Certified Internal Auditor (CIA) Practice Test

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What sampling procedure should an auditor use to estimate misstatement in perpetual inventory records effectively?

Monetary-unit sampling.
Ratio estimation.
Attribute sampling.
Stratified mean-per-unit sampling.

The correct answer is: Ratio estimation.

The most effective sampling procedure for estimating misstatement in perpetual inventory records is ratio estimation. This method is particularly useful in inventory audits because it allows the auditor to utilize known amounts from a smaller sample to make inferences about the total population. When using ratio estimation, the auditor calculates the ratio of misstatements to the total value of the items in the sample. By applying this ratio to the overall inventory, the auditor can estimate the total misstatement across the entire inventory population. It is particularly advantageous in settings where the underlying data is uniform, and the values of the items being sampled are correlated, which is often the case with inventory items. This method also enhances the efficiency of the audit process because it often requires a smaller sample size compared to other methods while providing a high level of accuracy in misstatement estimation. By focusing on ratios rather than absolute values, the auditor can leverage information from the sample to produce a well-grounded extrapolation for the entire inventory, making it a practical choice for assessing potential misstatements in systems that involve numerous transactions and values.