Question

The following questions relate to nonstatistical and monetary unit sampling. Choose the best response.

1. A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?

   1. Greater reliance on internal control

   2. Greater reliance on substantive analytical procedures

   3. Smaller expected frequency of errors

   4. Smaller measure of tolerable misstatement

2. The risk of incorrect acceptance relates to

   1. substantive tests and affects audit efficiency.

   2. substantive tests and affects audit effectiveness.

   3. tests of controls and affects audit efficiency.

   4. tests of controls and affects audit effectiveness.

3. In a probability-proportional-to-size sample with a sampling interval of $3,000, which of the following is true?

   1. An overstatement error of $200 in an item recorded at $300 will result in a projected error of $2,000.

   2. An overstatement error of $700 in an item recorded at $3,500 will result in a projected error of $600.

      1. I only

      2. II only

      3. Both I and II

      4. Neither I nor II

Answer 1

Question 1 : The correct answer is "D" : Smaller measure of tolerable misstatement.

Reason : Tolerable misstatement refers to the level up to which misstatements are acceptable by the auditor. If same is kept at a low level, it means that the auditor will have to obtain more sufficient and appropriate evidences. Auditor will do so by using a larger sample size to obtain more comfort over the population being tested.

Question 2 : The correct answer is "B" : substantive tests and affects audit effectiveness.

Reason : The risk of incorrect acceptance is a situation in which the results of an audit sample support a conclusion that an account balance is correct, when this is not really the case. Instead, the account balance is materially incorrect. Hence it affects both substantive tests and the effectiveness of the audit.

Question 3 : The correct answer is "A" : Only I

Reason : Under PPS method, an error is projected if the amount of item tested is less than the sampling interval otherwise it is taken at its actual value. Hence in the current case in case of an item recorded at 3,500$ which is more than the sampling interval, the actual misstatement of 700$ will be taken into consideration and the same will not be projected.

On the other hand, a misstatement of 200$ in 300$ item will be projected since 300$ is 10% of sampling interval which is 3,000$. Hence the amount of misstatement will be projected to 2,000$ ((200/300)*3000).