
d.
The documents related to the chosen sample may not be
available for inspection.
ANSWER:

18.

Using the following results from a variables sample, compute

the achieved precision:

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Chapter 10 Statistical Sampling for Substantive Testing

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
ANSWER:

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.
ANSWER:

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).
ANSWER:

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

Chapter 10 Statistical Sampling for Substantive Testing

d.

special considerations to include negative balances

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

ANSWER:
22.

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.
ANSWER:

25.

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.
ANSWER:

24.

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.
ANSWER:

23.

166

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.

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Chapter 10 Statistical Sampling for Substantive Testing

c.
d.

Smaller expected frequency of errors.

Smaller measure of tolerable error.

ANSWER:
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.
c.
An increase in alpha risk increases sample size.
d.
As materiality (M) increases, sample size increases.
ANSWER:

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.
ANSWER:

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.
ANSWER:

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.
ANSWER:

Chapter 10 Statistical Sampling for Substantive Testing

168

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.
c.
No, because the auditor sampled without replacement.
d.
No, because all items do not have an equal chance of
being selected.
ANSWER:

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.
ANSWER:
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

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Chapter 10 Statistical Sampling for Substantive Testing

classifying members of this population into

strata?
a.
b.
c.
d.

Account balance.
Account number.
Alphabetically by name.
Numerically by pages of the listing.

ANSWER:
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.
ANSWER:

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
ANSWER:
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.
ANSWER:

Chapter 10 Statistical Sampling for Substantive Testing

170

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.
ANSWER:

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.
ANSWER:

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.
ANSWER:
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
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.

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Chapter 10 Statistical Sampling for Substantive Testing

b.

level
d.

Reject the book value and extend control testing.

c.
Conclude that the book value is acceptable at a
of reliability higher than 95%.
Extend substantive testing.

ANSWER:
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.
b.
c.
d.

Decrease in sample size

No change in sample size
Increase in sample size
No change in sample size

ANSWER:
41.

No change in sample size

Decrease in sample size
No change in sample size
Increase in sample size

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.
ANSWER:

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.
ANSWER:

Chapter 10 Statistical Sampling for Substantive Testing

172

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.
c.
Acceptance sampling.
d.
Variables sampling.
ANSWER:

COMPLETION:
44. Of the two variations of classical variables sampling,
often results in smaller sample sizes
and is therefore more cost-effective under those
circumstances.
ANSWER:
45.

Detection risk, defined as the risk that material errors or

fraud that are not prevented or detected by the client's
system of internal control, will not be discovered by the
auditor, is referred to as
by
statisticians.
ANSWER:

46.

ALPHA

Standard deviation is defined as the degree of variation of

individual values about the population mean. The more
narrowly dispersed the values in the population, the
(larger or smaller) the standard deviation.
ANSWER:

48.

BETA RISK

Rejecting a book value that is stated fairly is referred to

as
risk.
ANSWER:

47.

DIFFERENCE ESTIMATION

SMALLER

In applying probability proportional to size sampling, the

auditor rejects a book value as being materially overstated
when upper error limit is
(greater or less)
than the tolerable error.

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Chapter 10 Statistical Sampling for Substantive Testing

ANSWER:

49.

For PPS sampling purposes, the allowance for sampling risk

is the sum of basic precision plus the
.
ANSWER:

50.

STRATIFYING, SAMPLING INTERVAL

Probability proportional to size sampling has its greatest

applicability to situations in which the auditor suspects a
few material errors of
.
ANSWER:

53.

SMALLER, SAMPLING INTERVAL

As contrasted with classical variables sampling, probability

proportional to size sampling has the advantage of
automatically
the population such that
logical units equal to or greater than the _____________
_________ have a 100% chance of being included in the
sample.
ANSWER:

52.

INCREMENTAL ALLOWANCE

The incremental allowance for precision need be calculated

only when errors are found in logical units that are
(larger or smaller)
than the _______________
.
ANSWER:

51.

GREATER

OVERSTATEMENT

In evaluating sampling results for mean per unit sampling

purposes, achieved precision (A') must be equal to or ______
(greater or less) than desired precision (A). Otherwise,
the actual beta risk is higher than specified in the
sampling plan, and further sampling would be necessary to
reduce the risk to an acceptable level.
ANSWER:

LESS

MATCHING:
54.

Match the following terms with their definitions:

A.
B.
C.
D.
E.

Projected error
Achieved precision
Basic precision
Desired precision
Finite correction factor

Chapter 10 Statistical Sampling for Substantive Testing

F.
H.
I.
J.
K.
L.
M.
N.

174

Range of acceptability
Sampling risk
Standard deviation
Upper error limit
Reliability
Sampling interval
Precision
Logical sampling unit

____1.

The risk that the auditors conclusions regarding a

population are incorrect.

____2.

A measure of population variability.

____3.

The range within which the true answer most likely falls.

____4.

The likelihood that the sample range contains the true

value.

____5.

Required for mean per unit and difference estimation

sampling applications when the preliminary sample size
equals or exceeds 5% of the population size.

____6.

The calculated range within which the true answer most

likely falls.

____7.

The range of possible values considered acceptable to the

auditor.

____8.

The item to which a randomly selected dollar attaches.

____9.

The distance between two consecutive sample items.

____10. Auditors best estimate of overstatement error.

SOLUTION:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

H
I
M
K
E
B
F
N
L
A

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Chapter 10 Statistical Sampling for Substantive Testing

PROBLEM/ESSAY:
55. An auditor wishes to randomly select a sample of customers'
accounts receivable for confirmation purposes. The population
consists of 4,000 accounts with a book value of $6,000,000. The
preliminary estimate of standard deviation (computer calculated
from book value) is $25. The auditor considers $40,000 to be a
material misstatement of accounts receivable. The auditor has
assessed inherent risk at 60% and control risk at 70%, and has
set alpha risk and overall audit risk at 10%.
a.

Assuming the following Z values, calculate the

sample size:

ALPHA/2
OR BETA
1.00%
2.00
2.50
5.00
10.00
20.0
24.0

Z VALUE
2.33
2.06
1.96
1.65
1.29
.85
.71

b.

An examination of the sample items produces a sample

mean of $1,200 and a standard deviation of the
sample
items equal to $22. What is the estimated
population
value?
c.
What is the achieved precision?
d.
What is the minimum audit adjustment based on these
findings?
SOLUTION:
a.
b.
c.
d.

35
$4,800,000
$24,539
Downward adjustment of $1,184,4539

56. An auditor suspects that the client's ending merchandise

inventory is materially overstated and wishes to apply

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Chapter 10 Statistical Sampling for Substantive Testing

probability proportional to size sampling to estimate the extent

of overstatement. The inventory consists of 10,000 line items on
computer printouts with a total book value of $14,000,000. The
auditor has set the risk of incorrect acceptance at 5%, the
tolerable error at $180,000, and the anticipated error at
$70,000.
a.

Given the following reliability and expansion factors

at a 5% risk of incorrect acceptance, calculate
sample
size:
OVERSTATEMENT
ERRORS
0
1
2
3

RELIABILITY FACTOR
3.00
4.75
6.30
7.76

b.
c.

EXPANSION FACTOR
1.60

What is the sampling interval?

In auditing the sample, the auditor discovered the
following errors:
Item
A
E
S

d.

Book Value
$20,000
$800,000
$220,000

Audited Value
0
$400,000
0

Calculate the projected error.

Determine the allowance for sampling risk and the upper
error limit.

SOLUTION:
a.
b.
c.
d.

618
$22,653
$642,653
Allowance for sampling risk = $84,949 ($67,959 + $16,990)
Upper error limit = $727,602 ($642,653 + $84,949)