cpa audit review ch15 review 5

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  1. An auditor is testing a multinational corporation’s fixed asset purchases for overstatement and notices that, out of the hundreds of purchases, a significant number of large purchases were made during the year. The auditor decides to use monetary-unit (MUS) sampling to test fixed asset purchases.

    True or False

    MUS sampling eliminates the need for auditor’s judgment.
    False --- Statistical sampling, such as MUS sampling, allows the auditor to obtain an objective sample from an existing population. However, this method of sampling does not eliminate the need for the auditor’s judgment in evaluating the sample.
  2. As lower acceptable levels of the risk of incorrect acceptance and performance materiality are established, the auditor should plan more work on individual accounts to
    Find smaller misstatements.

    A lower performance materiality means that the tolerable misstatement in an account is smaller. As a result, the auditor must plan for a larger sample size and more audit work on the accounts to discover smaller misstatements. For substantive tests of details, the sample size depends on the auditor’s desired assurance (1.0 – the risk of incorrect acceptance) that tolerable misstatement is not less than actual misstatement in the population. The desired assurance may be based on, among other things, the following: (1) the assessed risk of material misstatement, (2) the assurance provided by other substantive procedures related to the same assertion, (3) tolerable misstatement, and (4) expected misstatement for the population. Accordingly, as the acceptable risk of incorrect acceptance decreases, the desired assurance increases, and the auditor decreases the tolerable misstatement.
  3. Is the following statement about audit sampling risks is correct for a nonissuer true or false?

    Nonsampling risk can arise because an auditor failed to recognize misstatements.
    true -- Nonsampling risk can arise because an auditor failed to recognize misstatements.

    Nonsampling risk is the risk that the auditor may draw an erroneous conclusion for any reason not related to sampling risk. Examples include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation. Nonsampling risk may be reduced to an acceptable level through such factors as adequate planning and proper conduct of a firm’s audit practice in accordance with the quality control standards (AU-C 530).
  4. Does the following factor need to considered in planning a particular audit sample for a test of controls?

    Acceptable risk of overreliance.
    yes ---Acceptable risk of overreliance.

    A test of controls is an application of attribute sampling. The initial size for an attribute sample from a large population is based on the desired assurance (complement of the risk of overreliance) that the tolerable population deviation rate is not exceeded by the actual rate, the tolerable population deviation rate, and the expected population deviation rate.
  5. An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the
    Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable population deviation rate.

    If the sample deviation rate plus the allowance for sampling risk exceeds the tolerable population deviation rate, the sample results do not support the planned risk of overreliance. Thus, the risk of overreliance should be assessed at a higher level. The result is a lower acceptable level of detection risk for a given audit risk and an increase in the assurance to be provided by substantive testing.
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cpa audit review ch15 review 5
cpa audit review ch15 review 5
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