Exam 10: Audit Sampling

Calculate the projected likely misstatement (PLM) for the data given below using the average difference method and the ratio method. (Round to the nearest dollar.)

Using the audit risk model: If audit risk is 0.05, inherent risk is 1.0, control risk is 0.20, and analytical procedures risk is 1.0, the risk of incorrect acceptance is 0.25.

For which of the following audit tests is an auditor most likely to use attribute sampling?

Left and Right PAs audited the accounts receivable of Investo Limited on a sample basis. There were 2,000 customer accounts in the subsidiary ledger with a total recorded value of $375,000. As part of the audit program, Left and Right selected a sample of 100 accounts having a recorded value of $20,000. They performed the audit procedures and determined that the audited amount of the sample totalled $19,000. Required: A) Calculate the projected likely misstatement (PLM) using (1) the average difference method and (2) the ratio method. B) Evaluate the results of the calculation in part (A). Assume that Left and Right set the tolerable misstatement for accounts receivable at $25,000.

Statements or examples that relate to audit sampling are listed below. Match the statements 1 through 5 to the term (A through D) that it best describes and place the identifying letter in the space provided. A: Statistical sampling B: Non-statistical sampling C: Sampling risk D: Non-sampling risk ____ 1. Jones CPA selected a sample and evaluated the results of her sample using the laws of probability. ____ 2. Wilson CPA checked to see if there were any signatures in the credit approval box on a sample of sales orders rather than looking only for authorized signatures. ____ 3. Based on a statistical sample, Jackson CPA concluded that the client's control system was working on an acceptable basis when in fact the population deviation rate was unacceptable. ____ 4. For his sample Barnum CPA selected all invoices over $1,000 and all invoices recorded on the 15^th of each month. ____ 5. When a client could not produce an invoice for a sample selected by the auditor, the auditor accepted the client's assurance that the invoice contained the appropriate approval.

After extrapolating the results of performing substantive tests on a sample of accounts from the accounts receivable subsidiary ledger, Allen CPA concluded that the accounts receivable balance was materially misstated. In fact, the balance was materially correct. This situation illustrates the risk of ________.

In the audit of account balances, the sample size will tend to be smaller when the ________.

Below are steps in the process of tests of controls for assessing control risk. Indicate, using the correct letter, the phase in which the step belongs. A: Problem recognition phase B: Evidence collection phase C: Evidence evaluation phase ____ 1. Define the deviation conditions. ____ 2. Calculate the sample deviation rate. ____ 3. Judge the deviation rate in relation to the tolerable rate. ____ 4. Determine the sample size. ____ 5. Define the population. ____ 6. Perform procedures to test the controls. ____ 7. Specify the audit objectives.

The determination of an appropriate sample on a representative basis must be made using statistical methods.

An example of non-sampling risk is the selection of a random sample that is not representative of the population.

If the association of population items with random numbers is difficult and expensive, but the auditor does not have sufficient knowledge about the population, the auditor should ________.

Non-statistical sampling may be better to use than statistical sampling when ________.