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statistical sampling to auditing
Applications Of Statistical Sampling To Auditing 1st Edition Alvin A. Arens, James K. Loebbecke - Solutions
The following is a situation in which information about a population is needed.A large CPA firm has in effect a staff evaluation system by which all assistants are ranked on a scale ranging from 0 to 100. (100 is considered perfect.) Each supervisor ranks all assistants under his or her supervision
Define what is meant by tests of transactions. What is the purpose of performing tests of transactions ?
Describe what is meant by compliance and substantive tests of transactions. What is the relationship between them ?
There are two types of control procedures those that leave an audit trail and those that do not. Which of these two types can be tested for compliance by using attributes sampling ? How is the other type tested for compliance ?
What is meant by a sampling distribution? Why are sampling distributions important in attributes sampling?
Define the term confidence level. What is the relationship between the confidence level the auditor selects and the intended reliance on the client’s system of internal control ?
An auditor selects a sample size of 100 items from a population of 10,000 items. How large should the sample size be, all other things being equal, if the population were 10,000,000 items? Explain your conclusion.
What is the relevance of the advance estimate of the population error rate in attributes sampling? How can it be determined?
What is meant by nonsampling errors, and why are they important? How can they be minimized ?
Distinguish between the computed upper precision limit and the sample error rate. How is each determined?
What is the relationship between a tests of transactions audit program and the attributes of interest for a given audit area ?
Distinguish between the desired upper precision limit and the computed upper precision limit. How is each determined ?
Assuming that all other factors remain constant, state the relationship between the following:a. Confidence level and sample sizeb. Population size and sample sizec. Desired upper precision limit and sample sized. Expected error rate and sample size
Assume that the auditor has selected 100 sales invoices from a population of 10,000 to test for an indication of internal verification of pricing and extensions. Determine the upper precision limit of the error at a 95 percent confidence level if three exceptions existed in the sample. Explain the
When the computed upper precision limit exceeds the desired upper precision limit, what courses of action are available to the auditor? Under what circumstances should each of these courses of action be followed ?
The following multiple-choice questions about attributes sampling and related issues were taken from recent CPA examinations:a. There are many kinds of statistical estimates that an auditor may find useful, but basically, every accounting estimate is either of a quantity or of an error rate. The
Davidson Supply Company is a medium-sized distributor of wholesale hardware supplies in the central Ohio area. It has been a client of yours for several years and has instituted an excellent system for the control of sales at your recommendation.In providing control over shipments, the client has
In performing tests of transactions of sales for the Oakland Hardware Company, Ben Frentz, CPA, is concerned with the internal verification of pricing, extensions, and footings of sales invoices and the accuracy of the actual calculations. In testing sales using attributes sampling, he uses
For the audit of Carbald Supply Company, Carole Wever, CPA, is conducting a test of sales for nine months of the year ended 12/31/X7. Included among her audit procedures are the following:Foot and crossfoot the sales journal and trace the balance to the general ledger.Review all sales transactions
You decided to use attributes sampling in your testing of Frederics Clothing’s sales procedures for the year ended July 31, 198X. The client has a straightforward system that in previous years has yielded excellent results with conventional testing. Of course, the fact that July and August were
In the preliminary work for a July 31, 198Y, audit, the auditor decided to test the operation of the accounts payable/cash disbursements system. Checks written between August 1,198X, and April 30,198Y, numbered 2,731. A sample of these checks and supporting documents was examined for propriety. For
You are responsible for the 12/31/8X audit of Reynolds Jewelry Company, a medium-sized manufacturer of custom jewelry. This is the second year of the engagement, but the first year in which attributes sampling is to be used.Engagement planning, including internal control evaluation, began on
Grambing Manufacturing Co. is engaged in the manufacture of Product Xs— small, nonfunctional devices designed for the mass market. The company produces approximately 2,000 varieties of Xs, which it distributes direct to retail stores. Grambing has approximately 460 employees—350 in production
Identify five possible sampling objectives the auditor might have in selecting sample items. For each objective, give an example for which the objective is likely to be appropriate.
Distinguish between judgmental and statistical selection methods. Discuss when each method is appropriate.
Identify general circumstances in which it may be desirable to select sample items with intentional bias.
Explain what is meant by block sampling, and describe how an auditor could obtain five blocks of 20 sales invoices from a sales journal.
Under what circumstances is it appropriate to use statistical measurement techniques with judgmental selection methods?
Compared with judgmental selection, what is the major advantage of random selection ?
Define what is meant by random selection. What are three methods of random selection ?
List the four requirements of random selection, and explain why each is important.
Explain what is meant by a random number table. Describe how an auditor would select 35 random numbers from a population of 1,750 items by using a random number table.
List the five major steps needed to use a random number table. Explain how each step would be performed to select 15 accounts for confirmation from a listing of eight pages of accounts receivable with exactly 36 accounts receivable outstanding per page.
Describe what each of the following terms means in relation to random selection: sequential ordering with a grid; discards; documentation.
What are the advantages of computer terminals compared to random number tables for selecting random numbers ? Identify the information that must be entered in the terminal in order to select the numbers.
Describe systematic sampling. What are the first four invoice numbers in the sample if a sample of 75 sales invoices is to be selected from a population with invoice numbers ranging from 16,297 to 21,411? Assume a random starting point of 46.
Explain how potential bias can result from using systematic sampling. How can the auditor reduce the likelihood of this potential bias ?
Why do auditors use stratified sampling? Explain the similarities of and differences between stratified and unstratified random selection using tables.
Explain what is meant by dollar unit sampling and the difference between dollar unit and physical unit sampling. What are the advantages and problems with dollar unit sampling ?
Explain the difference, for dollar unit sampling, between random number table with cumulative amounts, random selection noncumulative, and systematic sampling.
The following apply to statistical sampling. Choose the most appropriate response.a. Which of the following best describes the distinguishing feature of statistical sampling ?i. It requires the examination of a smaller number of supporting documents.ii. It provides a means for measuring
In each of the following independent problems, design an unbiased random sampling plan using the random number table in Figure 2-1. The plan should include defining the sampling unit, establishing a numbering system for the population, and establishing a correspondence between the random number
In each of the following independent problems, design a systematic sampling plan with one start. The plan should include defining the sampling unit, establishing a numbering system for the population, and establishing a correspondence between the random number table and the population in order to
Charles White, CPA, has decided to use random selection in the audit of sales. The sales transactions are numbered from 1 to 3150. They are listed 35 to a page in the sales journal. The sample size for the audit test is 70.a. Describe five different methods for selecting a random sample of sales
Lenter Supply Company is a medium-sized distributor of wholesale hardware supplies in the central Ohio area. It has been a client of yours for several years and has instituted an excellent system for the control of sales at your recommendation. In providing control over shipments, the client has
You plan to select a random sample of 100 vouchers from a voucher register. Each voucher is identified by a month and voucher number. Vouchers start with the number 1 each month. The largest voucher number for each month is as follows:Required :a. Establish a numbering system for the population and
The Bengton Manufacturing Company maintains one cash disbursement journal, but for purposes of relations with local banks, two different bank accounts are used. Internal controls are the same for both. The sequencing of checks used in the current year is as follows:Required :a. Set up a sampling
The following sales procedures were encountered during the regular annual audit of Marvel Wholesale Distributing Company.Customer orders are received by the sales order department. A clerk computes the dollar amount of the order and sends it to the credit department for approval. Credit approval is
You are doing price tests of raw materials inventory for the Merties Manufacturing Company using statistical sampling. Your sampling plan calls for a random sample of 125 part numbers. Since you are using FIFO inventory valuation, it is essential that you obtain a random sample of part numbers.
Jack Ronson, CPA, is confirming accounts receivable for Regional Book Wholesale Company. He has decided to use stratified estimation. The basis for stratification and the population sample information are as follows:Required :a. Assume the client has provided Ronson with a listing of accounts
The cash disbursement journal for Jones Electric includes checks listed in sequential order. The checks for the year begin with 2167 and end with 8573. A sample of 75 canceled checks is desired. The sampling unit for the random selection has been defined as the canceled check.Required :a. Select
The payroll journal for Robinson Furniture Company includes 2,628 payroll checks for the year ended June 30. The first check number is 26,437 and the last one is 29,064. The checks are recorded sequentially, and the sample unit is defined as the check number. The auditor has decided to use
This problem requires the availability of a computer or computer terminal that is programmed to select random numbers.Required :a. Use the computer or terminal to select a sample of 75 canceled checks from a cash disbursement journal. The checks for the year begin with 2167 and end with 8573. The
Roger Starr, CPA, has decided to use dollar unit sampling to select a random sample of 120 items from a voucher register. The voucher register has 194 pages, with 60 items per page. The total in the voucher register is \($6,952,326.\)Required :a. What is the sampling unit? Explain how a random
The following is the entire extended inventory for Jake’s Bookbinding Company. The population is smaller than would ordinarily be used for statistical sampling, but an entire population is useful to show how to select samples by dollar unit sampling.Required :a. Select a random sample
Distinguish between the terms errors and irregularities as used in the professional literature. What is the difference in the auditor’s responsibility for the discovery of errors as compared to irregularities ?
Describe what is meant by an overall level of assurance. Explain why each of the following statements is true:a. A CPA firm should attempt to achieve the same overall level of assurance for all audit clients with approximately the same circumstances.b. A CPA firm should increase the overall level
State the two categories of circumstances that determine the overall level of assurance and list the factors that the auditor can use to indicate the degree to which each category exists.
When an auditor issues an unqualified opinion, it is the same for a publicly held company and a small, closely held firm. What justification is there for providing lower levels of assurance for closely held companies than for listed companies if the audit report is the same? Justify it from the
Auditors have not been successful in measuring the levels of assurance achieved in different audits. How is it possible to think in terms of obtaining increased or decreased levels of assurance without a precise means of measuring the level achieved ?
Explain the logic that results in the conclusion that the auditor should accumulate more audit evidence when there #is a high expectation of errors than when there is a low expectation.
List the factors affecting the auditor’s expectation of error and explain why each factor should affect the evidence needed to achieve a given level of assurance.
Explain the relationship between the factors affecting the expectation of error, the desired overall level of assurance, and the accumulation of audit evidence.
Assume that the client’s internal controls over the recording and classifying of permanent asset additions are considered weak because the person responsible for recording new acquisitions has inadequate technical training and limited experience in accounting. How would this situation affect the
Each of the following questions concerns the concept of materiality in auditing:a. What criteria should the auditor use in deciding whether an estimated error in inventory, based on a sample, is sufficiently material to require an adjustment to the financial statements ?b. What criteria should the
List and describe the major ways the auditor obtains an understanding of a client and its business. How does the auditor’s understanding of the client and its business affect the conduct of the audit ?
Explain why the auditor must study and evaluate the system of internal control and test its effectiveness as a part of the ordinary audit.
Explain what is meant by a dual-purpose test. Give an example of one.
State the relationship between the preliminary evaluation of an internal control system and tests of compliance.
State the relationship between analytical tests, tests of transactions, and direct tests of balances.
Identify the four ways the auditor can change evidence in a particular engagement. For each of the four, state a circumstance that may affect the decision.
Frequently, questions have been raised regarding the responsibility of the independent auditor for the discovery of fraud (including defalcations and other similar irregularities), and concerning the proper course of conduct for the independent auditor when an examination discloses specific
You are auditing sales and cash receipts transactions and the related accounts receivable balance for two different companies, each with a balance of \($3,000,000.\) The companies are identical except for the differences specified in situations a throughfbelow. Each situation is to be considered
The concept of materiality is important to the CPA in examination of financial statements and expression of opinion upon these statements.Required :Discuss the following:a. How are materiality (and immateriality) related to the proper presentation of financial statements ?b. In what ways will
Discussed the four evidence decisions that must be made on every audit. These are:1. Appropriate audit procedures 2. Proper sample size 3. Timing of the procedures 4. Particular items selected for testing The following questions refer to these and related decisions.Required :a. In addition to
Statements on Auditing Standards in the section on internal control (Section 320B.35) is the following formula:where:S = reliability level for substantive tests R = combined reliability level desired C = reliance assigned to internal accounting control and other relevant factorsFor purposes of
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