Ch07 tb moroney 3e - quiz solutions PDF

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Testbank to accompany

Auditing: a practical approach 3e by Moroney et al.

© John Wiley & Sons Australia, Ltd 2017

Chapter 7: Sampling and overview of the risk response phase of the audit

Chapter 7: Sampling and overview of the risk response phase of the audit True/False 1.

An audit program includes the audit procedures to be used when testing controls and when conducting detailed substantive audit procedures. *a. b.

True False

Correct answer: a Learning Objective 7.1 ~ explain how audit sampling is used in an audit 2.

Sampling is required when an audit procedure is tested on an entire group of transactions or all items within an account balance. a. *b.

True False

Correct answer: b Learning Objective 7.1 ~ explain how audit sampling is used in an audit 3.

Sampling risk is the risk that the sample chosen by the auditor is not representative of the population available for testing. *a. b.

True False

Correct answer: a Learning Objective 7.2 ~ recognise the difference between sampling and non-sampling risk 4.

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. *a. b.

True False

Correct answer: a Learning Objective 7.2 ~ recognise the difference between sampling and non-sampling risk

© John Wiley & Sons Australia, Ltd 2017

7.2

Testbank to accompany Auditing: a practical approach 3e

5.

An advantage of statistical sampling is that it allows an auditor to measure sampling risk. *a. b.

True False

Correct answer: a Learning Objective 7.3 ~ discriminate between statistical and non-statistical sampling 6.

A disadvantage of statistical sampling is sometimes the costs involved in using the technique *a. b.

True False

Correct answer: a Learning Objective 7.3 ~ discriminate between statistical and non-statistical sampling 7.

Non-statistical sampling involves random selection and probability theory to evaluate the results. a. *b.

True False

Correct answer: b Learning Objective 7.3 ~ discriminate between statistical and non-statistical sampling 8.

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. a. *b.

True False

Correct answer: b Learning Objective 7.4 ~ describe sampling methods

© John Wiley & Sons Australia, Ltd 2017

7.3

Chapter 7: Sampling and overview of the risk response phase of the audit

9.

Tolerable error is the minimum error an auditor is willing to accept within the population tested. a. *b.

True False

Correct answer: b Learning Objective 7.4 ~ describe sampling methods

10.

Block selection involves the selection of items that are grouped together within the population of items available. *a. b.

True False

Correct answer: a Learning Objective 7.4 ~ describe sampling methods

11.

An increase in the number of sampling units in the population will result in a decrease in the sample size. a. *b.

True False

Correct answer: b Learning Objective 7.5 ~ describe the factors that influence the sample size when testing controls

12.

Stratification of the population will result in less efficient sampling and increase the sample size required. a. *b.

True False

Correct answer: b Learning Objective 7.6 ~ explain the factors that influence the sample size when conducting substantive testing

© John Wiley & Sons Australia, Ltd 2017

7.4

Testbank to accompany Auditing: a practical approach 3e

13.

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. *a. b.

True False

Correct answer: a Learning Objective 7.6 ~ explain the factors that influence the sample size when conducting substantive testing

14.

Projected error refers to the extrapolation of the errors detected when testing a sample to the population from which the sample was drawn. *a. b.

True False

Correct answer: a Learning Objective 7.7 ~ explain how to evaluate the results of tests conducted on a sample 15.

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. *a. b.

True False

Correct answer: a Learning Objective 7.8 ~ discriminate the difference between tests of controls and substantive tests 16.

Tests of controls are audit procedures designed to detect material misstatements at the assertion level. a. *b.

True False

Correct answer: b Learning Objective 7.8 ~ discriminate the difference between tests of controls and substantive tests

© John Wiley & Sons Australia, Ltd 2017

7.5

Chapter 7: Sampling and overview of the risk response phase of the audit

17.

The timing of audit testing refers to the stage of the audit when procedures are performed and the date that audit evidence relates to. *a. b.

True False

Correct answer: a Learning Objective 7.9 ~ explain the factors that affect the nature, timing and extent of audit testing

18.

The decision of what constitutes sufficient appropriate audit evidence is a matter for professional judgement *a. b.

True False

Correct answer: a Learning Objective 7.10 ~ explain how auditors arrive at a conclusion based upon the evidence gathered 19.

The permanent file includes detailed descriptions of evidence gathered for a particular year's audit. a. *b.

True False

Correct answer: b Learning Objective 7.11 ~ illustrate how auditors document the details of evidence gathered in working papers 20.

The permanent file includes client information and documentation that apply to more than one audit. *a. b.

True False

Correct answer: a Learning Objective 7.11 ~ illustrate how auditors document the details of evidence gathered in working papers

© John Wiley & Sons Australia, Ltd 2017

7.6

Testbank to accompany Auditing: a practical approach 3e

Multiple-choice questions 21.

Sampling is not required when: a. *b. c. d.

the auditor is conducting tests of controls an audit procedure is conducted on an entire group of transactions it is the first year that the auditor has done the audit for a client the client requests the auditor not to collect samples of certain transactions

Correct answer: b Learning Objective 7.1 ~ explain how audit sampling is used in an audit 22.

Non-sampling risk arises when an auditor: *a. b. c. d.

uses an inappropriate audit procedure tests all of the items in a population does not use sampling spends too much time testing the accounts most at risk of material misstatement

Correct answer: a Learning Objective 7.2 ~ recognise the difference between sampling and non-sampling risk 23.

When testing controls, sampling risk is the risk that the auditor: a. *b. c. d.

concludes that their client's internal controls are effective when they are ineffective both a and b concludes that their client's internal controls are ineffective when they are effective none of the above

Correct answer: b Learning Objective 7.2 ~ recognise the difference between sampling and non-sampling risk

24.

When testing controls, non-sampling risk is the risk that an auditor: a. b. *c. d.

does not select a sample both a and b designs tests that are ineffective none of the above

Correct answer: c Learning Objective 7.2 ~ recognise the difference between sampling and non-sampling risk

© John Wiley & Sons Australia, Ltd 2017

7.7

Chapter 7: Sampling and overview of the risk response phase of the audit

25.

Which of the following is not an advantage of non-statistical sampling? *a. b. c. d.

it allows an auditor to measure sampling risk it is lower cost than statistical sampling it allows an auditor to select a sample that they believe is appropriate it requires less staff training

Correct answer: a Learning Objective 7.3 ~ differentiate between statistical and non-statistical sampling

26.

Which of the following statements regarding statistical sampling is correct? a. b. c. *d.

it involves haphazard selection it is generally used for low risk accounts it is easier to use than non-statistical sampling it involves random selection

Correct answer: d Learning Objective 7.3 ~ differentiate between statistical and non-statistical sampling 27.

Non statistical sampling is easier to use than statistical sampling as it a. b. c. *d.

is lower in cost allows the auditor to select a sample they believe is appropriate requires less staff training all of the above

Correct answer: d Learning Objective 7.3 ~ differentiate between statistical and non-statistical sampling 28.

When conducting an audit, statistical sampling involves a. b. *c. d.

calculated selections and probability to evaluate results less staff and training, and is less costly than other sampling random selection and probability to evaluate results allows the auditor to select a sample they believe appropriate

Correct answer: c Learning Objective 7.3 ~ differentiate between statistical and non-statistical sampling

© John Wiley & Sons Australia, Ltd 2017

7.8

Testbank to accompany Auditing: a practical approach 3e

29.

Which sampling method involves the selection of items that are grouped together within the population of items available? a. b. c. *d.

haphazard selection random selection systematic selection block selection

Correct answer: d Learning Objective 7.4 ~ specify sampling methods 30.

Random selection involves: a. *b. c. d.

the selection of a sample without the use of a methodical technique the selection of a sample that is free from bias and where each item in a population has an equal chance of selection dividing a population into groups of sampling units with similar characteristics the selection of items that an auditor believes should be included in their sample for testing

Correct answer: b Learning Objective 7.4 ~ specify sampling methods

31.

Before selecting a sample, an auditor will use their professional judgement to: a. b. c. *d.

set the tolerable error rate select an appropriate population for testing set the required level of confidence all of the above

Correct answer: d Learning Objective 7.4 ~ specify sampling methods

© John Wiley & Sons Australia, Ltd 2017

7.9

Chapter 7: Sampling and overview of the risk response phase of the audit

32.

Which of the following is a factor that influences the sample size when testing controls? *a. b. c. d.

an increase in the tolerable rate of deviation stratification of the population when appropriate an increase in the auditor's assessment of the risk of material misstatement an increase in tolerable misstatement

Correct answer: a Learning Objective 7.5 ~ decide the factors that influence the sample size when testing controls

33.

When testing controls, the tolerable error is: a. *b. c. d.

the minimum rate of deviation that an auditor will accept the tolerable rate of deviation that an auditor will accept before concluding that a control is ineffective the tolerable rate of deviation that an auditor will accept before concluding that a control is effective the maximum amount of error in an account balance that an auditor will accept before concluding that an account is materially misstated

Correct answer: b Learning Objective 7.5 ~ decide the factors that influence the sample size when testing controls

34.

When testing controls, a decrease in the sample size will occur when there is: a. b. *c. d.

a decrease in the tolerable rate of deviation an increase in the extent to which the auditor's risk assessment takes into account relevant controls an increase in the tolerable rate of deviation an increase in the number of sampling units in the population

Correct answer: c Learning Objective 7.5 ~ decide the factors that influence the sample size when testing controls

© John Wiley & Sons Australia, Ltd 2017

7.10

Testbank to accompany Auditing: a practical approach 3e

35.

What impact will there be on sample size when there is an increase in the number of sampling units in the population? a. *b. c. d.

decrease negligible increase none of the above

Correct answer: b Learning Objective 7.6 ~ decide the factors that influence the sample size when conducting substantive testing 36.

Which of the following statements is incorrect? a. b. *c. d.

an auditor may decide to stratify the population before selecting a sample from it an auditor will use their professional judgement to determine the tolerable error and required level of confidence 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 an auditor will use their professional judgement when considering what would be considered an error within the population tested

Correct answer: c Learning Objective 7.6 ~ decide the factors that influence the sample size when conducting substantive testing 37.

What impact will there be on sample size for substantive testing when there is an increase in the tolerable misstatement? a. b. *c. d.

negligible increase decrease none of the above

Correct answer: c Learning Objective 7.6 ~ decide the factors that influence the sample size when conducting substantive testing

© John Wiley & Sons Australia, Ltd 2017

7.11

Chapter 7: Sampling and overview of the risk response phase of the audit

38.

When evaluating sample test results, which of the following statements is incorrect? *a. b. c. d.

an auditor will not consider whether the population was stratified before being sampled if an error is considered to be unique it will be removed before projecting remaining errors to the population if an auditor discovers errors when testing transactions or account balances, they will need to project the error to the population being tested if the rate of deviation exceeds the tolerable rate the auditor will extend their testing

Correct answer: a Learning Objective 7.6 ~ decide the factors that influence the sample size when conducting substantive testing

39.

An account is at a higher risk of misstatement when it requires: a. *b. c. d.

estimation both a and b complex calculations simple valuation techniques

Correct answer: b Learning Objective 7.7 ~ outline how to evaluate the results of tests conducted on a sample 40.

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. *b. c. d.

decide that further audit work was required conclude that the errors detected are not material conclude that the errors uncovered are material conduct other tests aimed at the assertion being tested

Correct answer: c Learning Objective 7.7 ~ outline how to evaluate the results of tests conducted on a sample

© John Wiley & Sons Australia, Ltd 2017

7.12

Testbank to accompany Auditing: a practical approach 3e

41.

When conducting substantive testing, which of the following is not a factor that influences the sample size? a. b. *c. d.

an increase in the auditor's assessment of the risk of material misstatement stratification of the population when appropriate an increase in the tolerable rate of deviation an increase in tolerable misstatement

Correct answer: c Learning Objective 7.7 ~ outline how to evaluate the results of tests conducted on a sample 42.

Tests of controls are conducted to establish that: a. b. c. *d.

there are no material misstatements in the financial statements controls operate effectively controls operate consistently throughout the period both a and c

Correct answer: d Learning Objective 7.8 ~ recognise the difference between tests of controls and substantive tests 43.

Control risk is the risk that: a. *b. c. d.

an auditor's substantive procedures will not detect material misstatements a client's system of internal controls will not prevent or detect a material misstatement an auditor expresses an inappropriate audit opinion when a financial report is materially misstated none of the above

Correct answer: b Learning Objective 7.8 ~ recognise the difference between tests of controls and substantive tests

44.

Substantive audit procedures include: a. b. c. *d.

analytical procedures detailed tests of transactions detailed tests of balances all of the above

Correct answer: d Learning Objective 7.8 ~ recognise the difference between tests of controls and substantive tests

© John Wiley & Sons Australia, Ltd 2017

7.13

Chapter 7: Sampling and overview of the risk response phase of the audit

45.

When conducting detailed substantive procedures, auditors search for evidence that: *a. b. c. d.

all transactions have been recorded in the correct accounts no fraud has occurred during the year the client's internal control system is operating effectively they have remained independent of their clients

Correct answer: a Learning Objective 7.8 ~ recognise the difference between tests of controls and substantive tests

46.

When control risk is high the audit strategy is to: a. b. *c. d.

assume the client's management is dishonest and immediately report them to ASIC increase reliance on tests of controls and reduce reliance on substantive testing of transactions and account balances. do little or no tests of controls and increase reliance on substantive testing of transactions and account balances refuse to continue with the remainder of the audit due to the high risk of fraud

Correct answer: c Learning Objective 7.9 ~ relate the factors that impact the nature, timing and extent of audit testing

47.

For high-risk accounts, the timing of most audit procedures will be: *a. b. c. d.

at, or after, year-end before year end whenever the client says it is most convenient for them to be conducted during the interim audit testing stage

Correct answer: a Learning Objective 7.9 ~ relate the factors that impact the nature, timing and extent of audit testing

© John Wiley & Sons Australia, Ltd 2017

7.14

Testbank to accompany Au...