Solution Manual for Auditing Canadian 7th Edition

Smieliauskas Bewley 1259259870 9781259259876

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) The set of all of the elements that comprise an account balance or a class of transactions is referred to as a .

A) sampling unit

Answer: D

B) population unit

C) sample

D) population

2) Which of the following audit procedures is NOT typically used in audit sampling applications?

A) Observation of personnel and procedures.

C) Confirmation.

Answer: A

B) Physical count of tangible assets.

D) Recalculation.

3) An advantage of statistical sampling over non-statistical sampling is that statistical sampling helps an auditor to _.

A) make a preliminary estimate of the appropriate sample size

B) reduce the level of audit risk and materiality to a relativelylow amount

C) eliminate the risk of non-sampling errors

D) minimize the failure to detect errors and irregularities

Answer: A

4) Which of the following is an advantage of statistical sampling?

A) It permits a less rigid approach to unique audit problems.

B) It uses an evaluation method that allows evaluation of the sample on factors other than the sample evidence

C) It requires auditors to be exact in their judgments on risk and materiality

D) It permits auditors to use a computer to select a random sample

Answer: C

5) Non-statistical sampling may be better to use than statistical sampling when _.

A) the auditor has insufficient knowledge about the population to take a statistical sample

B) the population is known to be diverse, with a high inherent risk of error

C) the inherent risk of error in the population is low

D) auditors are not technically proficient in sampling

Answer: B

6) The probabilitythat an auditor's conclusion based on a sample might differ from the auditor's conclusion based on an audit of the entire population identifies the concept of .

A) tolerable rate and the expected deviation rate

B) sampling risk

C) confidence levels

D) statistical sampling

Answer: B

7) Which description best illustrates sampling risk?

A) Choosing a sample that does not represent the population.

B) Failing to recognize errors or deviations in the documents examined.

C) Applying audit procedures that are inappropriate for the audit objectives.

D) Arriving at incorrect statistical conclusions because of computational errors.

Answer: A

8) 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 .

A) use a computer to analyze the population and then decide which method to use

B) use statistical sampling

C) first determine the possible impacts of an error in the population on the financial statements to decide if sampling is reasonable

D) use non-statistical sampling

Answer: C

9) In testing controls over invoices, an auditor discovers that in 10% of her statistical sample invoices were sent for full shipments, even if shipping documents suggested partial shipments. In this case, she would likely .

A) conclude that controls are working at 90% effectiveness and classifycontrol risk as low

B) consult with her partner to consider launching a fraud investigation

C) recalculate control risk to determine if there is anyeffect on the nature, timing, or extent of her year-end procedures

D) increase her sample size to determine the extent of the control weakness

Answer: D

10) The purpose of tests of controls is to determine whether

A) internal control policies and procedures are working as prescribed

B) the auditor has an understanding of the control system

C) errors and irregularities are prevented or detected in a timelymanner

D) substantive testing can be kept to a minimum

Answer: A

11) Which of the following is a term used to describe a departure from a prescribed internal control procedure?

A) Misstatement. B) Exception. C) Event. D) Known error

Answer: B

12) For which of the following audit tests is an auditor most likelyto use attribute sampling?

A) Examining invoices in support of the valuation of fixed asset additions.

B) Selecting accounts receivable for confirmation of account balances.

C) Making an independent estimate of the amount of a FIFO inventory.

D) Inspecting employee time cards for proper approval by supervisors.

Answer: D

13) Which of the following is used in attribute sampling to determine the sample size?

A) Sampling risk, sample deviation rate, and tolerable deviation rate.

B) Sample deviation rate, tolerable deviation rate, and expected population deviation rate.

C) Sampling risk, tolerable deviation rate, and expected population deviation rate.

D) Sampling risk, sample deviation rate, and expected population deviation rate.

Answer: D

14) In a sample-based audit of an account balance, which of the following combinations properly expresses the relationship between changes in the factors indicated and changes in sample size?

Answer: D

15) The risk model is defined as AR = IR × CR × DR. The risk of assessing control risk too low can lead to .

A) the auditor performing more work than needed, thus wasting resources

B) expanding sample sizes required for statistical sampling of account balances

C) the auditor failing to do additional work that should be done

D) poor choice of procedures

16) As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment resulted because the true deviation rate in the population was

A) less than the deviation rate in the auditor's sample

B) less than the risk of assessing control risk too low based on the auditor's sample

C) more than the deviation rate in the auditor's sample

D) more than the risk of assessing control risk too low based on the auditor's sample

Answer: C

17) The risk of assessing control risk too high is the risk that the evidence of compliance with control procedures in the sample indicates .

A) low control risk when the actual degree of compliance justifies a low control risk assessment

B) high control risk when the actual degree of compliance would justifya higher control risk assessment

C) high control risk when the actual degree of compliance would justifya lower control risk assessment

D) low control risk when the actual degree of compliance does not justify a low control risk assessment

Answer: C

18) Detection risk is the risk that the auditor will not detect material misstatements in the accounts. To limit detection risk to an acceptable level, the auditor .

A) performs substantive tests

B) gains an understanding of the internal control system

C) applies statistical methods

D) tests controls

Answer: A

19) When performing the substantive tests on an account balance, the auditor is concerned about two aspects of sampling-based decision errors: (1) the risk of incorrect rejection (RIR) and (2) the risk of incorrect acceptance (RIA). Which of the following is true about RIR and RIA?

A) RIA is of greater concern to the auditor than the RIR.

B) RIA and the RIR are of equal importance to the auditor.

C) RIR is of greater concern to the auditor than the RIA.

D) Neither the RIR nor the RIA need be considered by the auditor.

Answer: A

20) Which of the following courses of action is an auditor most likelyto follow in designing a sampling plan for cash disbursements if the auditor is aware of several unusually large cash disbursements?

A) Set the tolerable deviation rate at a lower level than originally planned.

B) Stratifythe cash disbursements population so that all of the unusually large disbursements are selected.

C) Increase the sample size to reduce the effect of the unusuallylarge disbursements.

D) Continue to draw new samples until all the unusually large disbursements are included in the sample.

Answer: B

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

A) incorrect acceptance

C) incorrect rejection

Answer: C

B) assessing control risk too high

D) assessing control risk too low

22) The standard deviation of a population of data is a statistical measure of .

A) how much data are skewed

C) the average value of data items

Answer: D

B) how much data are correlated

D) the dispersion of data

23) A number of factors can affect the size of a sample for a substantive audit of the details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?

A) A lower assessed level of control risk.

B) Using a larger number of effective analytical procedures to obtain evidence about particular assertions.

C) Smaller measure of tolerable misstatement.

D) Smaller expected frequency of account item errors.

Answer: C

24) In the audit of account balances, the sample size will tend to be smaller when the

A) risk of incorrect acceptance is lower

C) population variability is smaller

Answer: C

B) tolerable misstatement is smaller

D) risk of incorrect rejection is lower

25) The total amount of monetaryerror that is found in a sample is referred to as the .

A) known misstatement

C) possible misstatement

Answer: A

B) projected likelymisstatement

D) tolerable misstatement

26) When evaluating the results of substantive audit procedures, auditors run the sampling risk(s) of

A) assessing control risk too high or too low

B) incorrect acceptance of the population only

C) incorrect acceptance and incorrect rejection of the population

D) assessing control risk too low only

Answer: C

27) The amount bywhich a projected likelymisstatement differs from an actual misstatement is usually the result of

A) a misunderstanding of accounting principles

B) management override of an internal control procedure

C) sampling error

D) risk of incorrect acceptance

Answer: C

28) Green CPA audited the inventory of ABC Companyon a sample basis. Green audited a sample of 120 items and found a net overstatement of $600. The audited sample had a recorded value of $12,000. The entire inventorycontained 2,400 items with a total book value of $280,000. The projected likelyoverstatement using the average difference method is .

A) $56,000 B) $14,000 C) $12,000 D) $48,000

Answer: C

29) Green CPA audited the inventory of ABC Companyon a sample basis. Green audited a sample of 120 items and found a net overstatement of $600. The audited sample had a recorded value of $12,000. The entire inventorycontained 2,400 items with a total book value of $280,000. The projected likelyoverstatement using the dollar unit sampling method is .

A) $56,000 B) $14,000 C) $12,000 D) $48,000

Answer: B

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

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

Answer: True False

31) Analytical procedures, such as vertical analysis, ratio calculations, and time series analysis, are usually done on a sample basis.

Answer: True False

32) If statistical calculations were not applied, then a sampling method would be considered non-statistical, even though a random sample was selected

Answer: True False

33) Non-statistical sampling is audit sampling in which auditors do not use the probability calculations to express the results.

Answer: True False

34) When auditors perform procedures using statistical sampling and obtain sufficient evidence, a conclusion about the population characteristics will not be wrong

Answer: True False

35) Sampling risk is the risk that the sample does not represent the population.

Answer: True False

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

Answer: True False

37) Non-sampling risk exists in both statistical and non-statistical sampling.

Answer: True False

38) Attribute sampling is audit sampling in which auditors look for the presence or absence of a control condition.

Answer: True False

39) Auditing a larger sample reduces the probability of determining that the control is working well when in fact it is not.

Answer: True False

40) Assessing control risk too low threatens the efficiencyof the audit but not the effectiveness.

Answer: True False

41) The sample deviation rate is the best single-point estimate of the actual, but unknown, deviation rate in the population.

Answer: True False

42) 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.

Answer: True False

43) In specifying the objectives for substantive testing of accounts receivable, an auditor hypothesizes that the companydoes not have a right to collect the money, and looks for evidence that theydo.

Answer: True False

44) The risk of incorrect rejection exists both in statistical and non-statistical sampling.

Answer: True False

45) In making a decision about the extent of misstatement in a population, the known misstatement in the sample must be projected to the population.

Answer: True False

46) When the projected likely misstatement is greater than the tolerable misstatement in a sample-based audit of an account balance, the auditor can decide that the account balance is materially misstated and therefore run the risk of incorrect acceptance.

Answer: True False

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

47) Below are steps in the process of tests of controls for assessing control risk. Indicate, using the correc 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.

Answer: 1. A

2. C 3. C 4. B 5. A 6. B 7. A

48) Statements or examples that relate to audit sampling are listed below. Match the statements 1 throug 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 proba

2. Wilson CPA checked to see if there were anysignatures in the credit approval box on a samp orders rather than looking only for authorized signatures.

3. Based on a statistical sample, Jackson CPA concluded that the client's control system was w 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 t each month.

5. When a client could not produce an invoice for a sample selected by the auditor, the auditor the client's assurance that the invoice contained the appropriate approval. Answer: 1. A 2. D 3. C 4. D

49) Jack and Jill, two auditors who have separate accounting practices, have independently assessed the risks associated with the accounts receivable of their respective clients. The appropriate audit risk for both is determined to be .02. Both agree that inherent risk should be set at the maximum (1.0) and that no analytical procedures will be performed. Jack evaluates control risk as moderate (.40), w Jill assesses it as relatively low (.20). Using the audit risk model, answer the following questions.

Required:

A) What is the risk of incorrect acceptance (RIA) for Jack and for Jill?

B) Based on your answer in part (A), which auditor will have to collect the most evidence? Explain y reasoning

C) What effect does differing assessments of control risk have on the sample size of accounts receiva Explain.

Answer:

A) Using the audit risk model, the risk of incorrect acceptance is as follows:

Risk of incorrect acceptance (RIA) = AR/(IR × CR × APR)

For Jack, RIA = .02/(1 × .4 × 1) = .05

For Jill, RIA = .02/(1 × .2 × 1) = .10

B) In general, the lower the risk of incorrect acceptance required bythe auditor, the more evide will have to be collected. Therefore, Jack, who has an RIA of 05, will require more evidence t

C) As noted in part (B), the lower the risk of incorrect acceptance, the larger the sample must b Therefore, Jack's sample for accounts receivable must be larger than Jill's sample. This makes because the less risk the auditor is willing to take, the more evidence the auditor requires. If the auditor requires more evidence, then the auditor must draw larger samples.

50) 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 sam totalled $19,000.

Required:

A) Calculate the projected likelymisstatement (PLM) using (1) the average difference method and (2 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.

Answer: A) (1) Average difference method:

PLM = sample misstatement × Number of population units/ Number of sampling units

= ($1,000 × 2,000)/100 = $20,000

(2) Ratio method

PLM = sample misstatement × Population value/recorded value

= $1,000 × $375,000/$20,000

= $18,750

B) Since $20,000 and $18,750 are both well below the tolerable misstatement of $25,000, acco receivable is probably not materiallymisstated. However, this does not take sampling error into account.

51) Assume several auditors selected various unrestricted, unstratified random samples from a populatio 1,200 customers' accounts receivable with a recorded value of $480,000. The results of their tests are the table below.

Projected LikelyMisstatement

Overstatement (Understatement)

Required:

For each of the sample sizes, calculate the projected likely misstatement (PLM) using (1) average dif method, and (2) the Dollar Unit Sample method. Treat each case independently. Round the PLM sol the nearest dollar.

Answer: Projected Likely Misstatement

Overstatement (Understatement)

52) Calculate the projected likelymisstatement (PLM) for the data given below using the average differe method and the ratio method. (Round to the nearest dollar.)