Jason and Marco are working on the audit of Jackson Enterprises, Inc., a large national retailer of fireworks and other pyrotechnic products. Jason, an audit intern has been learning about audit sampling techniques, in particular probability-proportionate-to-size sampling. Marco asks Jason how auditors using this sampling method determine the risk of incorrect rejection. What should Jason's response be to this? When using this particular sampling method, the auditors typically do not concern themselves with the risk of incorrect rejection, as this sampling method tests the entire population. When using this sampling method, the auditors specify the risk of incorrect rejection as the assessed level of audit risk multiplied by the determined level of inherent risk. When it comes to probability-proportionate-to-size sampling, the auditors do not specify a risk of incorrect rejection; rather auditors control this risk indirectly. O When it comes to probability-proportionate-to-size sampling, the auditors specify a precise risk of incorrect rejection, and use assessed risk of material misstatement to adjust it accordingly.

Jason and Marco are working on the audit of Jackson Enterprises, Inc., a large national retailer of fireworks and other pyrotechnic products. Jason, an audit intern has been learning about audit sampling techniques, in particular probability-proportionate-to-size sampling. Marco asks Jason how auditors using this sampling method determine the risk of incorrect rejection. What should Jason's response be to this? When using this particular sampling method, the auditors typically do not concern themselves with the risk of incorrect rejection, as this sampling method tests the entire population. When using this sampling method, the auditors specify the risk of incorrect rejection as the assessed level of audit risk multiplied by the determined level of inherent risk. When it comes to probability-proportionate-to-size sampling, the auditors do not specify a risk of incorrect rejection; rather auditors control this risk indirectly. O When it comes to probability-proportionate-to-size sampling, the auditors specify a precise risk of incorrect rejection, and use assessed risk of material misstatement to adjust it accordingly.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

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.
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
.Dan and Lily, two audit staff associates are discussing audit sampling while working on the audit of a major client. Dan is explaining to Lily the various audit sampling methods that he has seen being used by audit managers. Dan asks Lily if she has ever heard of the ratio method with respect to evaluating sample results. Lily replies that she has not, so they decide to ask their supervisor, Brad. What would be the best answer from Brad to appropriately answer this question
In assessing the possibility of invalid data in a human resources computer system, such as incorrect job classifications, ages exceeding retirement age, or erroneous ethnic classifications, the auditor should employ the following approach to determine the potential extent of the problem:Select one: a. Submit test data to test the effectiveness of edit controls over the input of data. b. Use generalized audit software to select a sample of employees. Use the sample to determine the validity of data items and project the result to the population as a whole. c. Review and test access controls to ensure that access is limited to authorized individuals. d. Use generalized audit software to develop a detailed report of all data outside specified parameters.
Sample Selection. Hunter McNeal is studying and evaluating Branyon’s internal controlsrelated to the mathematical verification of sales invoices. In this verification, Branyon’s control activities require that employees perform the following procedures:∙ Verify that sales invoices are prepared only for items actually shipped to customers. Thisactivity is evidenced by requiring employees to place a checkmark next to quantities onthe sales invoices.∙ Verify that prices charged to customers are from approved price lists. This activityis evidenced by requiring employees to place a checkmark next to prices on the salesinvoice.∙ Verify that extensions and footings on invoices are mathematically accurate. This activityis evidenced by requiring employees to initial the bottom of the invoice in a sectionmarked “Mathematically verified by.”To verify the operating effectiveness of these activities, McNeal established an expectedpopulation deviation rate of 3 percent, a tolerable rate of deviation…
During the audit of Sunrise Enterprises, LLC, a provider of plastic utensils and other items to restaurants throughout the southeastern United States, the auditors have determined that the client's inventory represents an area of higher inherent risk. As a result, which of the following choices would most likely represent a prudent course of action by the auditor? O The auditor is most likely to simply disclaim an opinion on the client's inventory and any related accounts, as this area represents higher audit risk. The auditor may decide to audit the inventory accounts closer to the balance sheet date, and extend the extent of procedures performed on these accounts. O The auditor is likely to adopt a reliance on controls strategy, and perform less substantive procedures accordingly. O The auditor is likely to perform procedures on these accounts closer to the beginning of the audit, to allow more time to fix any problems uncovered.
The two types of sampling risks that auditors face include the risk of incorrect acceptance and the risk of incorrect rejection. What do each of these mean and how will each impact the audit process and the audit results? Which is considered the more important risk?
The internal auditors of Brown Electrical Company report to the controller. Because of changes made in the past year to several of the transaction processing programs, the internal auditors created a new test data set. The external auditors requested that the old data set also be run. The internal auditors, embarrassed, explained that they overwrote the original test data set. Required: Outline any potential risks, and determine the courses of action the external auditor should take.
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.