Questions and Answers of Statistical Sampling To Auditing

Explain how it is possible to use different audit approaches to obtain a given level of assurance. Provide two examples of different audit approaches that would result in the same level of assurance.
Identify three circumstances in which it may be desirable to judgmentally select a sample size and sample items rather than use statistical sampling methods.
Identify five factors that are likely to affect judgmentally determined sample size for substantive tests of transactions and details of balances. Explain the relationship between the factors and the
Which two statistical methods are applicable to compliance tests of transactions? Identify the circumstances in which each of these two methods is likely to be favored.
Identify the major considerations affecting reliability level and upper precision limit for compliance tests. Explain how the auditor will decide when to use a reliability of 95% compared to 80%.
What four statistical methods are most commonly used for substantive tests of transactions? Identify the circumstances in which each of the methods is most likely to be used.
What are the factors affecting the reliability level of substantive tests of transactions? Under what circumstances is the auditor likely to use a high confidence level? When is a low confidence
Identify and distinguish among the eleven statistical methods that are available for direct tests of balances.
Explain why attributes sampling is unlikely to be used for direct tests of balances. Under what circumstances is attributes sampling likely to be used ?
There are limited circumstances in which unstratified mean-per-unit is likely to be used. Why? What are the circumstances?
Identify the circumstances in which difference and ratio estimation can be used in auditing.
Identify the circumstances in which dollar unit sampling is most likely to be used. Also identify the circumstances in which an alternative method is likely.
Explain why it is desirable to select all larger items for audit testing, regardless of the statistical method used. What decision rule was recommended in the book to identify those large items ?
What is meant by a fallback method? Describe the three fallback methods commonly used for statistical methods.
Identify the factors that affect the reliability level for direct tests of balances. What are the circumstances in which a high reliability level would be used ?
The following are 13 factors that would probably affect the sample size for compliance tests of transactions:(1) Upper precision limit(2) Quality of compliance evidence available(3) Planned reliance
This is your first year in charge of the audit of the All-America Bank. All- America is a publicly held bank in excellent condition; it has been a client of the firm for several years. Two years ago,
Steadfast Wholesaling Company purchases a line of approximately 42,000 different items and wholesales to a variety of industries. The company utilizes an elaborate EDP perpetual inventory system as a
Following are four situations in which you will use statistical sampling. Indicate what precision and reliability values you will use for each and justify your answer. Be sure to indicate whether
If you were to perform hypothesis tests in the situations described in 11-19 c and d, what Beta risks would you use ?11-19 c and d:Following are four situations in which you will use statistical
Suppose you selected a dollar unit sample of 300 items, expecting to find zero errors, and evaluated the results using an upper precision limit of 1.0%. What actions would you take if you found:a. 3
What are the purposes of analytical tests from an auditor’s point of view?
Identify the major factors motivating auditors to seek more effective analytical testing techniques.
What is meant by regression analysis? Describe two audit situations in which regression analysis might be used.
Distinguish between inference and prediction as each is used in regression. Which is a more appropriate term when the auditor is verifying the reasonableness of an account balance with regression ?
What is meant by the term variables in regression? Distinguish between independent variables and dependent variables. Assume the auditor was using regression analysis to make inferences about total
What are the characteristics of simple linear regression? Provide an example in which this method might be appropriate.
Distinguish between linear and curvilinear regression. What are the advantages and disadvantages of each ?
Distinguish among the following three terms and define the standard formulation of independent and dependent variables for each term: simple linear regression, simple curvilinear regression, multiple
Using simple linear regression, define each term for the formulation Y = a + bX. Use this formula to determine February’s expected value of repair and maintenance expense for a rock crusher if
How would an auditor ascertain what information should be used to determine the values of a and b in question 10-9? Assuming the information is available, how would the values of a and b be
What is meant by a data set in regression analysis ? How many data sets would there be if 26 months of data were used to determine the value of a and b for each of four independent variables for
What is meant by the coefficient of correlation in regression analysis? What do the values .9 and — .82 for two different coefficients of correlation indicate ? How is the coefficient of
What is meant by a confidence interval for a regression line? Compare in concept the confidence interval for regression analysis and for variables sampling.
Compare a t-distribution to a normal distribution. Which is used for regression analysis ? Assume there were 20 data sets used to determine values for a and b. How many degrees of freedom should be
What is meant by an outlier in regression analysis? How would the auditor find which of the current year’s monthly recorded repairs and maintenance expense totals are outliers ? What would the
What is meant by a Markov chain process? What might be the purpose of using a Markov chain in the audit of inventory ? What information would be needed to make the calculations?
What is meant by the term discriminant analysis? How might discriminant analysis be used by auditors?
During your examination of the 1980 financial statements of MacKenzie Park Co., which manufactures and sells trivets, you wish to analyze selected aspects of the company’s operations.Labor hours
Renolds Rims and Spokes manufactures a large variety of automobile and truck tire rims for sale to manufacturers and repair shops. The equipment used to manufacture the rims is expensive and requires
The graph below is a 97.5% confidence interval for a regression analysis.Eight data sets were used for the calculations. The following questions refer to the graph.a. The two variables being used in
Tastee Dinner operates 14 family restaurants in the southwestern United States. All restaurants are centrally owned and controlled by a management group in Phoenix. Every Tastee Dinner is built on
Below are three graphs showing data points for independent and related dependent variables.a. Draw a rough approximation of the regression line for each, A to G (Y= a + bX).b. Identify the graph with
George Mayer, CPA, is auditing the allowance for uncollectible accounts. The client has always had collection problems, but management has been uncooperative about booking recommended adjustments to
Explain the difference in methodology and statistical conclusions between compliance tests using attributes sampling (physical unit) and those using simple attributes (dollar unit).
A sample size of 150 items is selected in a test of purchase transactions to determine whether the receiving report is attached to the related vendors’ invoices. The population size is 5,000 items
You are testing for the client’s failure to record purchases in the accounts payable journal by sampling receiving reports. No errors are expected. Explain how you would conduct the tests. Why
What is the difference between error bounds as used for dollar unit sampling and confidence limits ? Explain why the term upper and lower error bounds is used for dollar unit sampling instead of the
Explain why error bounds are calculated for substantive tests using simple attributes, whereas an upper precision limit in dollars is calculated for compliance tests.
An auditor is determining the appropriate sample size for testing inventory valuation using dollar unit sampling. The population has 2,620 inventory items valued at $$12,625,000.$ The allowable
The 2,620 inventory items described in question 9-6 are listed on 44 inventory pages with 60 lines per page. There is a total for each page. The client’s data are not in computer-readable form, and
The auditor decided to select a sample of 100 items using the random number table noncumulative method for verifying the inventory valuation in question 9-6. In the selection of the 100 random
No errors were uncovered in the sample of 100 items for question 9-6. Calculate the error bounds and draw audit conclusions based upon the results. How would the error bounds be affected if you used
What is meant by the “percent of error assumption” in those population items that are in error? Why is it common to use a 100% error assumption when it is almost certain to be highly conservative
Explain the difference between simple attributes and combined attributes- variables evaluation. When should each be used ?
Instead of no errors in question 9-9, assume that the following three errors were found:Calculate error bounds for the population, using both the attributes tables and the shortcut method. Draw audit
Assume that in question 9-12, the population item that included error 1 was included in the sample twice as two separate dollar units. How should the auditor treat this item?Question 9-12:Instead of
Why is it difficult to determine the appropriate sample size for combined attributes-variables evaluation? How should the auditor determine the proper sample size?
What options does the auditor have when an error bound for combined attributes-variables evaluation is larger than the allowable error? When should each option be followed ?
Explain what is meant by multinomial bound evaluation. What are the advantages and disadvantages of multinomial bound evaluation compared to combined attributes-variables evaluation ? When should it
Explain what is meant by dollar unit difference estimation. What are the advantages and disadvantages of dollar unit difference estimation compared to physical unit difference or ratio estimation ?
Under what circumstances is there a risk that dollar unit difference estimation is a biased estimator? Under what circumstances is it apt to be an unreliable estimator?
What are the circumstances in which dollar unit difference estimation should be used rather than one of the other three dollar unit sampling methods described in the chapter? When would it be
Taken as a group, what are the primary advantages and disadvantages of the dollar unit sampling methods described in this chapter?
The following questions concern the determination of the proper sample size in simple attributes sampling using dollar unit sampling.a. For each column, 1 through 5, determine the initial sample
The following questions relate to determining the computed upper precision limit in simple attributes.a. For each column, 1 through 5, determine the computed upper precision limit from the
You are planning to use dollar unit sampling to evaluate the results of accounts- receivable confirmation for the Meridian Company. You have already tested internal controls for sales, sales returns
You intend to use dollar unit sampling as a part of the audit of several accounts for Rovnpower Manufacturing Company. You have done the audit for the past several years, and there has rarely been an
You want to select a dollar unit sample from a population of cash disbursements. The parameters are:Assume a confidence level of 90% and an allowable error of $$1,000,000$.Required :a. What is the
Phil Murphy is using simple attributes in the audit of sales transactions. The system of internal control is excellent in all regards except for the internal verification of unit prices, extensions,
In the audit of Price Seed Company for the year ended 9/30, the auditor set a maximum allowable error of $$50,000$ at a Beta risk of 10%. A sample size of 100 was selected from a population of
Refer to problem 2-29, at the end of Chapter 2. Instead of using stratified estimation, assume Ronson intends to use dollar unit sampling.Required :a. Compare the ease of selection using dollar unit
Refer to problem 3-18, at the end of Chapter 3, concerning audit tests of control on shipments. The auditor in that case has now decided to use simple attributes.Required :a. Given the sampling unit
Refer to problem 6-23, at the end of Chapter 6, concerning the confirmation of accounts receivable of Pittance Manufacturing Company. You are now considering using dollar unit sampling in the audit
Refer to problem 6-26, concerning decision rules for variables sampling. Instead of using ratio estimation, the auditor is using dollar unit difference estimation. Assume that the allowable error,
Refer to problem 6-28, concerning the audit of sales and sales returns. For this problem, assume that Rebecca is using dollar unit sampling.Required :a. Would it be practical to use combined
Refer to problem 6-29, concerning discounts on raw materials and purchased parts. As an alternative to ratio or difference estimation, the CPA is considering dollar unit difference
Define stratified sampling.
What are the purposes of stratification?
Explain why stratification with three or four strata is more likely to be used for mean-per-unit estimation than for difference or ratio estimation.
Explain how the point estimate for the total population is calculated using stratified sampling. Calculate the point estimates for mean-per-unit, difference, and ratio estimation from the following
Explain how the standard deviation is calculated when stratified mean-per- unit sampling is used. What information is needed before the calculation can be made?
Explain why the standard error rather than the computed precision interval is calculated for each stratum when stratified sampling is used. Would the same combined computed precision interval result
Calculate the combined standard error of the population if the standard deviation in question 8-4 is 500 in stratum 1 and 300 in stratum 2. (Ignore the finite correction factor.)Question 8-4:Explain
Explain in what ways the decision-rule graph used in Chapter 7 to evaluate whether a population is materially misstated is similar to and different from the appropriate graph for stratified
What are the two most important criteria in deciding on the appropriate number of strata that should be used in an audit situation ?
Explain why recorded values are ordinarily used as the basis for determining the number of strata and stratum boundaries, when stratification on the basis of audited values would ordinarily result in
What basis other than recorded values could be used to determine stratum boundaries? Under what circumstances should a basis other than recorded values be used?
Explain the difference in methodology of each of the following three methods of determining stratum boundaries: judgmental, equal recorded value, and equal cumulative square root of frequency. Under
What is the difference between the formulas for sample size determination for stratified mean-per-unit and for stratified difference estimation ?
Determine the required sample size using stratified mean-per-unit estimation for the population in questions 8-4, 8-7, and 8-8.Question 8-8:Explain in what ways the decision-rule graph used in
Assume a calculated sample size of 200 for question 8-14. Allocate this sample size to the two strata by the two methods described in the chapter.Question 8-14:Determine the required sample size
Under what circumstances should stratified mean-per-unit be considered a more desirable alternative than ratio and difference estimation ?
What are the most appropriate circumstances in which to use stratified mean- per-unit estimation?
What are the most appropriate circumstances in which to use stratified difference or ratio estimation ?
Define what is meant by post-stratification. When is it appropriate to post- stratify ?
Explain the methodology for combining two or more statistical estimates from different audit tests. Calculate the combined confidence limits for two asset accounts whose separate confidence intervals
The following problems apply to stratified sampling. Choose the best response.a. Mr. Murray decides to use stratified sampling. The basic reason for using stratified sampling rather than unrestricted
Assume that an auditor is using stratified ratio estimation in the confirmation of accounts receivable. There are 940 accounts with a recorded value of $$250,000$. They are listed on ten pages,
Your client is a wholesaler of automobile and truck parts. The parts come in two sizes: loose parts, which are in bins, and bulk parts, which are in sealed packages arranged in pallets.You are

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