Indicate whether you agree or disagree with the following statements and explain your reasoning. Joseph Cabana was explaining to Carl Metz how sampling risk works for the audit team: "Non- sampling risk is the risk that as auditors we will arrive at a conclusion that has nothing to do with sampling issues." Kendal Clarke was auditing the miscellaneous expense account. She decided to chose every transaction that had a value of $20,000 or higher. Kendal is performing a statistical sampling technique known as systematic selection. Melissa Wilson had concluded that control risk was low for her audit client. Therefore, she decided that the most appropriate audit strategy was a combined audit strategy.

Indicate whether you agree or disagree with the following statements and explain your reasoning. Joseph Cabana was explaining to Carl Metz how sampling risk works for the audit team: "Non- sampling risk is the risk that as auditors we will arrive at a conclusion that has nothing to do with sampling issues." Kendal Clarke was auditing the miscellaneous expense account. She decided to chose every transaction that had a value of $20,000 or higher. Kendal is performing a statistical sampling technique known as systematic selection. Melissa Wilson had concluded that control risk was low for her audit client. Therefore, she decided that the most appropriate audit strategy was a combined audit strategy.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Evaluating a Sampling Application. Tom Barton, an assistant accountant with a local CPAfirm, recently graduated from Other University. He studied statistical sampling for auditing in college and wants to impress his employers with his knowledge of modern auditingmethods.Barton decided to select a random sample of payroll checks for the test of controls usinga tolerable rate of deviation of 5 percent and an acceptable risk of overreliance of 5 percent. The senior accountant told Barton that 2 percent of the checks audited last year hadone or more errors in the calculation of net pay. He decided to audit 100 random checks.Because supervisory personnel had paychecks with higher amounts than production workers, he selected 60 of the supervisor checks and 40 checks of the others. He was very carefulto see that the selections of 60 from the April payroll register and 40 from the August payrollregister were random.The audit of this sample yielded two deviations, exactly the 2 percent rate…
In audit sampling applications, sampling risk isa. A characteristic of statistical sampling applications but not of nonstatistical applications.b. The probability that the audit team will fail to recognize erroneous accounting in the client’sdocumentation.c. The probability that accounting misstatements will arise in transactions and enter theaccounting system.d. The probability that an audit team’s conclusion based on a sample might be differentfrom the conclusion based on an audit of the entire population.
Monetary Unit Sampling with IDEA: Determining Sample Size. Assume that your audit team has established the following parameters for the examination of ELM’s sales transactions: Risk of incorrect acceptance 10% Tolerable misstatement $311,711 (or 8% of the recorded balance of the transactions) Expected misstatement $77,928 (or 2% of the recorded balance of the transactions) Required:a. Use IDEA to determine the necessary sample size, given the above parameters.Parts (b), (c), and (d) are independent scenarios that affect the sample size in this example.b. Assume that your audit team has decided to increase their reliance on internal controland permit a corresponding increase in the risk of incorrect acceptance from 10 percentto 15 percent, which maintains overall audit risk at the same level. What is the necessarysample size, holding all other factors constant?c. Assume that your audit team has decided to reduce the level of tolerable misstatementfrom $311,711 to $233,783 (or…
Evan Kristopher, CPA intends to use probability-proportional-to-size sampling. He has properly selected and audited a sample of 100 accounts receivable from his client’s population of 3,000 accounts. He calculated a sampling interval of $6,000 and the tolerable misstatement for the account is $30,000. Evan also recalls that “basic precision” is equal to the appropriate reliability factor multiplied times the sampling interval. He wishes to accept a risk of incorrect acceptance of 10%. He found that 97 of the 100 accounts in the sample were properly calculated. However, the following three errors existed: Book Value Audited Value $75 $70 1,000 750 9,300 6,720 Required: Calculate the projected misstatement. Calculate the basic precision. Calculate the incremental allowance. Calculate the upper limit on misstatement. What would the auditors’ conclusion be for the population based on the analysis? explain please
Sample Size and Sampling Interval Determination: Monetary Unit Sampling. Reagan Simmons is conducting the audit of Ace Inc., and is using MUS to select a sampleof inventory items for examination. The recorded balance in Ace’s inventory account was$1,200,000. In carrying out the sampling plan, Simmons established a risk of incorrectacceptance of 5 percent, a tolerable misstatement of $100,000, and an expected misstatement of $20,000.Required:a. What parameters would Simmons consider in determining the sample size for Ace’sinventory?b. How would Simmons identify or establish each of these parameters?c. Determine the necessary sample size for the audit of Ace’s inventory.d. Based on the sample size determined in part (c), determine the appropriate samplinginterval.e. Briefly describe how Simmons would select the sample from a computerized inventorylist that Ace maintains.
Upper Limit on Misstatements Calculation: Monetary Unit Sampling. Carson Allister is performing an MUS application in the audit of Bird Company’s accounts receivable. Based on the acceptable level of the risk of incorrect acceptance of 5 percent and a tolerable misstatement of $120,000, Allister has calculated a sample size of 75 items and a sampling interval of$25,000. After examining the sample items, the following misstatements were identified: Item Recorded Balance Audited Value 1 $35,000 $28,000 2 10,000 8,000 3 6,000 3,000 Required:a. Calculate the upper limit on misstatements for Bird Company’s accounts receivable.b. Provide a brief description of the meaning of the upper limit on misstatements calculatedin part (a).c. What would Allister’s conclusion be with respect to the fairness of Bird’s accountsreceivable balance?
Which of the following statements about attribute sampling is correct? A. Larger transactions have a higher chance of being selected into the sample than smaller transactions. B. The risk of over-reliance does not affect the sample size. C. Attribute sampling is often used in the test of controls. D. The haphazard selection method is often used for attribute sampling. E. If the estimated population deviation rate is higher than the tolerable deviation rate, auditors conclude the internal control is effective.
In an audit sampling application, an auditora. Performs procedures on all items in a balance and makes a conclusion about the entirebalance.b. Performs procedures on less than 100 percent of the items in a balance and formulates aconclusion about the entire balance.c. Performs procedures on less than 100 percent of the items in a class of transactions tobecome familiar with the client’s accounting system.d. Performs analytical procedures on the client’s unaudited financial statements when planning the audit.
Sample Size Determination: Monetary Unit Sampling. The recorded accounts receivable balance for Warner Company was $500,000.Required:For each of the following independent sets of conditions, determine the appropriate samplesize for the examination of Warner’s accounts receivable in MUS. Based on the differencesin your calculations, identify the general relationship between different factors and samplesize. (RIA = risk of incorrect acceptance, TM = tolerable misstatement, EM = expectedmisstatement).a. RIA = 5%, TM = $50,000, EM = $10,000.b. RIA = 5%, TM = $50,000, EM = $25,000.c. RIA = 10%, TM = $50,000, EM = $10,000.d. RIA = 10%, TM = $50,000, EM = $25,000.
Which of the following statements is correct about monetary unit sampling?a. The risk of incorrect acceptance must be specified.b. Smaller logical units have a higher probability of selection in the sample than larger units.c. Each logical unit in the population has an equally likely chance of being selected in the sample.d. The projected misstatement cannot be calculated when one or more misstatements are discovered.