cpa audit review ch15 review 3

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cpa audit review ch15 review 3
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2014-10-05 23:16:15
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cpa audit review ch15 review 3
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  1. The risk of underreliance is that the sample selected to test controls

    Contains proportionately fewer errors or deviations from prescribed controls than exist in the balance or class as a whole.  

    Does not support the tolerable misstatement for some or all of management’s assertions.  

    Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transaction classes.

    Does not support the auditor’s planned reliance on controls when the true operating effectiveness of controls justifies such an assessment.
    Does not support the auditor’s planned reliance on controls when the true operating effectiveness of controls justifies such an assessment.  

    The risk of underreliance is one aspect of sampling risk. It is the risk of the erroneous conclusion based on a sample that controls are less effective than they actually are. This kind of error most likely diminishes the efficiency, but not the effectiveness, of the audit. Underreliance ordinarily leads to devoting greater and possibly unnecessary effort to substantive procedures.
  2. A CPA’s test of accuracy of inventory counts involves two storehouses. Storehouse A contains 10,000 inventory items and Storehouse B contains 5,000 items. The CPA plans to use sampling without replacement to test for an estimated 5% deviation rate. If the CPA’s sampling plan calls for a specified reliability of 95% and a tolerable rate of 7.5% for both storehouses, the ratio of the size of the CPA’s sample from Storehouse A to the size of the sample from Storehouse B should be  

    More than .5:1 but less than 1:1.  

    More than 1:1 but less than 2:1.  

    1:1.

    2:1.
    More than 1:1 but less than 2:1. 

    The relationship between population size and sample size is direct. As the population size increases, so does the necessary sample size, although not proportionally. Generally, the population size has very little effect on the sample size when the population is large. According to the AICPA Audit Guide Audit Sampling, a population greater than 2,000 sampling units is large. If the population has between 200 and 2,000 sampling units, the effect on the sample size is small. For smaller populations, sample size is reduced by the effect of population size. Thus, more items would have to be sampled from Storehouse A than from Storehouse B, but not twice as many.
  3. The possibility of the auditor’s failure to recognize a misstatement in an amount or a deviation from a prescribed control arises from  

    The standard error of the mean.  

    Nonsampling risk.  

    Statistical risk.

    Sampling risk.
    Nonsampling risk.  

    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). Sampling risk results from the use of statistical sampling.
  4. Which of the following factors does an auditor usually need to consider in planning a particular audit sample for a test of controls?  

    Total dollar amount of the items to be sampled.  

    Number of items in the population.  

    Acceptable risk of overreliance.

    Tolerable misstatement.
    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 advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods  

    Provide an objective basis for quantitatively evaluating sample risk.  

    Can more easily convert the sample into a dual-purpose test useful for substantive testing.

    Eliminate the need to use judgment in determining appropriate sample sizes.

    Provide greater assurance than a nonstatistical sample of equal size.
    Provide an objective basis for quantitatively evaluating sample risk.  

    .Sampling risk is the risk that the auditor’s conclusion based on a sample may differ from the conclusion when the same procedure is applied to the entire population. Two types of erroneous conclusions may be drawn. One is that controls are more effective than they actually are, or a material misstatement does not exist when in fact it does exist. This type of error affects audit effectiveness and is more likely to result in an inappropriate opinion. The second erroneous conclusion is that controls are less effective than they actually are, or a material misstatement exists when in fact it does not exist. This type of error affects audit efficiency and results in more work. Sampling risk is measured and controlled in statistical sampling.

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