Auditing and Attestation Paper 5

(b) The requirement is to identify the type of sampling plan that does not use a fixed sample size for tests of controls. Answer (b) is correct because sequential sampling results in the selection of a sample in several steps, with each step conditional on the result of the previous steps. Therefore, sample size will vary depending upon the number of stages that prove necessary. Answers (a), (c), and (d) are all incorrect because dollar-unit sampling, PPS sampling, and variables sampling all use a fixed sample size.

(b) The requirement is to identify the correct statement concerning a statistical sampling application where the population consists of forms which are not consecutively numbered. Answer (b) is correct because systematic sampling is a procedure where a random start is obtained and then every nth item is selected. For example, a sample of forty from a population of a thousand would require selecting every 25th item after obtaining a random start between items 1 through 25. Answer (a) is incorrect because selection of a random sample is possible even though the population is not consecutively numbered. Answer (c) is incorrect because there is no special reason for using stratified sampling. Stratified sampling breaks down the population into subpopulations and applies different selection methods to each subpopulation. This selection method is used when the population consists of different types of items (e.g., large balances and small balances). Answer (d) is incorrect because random number tables can be used even though the forms are not consecutively numbered. If random numbers are selected for which there are no forms, they are ignored. This is the same as if there were 86,000 items in a consecutively numbered population and random numbers selected between 86,000 and 99,999 are ignored.

(d) Answer (d) is correct because systematic items occurrence in a population may destroy a sample’s randomness. Answer (a) is incorrect because items need not be replaced in the population, and therefore is not a disadvantage of systematic sampling. Answer (b) is incorrect because an individual item will not occur more than once in a sample when systematic sampling is being used (because the auditor selects every nth item). Answer (c) is incorrect because systematic sampling refers to the type of sampling selection plan used and not the manner in which items in the population are recorded. Also, as indicated in (d) above, a systematic pattern in the population is a hindrance to systematic sampling.

(c) Stratified sampling is a technique of breaking the population down into subpopulations and applying different sample selection methods to the subpopulations. Stratified sampling is used to minimize the variance within the overall population [answer (c)]. Recall that as variance increases, so does the required sample size (because of the extreme values). Thus, stratification allows the selection of subpopulations to reduce the effect of dispersion in the population.

(d) The requirement is to identify the circumstance that would cause an auditor to assess control risk too low and decrease substantive testing inappropriately. Answer (d) is correct because when the true deviation rate in the population exceeds that in the sample, the auditor may assess control risk too low. The AICPA Audit Sampling Guide discusses tests of controls and attributes sampling in its second chapter. Answers (a) and (c) are incorrect because the true deviation rate and the risk of assessing control risk too low do not have such a relationship, either positive or negative. Answer (b) is incorrect because a deviation rate in the population that is less than the deviation rate in the auditor’s sample may lead the auditor to assess control risk too high.

(d) The requirement is to identify the correct statement about sampling for attributes. Answer (d) is correct because the sample size increases as the tolerable rate decreases, an inverse relationship. Answer (a) is incorrect because many deviations do not necessarily result in a misstatement. Answer (b) is incorrect because a doubling of the population size will result in less than a doubling of the required sample size. Answer (c) is incorrect because auditors must consider the qualitative aspects of deviations.

(a) The requirement is to identify the information needed in addition to the likely rate of deviations and the allowable risk of assessing control risk too low to determine the sample size for a test of controls in an attributes sampling plan. Answer (a) is correct because the tolerable deviation rate is also needed. Answer (b) is incorrect because the risk of incorrect acceptance relates to variables sampling applied to substantive testing, not attributes sampling applied to tests of controls. Answer (c) is incorrect because the auditor will examine the nature and cause of deviations after the sample has been selected. Answer (d) is incorrect because auditors often do not consider population size when performing attributes sampling applied to tests of controls.

(b) The requirement is to identify the correct statement with respect to treatment of a voided voucher that has been selected in a sample. Answer (b) is correct because the AICPA Audit Sampling Guide states that the auditor should obtain reasonable assurance that the voucher has been properly voided, and should then replace it with another voucher. Answer (a) is incorrect because the voided voucher is not normally considered to be a deviation. Answer (c) is incorrect because the auditor must obtain reasonable assurance that the misplaced voucher has been voided. Answer (d) is incorrect because the level of materiality normally does not directly affect the decision.

(c) The requirement is to determine the proper method of handling a sample item which cannot be located for evaluation purposes. Answer (c) is correct because an auditor would ordinarily consider the selected item to be a deviation. Answers (a) and (d) are incorrect since a possible cause for the missing purchase order could be a breakdown in one of the controls of the system. Thus, in selecting a new sample item(s) the auditor may be ignoring a portion of the population which is in error and may be artificially skewing the results of the tests performed on the sample. Answer (b) is incorrect because there is no reason to believe that the entire test is invalid and cannot be relied upon.

(a) The requirement is to determine why deviations from control procedures do not necessarily result in errors. Answer (a) is correct because it provides an example of a situation in which a deviation from a control procedure exists (lack of documentation of transaction approval), although the entry was authorized and proper. Thus, such a deviation does not necessarily result in an error in the financial statements. Answer (b) is incorrect because a deviation from control procedure and an error may occur in the same transaction. Answer (c) is incorrect since the fact that all deviations do not lead to errors will result in a lower error rate. Answer (d) is incorrect because while it represents a correct statement, it does not follow from the point of the question which is based on the idea that deviations do not directly result in errors.