Chapter 9 Audit Sampling: An Application to Substantive Tests of Account Balances McGraw-Hill/Irwin...

Chapter 9Chapter 9

Audit Sampling: An Application to Substantive Tests of Account Balances

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

Purpose

To determine if a financial statement account is fairly stated.

Sampling Techniques

Statistical

- Monetary Unit Sampling ( MUS)

- Classical variable sampling

Non-statistical

9-4

Substantive Tests of Details of Account Balances

The statistical concepts we discussed in the last The statistical concepts we discussed in the last chapter apply to this chapter as well. Three important chapter apply to this chapter as well. Three important determinants of sample size aredeterminants of sample size are

1.1. Desired confidence level.Desired confidence level.

2.2. Tolerable misstatement.Tolerable misstatement.

3.3. Estimated misstatement.Estimated misstatement.

Population plays a bigger role in some of the sampling Population plays a bigger role in some of the sampling techniques used for substantive testing.techniques used for substantive testing.

Misstatements discovered in the audit sample must be Misstatements discovered in the audit sample must be projected to the population, and there must be an projected to the population, and there must be an allowance for sampling risk.allowance for sampling risk.

The statistical concepts we discussed in the last The statistical concepts we discussed in the last chapter apply to this chapter as well. Three important chapter apply to this chapter as well. Three important determinants of sample size aredeterminants of sample size are

1.1. Desired confidence level.Desired confidence level.

2.2. Tolerable misstatement.Tolerable misstatement.

3.3. Estimated misstatement.Estimated misstatement.

Population plays a bigger role in some of the sampling Population plays a bigger role in some of the sampling techniques used for substantive testing.techniques used for substantive testing.

Misstatements discovered in the audit sample must be Misstatements discovered in the audit sample must be projected to the population, and there must be an projected to the population, and there must be an allowance for sampling risk.allowance for sampling risk.

LO# 1

9-5


Consider the following information about the inventory account balance of an audit client:

Book value of inventory account balance 3,000,000$ Book value of items sampled 100,000$ Audited value of items sampled 98,000 Total amount of overstatement observed in audit sample 2,000$

The ratio of misstatement in the sample is 2%The ratio of misstatement in the sample is 2%($2,000 ($2,000 ÷ $100,000)÷ $100,000)

The ratio of misstatement in the sample is 2%The ratio of misstatement in the sample is 2%($2,000 ($2,000 ÷ $100,000)÷ $100,000)

Applying the ratio to the entire population produces a bestestimate of misstatement of inventory of $60,000.

($3,000,000 × 2%)

LO# 1

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The results of our audit test depend upon The results of our audit test depend upon the tolerable misstatement associated the tolerable misstatement associated

with the inventory account. If the tolerable with the inventory account. If the tolerable misstatement is $50,000, we cannot misstatement is $50,000, we cannot

conclude that the account is fairly stated conclude that the account is fairly stated because our best estimate of the because our best estimate of the

projected misstatement is greater than projected misstatement is greater than the tolerable misstatement.the tolerable misstatement.

The results of our audit test depend upon The results of our audit test depend upon the tolerable misstatement associated the tolerable misstatement associated

with the inventory account. If the tolerable with the inventory account. If the tolerable misstatement is $50,000, we cannot misstatement is $50,000, we cannot

conclude that the account is fairly stated conclude that the account is fairly stated because our best estimate of the because our best estimate of the

projected misstatement is greater than projected misstatement is greater than the tolerable misstatement.the tolerable misstatement.

LO# 1

9-7

Monetary-Unit Sampling (MUS)

MUS uses attribute-sampling theory to MUS uses attribute-sampling theory to express a conclusion in dollar amounts rather express a conclusion in dollar amounts rather than as a rate of occurrence. It is commonly than as a rate of occurrence. It is commonly used by auditors to test accounts such as used by auditors to test accounts such as

accounts receivableaccounts receivable, , loans receivableloans receivable, , investment securitiesinvestment securities, and , and inventoryinventory. .

MUS uses attribute-sampling theory to MUS uses attribute-sampling theory to express a conclusion in dollar amounts rather express a conclusion in dollar amounts rather than as a rate of occurrence. It is commonly than as a rate of occurrence. It is commonly used by auditors to test accounts such as used by auditors to test accounts such as

accounts receivableaccounts receivable, , loans receivableloans receivable, , investment securitiesinvestment securities, and , and inventoryinventory. .

LO# 2

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MUS uses attribute-sampling theory (used MUS uses attribute-sampling theory (used primarily to test controls) to estimate the primarily to test controls) to estimate the

percentage of monetary units in a population percentage of monetary units in a population that might be misstated and then multiplies that might be misstated and then multiplies

this percentage by an estimate of how much this percentage by an estimate of how much the dollars are misstated.the dollars are misstated.

MUS uses attribute-sampling theory (used MUS uses attribute-sampling theory (used primarily to test controls) to estimate the primarily to test controls) to estimate the

percentage of monetary units in a population percentage of monetary units in a population that might be misstated and then multiplies that might be misstated and then multiplies

this percentage by an estimate of how much this percentage by an estimate of how much the dollars are misstated.the dollars are misstated.

LO# 2

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Advantages of MUSAdvantages of MUS1.1. When the auditor expects no misstatement, MUS When the auditor expects no misstatement, MUS

usually results in a smaller sample size than classical usually results in a smaller sample size than classical variables sampling.variables sampling.

2.2. The calculation of the sample size and evaluation of The calculation of the sample size and evaluation of the sample results are not based on the variation the sample results are not based on the variation between items in the population.between items in the population.

3.3. When applied using the probability-proportional-to-size When applied using the probability-proportional-to-size procedure, MUS automatically results in a stratified procedure, MUS automatically results in a stratified sample.sample.

1.1. When the auditor expects no misstatement, MUS When the auditor expects no misstatement, MUS usually results in a smaller sample size than classical usually results in a smaller sample size than classical variables sampling.variables sampling.

2.2. The calculation of the sample size and evaluation of The calculation of the sample size and evaluation of the sample results are not based on the variation the sample results are not based on the variation between items in the population.between items in the population.

3.3. When applied using the probability-proportional-to-size When applied using the probability-proportional-to-size procedure, MUS automatically results in a stratified procedure, MUS automatically results in a stratified sample.sample.

LO# 2

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Disadvantages of MUSDisadvantages of MUS1.1. The selection of zero or negative balances generally The selection of zero or negative balances generally

requires special design consideration.requires special design consideration.

2.2. The general approach to MUS assumes that the The general approach to MUS assumes that the audited amount of the sample item is not in error by audited amount of the sample item is not in error by more than 100%.more than 100%.

3.3. When more than one or two misstatements are When more than one or two misstatements are detected, the sample results calculations may detected, the sample results calculations may overstate the allowance for sampling risk.overstate the allowance for sampling risk.

1.1. The selection of zero or negative balances generally The selection of zero or negative balances generally requires special design consideration.requires special design consideration.

2.2. The general approach to MUS assumes that the The general approach to MUS assumes that the audited amount of the sample item is not in error by audited amount of the sample item is not in error by more than 100%.more than 100%.

3.3. When more than one or two misstatements are When more than one or two misstatements are detected, the sample results calculations may detected, the sample results calculations may overstate the allowance for sampling risk.overstate the allowance for sampling risk.

LO# 2

9-11

Steps in MUS SamplingSteps in MUS Sampling Application

Planning1. Determine the test objectives.2. Define the population characteristics. • Define the population. • Define the sample unit. • Define a misstatement.3. Determine the sample size, using the following inputs: • The desired confidence level or risk of incorrect acceptance. • The tolerable misstatement. • The expected population misstatement. • Population size.Performance4. Select sample items.5. Perform the auditing procedures. • Understand an alayzye any missstatements observed.Evaluation6. Calculate the projected misstatement and the upper limit on misstatement.7. Draw final conclusions.

LO# 2

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Planning1. Determine the test objectives.2. Define the population characteristics. • Define the population. • Define the sample unit. • Define a misstatement.

Sampling may be used for substantive testing to:

1. Test the reasonableness of assertions about a financial statement amount (i.e., is the amount fairly stated). This is the most common use of sampling for substantive testing.

2. Develop an estimate of some amount.

Sampling may be used for substantive testing to:

1. Test the reasonableness of assertions about a financial statement amount (i.e., is the amount fairly stated). This is the most common use of sampling for substantive testing.

2. Develop an estimate of some amount.

LO# 2

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For MUS the population is defined as the monetary value of an account balance,

such as accounts receivable, investment securities, or inventory.

LO# 2

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An individual dollar represents the sampling unit.

LO# 2

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A misstatement is defined as the difference between monetary amounts in the client’s records and

amounts supported by audit evidence.

LO# 2

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3. Determine the sample size, using the following inputs: • The desired confidence level or risk of incorrect acceptance. • The tolerable misstatement. • The expected population misstatement. • Population size.

Factor Relationship

to Sample Size Change in Factor

Effect on Sample

Lower DecreaseHigher IncreaseLower IncreaseHigher DecreaseLower DecreaseHigher IncreaseLower DecreaseHigher Increase

Desired confidence level

Tolerable mistatement

Expected mistatement

Population size

Direct

Inverse

Direct

Direct

LO# 2

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Performance4. Select sample items.5. Perform the auditing procedures.Evaluation6. Calculate the projected misstatement and the upper limit on misstatement.7. Draw final conclusions.

The auditor selects a sample for MUS by using a systematic selection approach called probability-

proportional-to-size selection. The sampling interval can be determined by dividing the book value of the

population by the sample size. Each individual dollar in the population has an equal chance of being selected

and items or “logical units” greater than the interval will always be selected.

LO# 2

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Steps in MUS SamplingAssume a client’s book value of accounts receivable is $2,500,000, and the

auditor determined a sample size of 93. The sampling interval will be $26,882 ($2,500,000 ÷ 93). The random number selected is $3,977 the

auditor would select the following items for testing:Cumulatvie Sample

Account Balance Dollars Item1001 Ace Emergency Center 2,350$ 2,350$ 1002 Admington Hospital 15,495 17,845 3,977$ (1)1003 Jess Base, Inc. 945 18,780 1004 Good Hospital Corp. 21,893 40,673 30,859 (2)1005 Jen Mara Corp. 3,968 44,641 1006 Zippy Corp. 32,549 77,190 57,741 (3)1007 Green River Mfg. 2,246 79,436 1008 Bead Hospital Centers 11,860 91,306 84,623 (4)

• • • •• • • •

1213 Andrew Call Medical - 2,472,032 1214 Lilly Heather, Inc. 26,945 2,498,977 2,477,121 (93)1215 Janyne Ann Corp. 1,023 2,500,000$ Total Accounts Receivable 2,500,000$

3,977$ 26,882 30,859$

LO# 3

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Performance4. Select sample items.5. Perform the auditing procedures.Evaluation6. Calculate the projected misstatement and the upper limit on misstatement.7. Draw final conclusions.

After the sample items have been selected, the auditor conducts the planned audit

procedures on the logical units containing the selected dollar sampling units.

LO# 3

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Evaluation6. Calculate the projected misstatement and the upper limit on misstatement.7. Draw final conclusions.

The misstatements detected in the sample must be projected to the population.

Book value 2,500,000$ Tolerable misstatement 125,000$ Sample size 93 Desired confidence level 95%Expected amount of misstatement 25,000$ Sampling interval 26,882$

Example Information

LO# 3

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Steps in MUS SamplingBasic Precision using the TablesBasic Precision using the TablesIf no misstatements are found in the sample,

the best estimate of the population misstatement would be zero dollars.

SampleSize 0 1 2 3

65 4.6 7.1 9.4 11.5 70 4.2 6.6 8.8 10.8 85 4.0 6.2 8.2 10.1 80 3.7 5.8 7.7 9.5 90 3.3 5.2 6.9 8.4

100 3.0 4.7 6.2 7.6 125 2.4 3.8 5.0 6.1

Actual Number of Deviations Found

$26,882 $26,882 × 3.0 = × 3.0 = $80,646$80,646 upper misstatement limit upper misstatement limit

LO# 3

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Steps in MUS SamplingMisstatements DetectedMisstatements Detected

In the sample of 93 items, the following misstatements were found:

Customer Book Value Audit Value Difference Tainting Factory

Good Hospital 21,893$ 18,609$ 3,284$ 15%Marva Medical Supply 6,705 4,023 2,682 40%Axa Corp. 32,549 30,049 2,500 NALearn Heart Centers 15,000 - 15,000 100%

Customer Book Value Audit Value Difference Tainting Factory

Good Hospital 21,893$ 18,609$ 3,284$ 15%Marva Medical Supply 6,705 4,023 2,682 40%Axa Corp. 32,549 30,049 2,500 NALearn Heart Centers 15,000 - 15,000 100%

$3,284 $3,284 ÷ $21,893 = 15%÷ $21,893 = 15%$3,284 $3,284 ÷ $21,893 = 15%÷ $21,893 = 15%Because the Axa balance of $32,549 is greater than the interval of $26,882, no sampling risk is added. Since all the dollars in the large accounts are audited, there is no

sampling risk associated with large accounts.

Because the Axa balance of $32,549 is greater than the interval of $26,882, no sampling risk is added. Since all the dollars in the large accounts are audited, there is no

sampling risk associated with large accounts.

LO# 3

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Steps in MUS SamplingComputed Upper Misstatement Limit using TablesComputed Upper Misstatement Limit using Tables

We compute the upper misstatement limit by calculating basic precision and ranking the detected misstatements based on the size of the tainting factor from the largest to the smallest.

Customer

Tainting Factor

Sample Interval

Projected Misstatement

95% Upper Limit

Upper Misstatement

Basic Precision 1.00 26,882$ NA 3.0 80,646$ Learn Heart Centers 1.00 26,882 (26,882) 1.7 (4.7 - 3.0) 45,700 Marva Medical 0.40 26,882 (10,753) 1.5 (6.2 - 4.7) 16,130 Good Hospital 0.15 26,882 (4,032) 1.4 (7.6 - 6.2) 5,645 Add misstatments greaterthat the sampling interval:Axa Corp. NA 26,882 NA 2,500

Upper Misstatement Limit 150,621$

(0.15 (0.15 × $26,882 × $26,882 × 1.4 = $5,645)× 1.4 = $5,645)(0.15 (0.15 × $26,882 × $26,882 × 1.4 = $5,645)× 1.4 = $5,645)

LO# 3

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Evaluation6. Calculate the projected misstatement and the upper limit on misstatement7. Draw final conclusions.

We compare the tolerable misstatement to the upper We compare the tolerable misstatement to the upper misstatement limit. If the upper misstatement limit is misstatement limit. If the upper misstatement limit is less less than or equal tothan or equal to the tolerable misstatement, we conclude the tolerable misstatement, we conclude

that the balance is that the balance is not materially misstatednot materially misstated. .

We compare the tolerable misstatement to the upper We compare the tolerable misstatement to the upper misstatement limit. If the upper misstatement limit is misstatement limit. If the upper misstatement limit is less less than or equal tothan or equal to the tolerable misstatement, we conclude the tolerable misstatement, we conclude

that the balance is that the balance is not materially misstatednot materially misstated. .

In our example, the final decision is whether the accounts receivable balance

is materially misstated or not.

LO# 3

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Steps in MUS SamplingIn our example, the upper misstatement limit of $150,621 is greater than the tolerable misstatement of $125,000, so

the auditor concludes that the accounts receivable balance is materially misstated.

When faced with this situation, the auditor may:

1. Increase the sample size.

2. Perform other substantive procedures.

3. Request the client adjust the accounts receivable balance.

4. If the client refuses to adjust the account balance, the auditor would consider issuing a qualified or adverse opinion.

When faced with this situation, the auditor may:

1. Increase the sample size.

2. Perform other substantive procedures.

3. Request the client adjust the accounts receivable balance.

4. If the client refuses to adjust the account balance, the auditor would consider issuing a qualified or adverse opinion.

LO# 3

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Risk When Evaluating Account Balances

Auditor's Decision Basedon Sample Evidence Not Materially Misstated Materially Misstated

Supports the fairness of the account balance

Correct decision Risk of incorrect

acceptance (Type II) Does not support the

fairness of the account balance

Risk of incorrect rejection (Type I)

Correct Decision

True State of Financial Statement Account

LO# 3

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Why is the Sampling Interval Rather than the Sample Size Used

in Evaluating MUS Results?Due to simplifying assumptions about accounting populations,

the misstatement factors used in most MUS evaluation approaches are nearly identical to the misstatement factors

associated with a sample size of 100, regardless of the actual sample size used by the auditor. Always use these factors:

Number of Misstatement Incremental Misstatement IncrementalErrors Factor Increase Factor Increase

0 3.0 2.31 4.7 1.7 3.9 1.62 6.2 1.5 5.3 1.43 7.6 1.4 6.6 1.34 9.0 1.4 7.9 1.3

95% Confidence Level 90% Confidence Level

LO# 3

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Effect of Understatement Misstatements

MUS is not particularly effective at detecting understatements. An understated account is less likely to be

selected than an overstated account.

Customer Book Value

Audit Value Difference

Tainting Factor

Wayne County Medical 2,000$ 2,200$ (200)$ -10%Customer

Book Value

Audit Value Difference

Tainting Factor

Wayne County Medical 2,000$ 2,200$ (200)$ -10%

The most likely error will be reduced by The most likely error will be reduced by $2,688$2,688((– 0.10 × $26,882)– 0.10 × $26,882)

The most likely error will be reduced by The most likely error will be reduced by $2,688$2,688((– 0.10 × $26,882)– 0.10 × $26,882)

LO# 3

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Nonstatistical Sampling for Tests of Account Balances

The sampling unit for nonstatistical sampling is normally a customer account, an individual transaction, or a line item on a transactions. When using nonstatistical sampling, the

following items must be considered:

o Identifying individually significant items.Identifying individually significant items.

o Determining the sample size.Determining the sample size.

o Selecting sample items.Selecting sample items.

o Calculating the sample results.Calculating the sample results.

o Identifying individually significant items.Identifying individually significant items.

o Determining the sample size.Determining the sample size.

o Selecting sample items.Selecting sample items.

o Calculating the sample results.Calculating the sample results.

LO# 4

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Identifying Individually Significant Items

The items to be tested individually are items that may contain potential misstatements that individually exceed

the tolerable misstatement. These items are tested 100% because the auditor is not willing to accept any

sampling risk.

LO# 4

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Determining the Sample Size

SampleSize

=Sampling Population book value

Tolerable – Expected misstatement × Assurance factor

Assessment of Risk of Slightly BelowMaterial Misstatement Maximum Maximum Moderate Low

Maximum 3.0 2.7 2.3 2.0Slightly below maximum 2.7 2.4 2.0 1.6Moderate 2.3 2.1 1.6 1.2Low 2.0 1.6 1.2 1.0

Desired Level of Confidence

LO# 4

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Selecting Sample Items

Auditing standards require that the sample items be selected in such a way that the sample can be

expected to represent the population.

LO# 4

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Calculating the Sample Results

One way of projecting the sampling results to the population is to apply the misstatement ratio in the

sample to the population.

If the population If the population total is $200,000, total is $200,000, the projected the projected misstatement would misstatement would be $20,000 be $20,000 ($200,000 ($200,000 × 10%)× 10%)

If the population If the population total is $200,000, total is $200,000, the projected the projected misstatement would misstatement would be $20,000 be $20,000 ($200,000 ($200,000 × 10%)× 10%)

Assume the auditor Assume the auditor finds $1,500 in finds $1,500 in misstatements in a misstatements in a sample of $15,000. sample of $15,000. The misstatement The misstatement ratio is 10%.ratio is 10%.

Assume the auditor Assume the auditor finds $1,500 in finds $1,500 in misstatements in a misstatements in a sample of $15,000. sample of $15,000. The misstatement The misstatement ratio is 10%.ratio is 10%.

LO# 4

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Calculating the Sample Results

A second method is the difference estimation. This method projects the average misstatement of each item

in the sample to all items in the population.

The projected The projected misstatement would be misstatement would be $30,000 ($30,000 ($3 × 10,000). $3 × 10,000).

The projected The projected misstatement would be misstatement would be $30,000 ($30,000 ($3 × 10,000). $3 × 10,000).

Assume Assume misstatements in a misstatements in a sample of 100 items sample of 100 items total $300 (for total $300 (for average average misstatement of $3), misstatement of $3), and the population and the population contains 10,000 contains 10,000 items.items.

Assume Assume misstatements in a misstatements in a sample of 100 items sample of 100 items total $300 (for total $300 (for average average misstatement of $3), misstatement of $3), and the population and the population contains 10,000 contains 10,000 items.items.

LO# 4

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Nonstatistical Sampling Example

The auditor’s of Calabro Wireless Service have decided to use nonstatistical sampling to examine the accounts receivable balance. Calabro has a total of 11,800

(15 + 250 + 11,535) accounts with a balance of $3,717,900. The auditor’s stratify the accounts as

follows:

Number and Size Bookof Accounts Value

15 accounts > $25,000 550,000$ 250 accounts > $3,000 850,500 11,535 accounts < $3,000 2,317,400 Total 3,717,900$

LO# 4

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The auditor’s decide . . .The auditor’s decide . . .o There is a low assessment for inherent and control risk.There is a low assessment for inherent and control risk.

o The tolerable misstatement is $40,000, and the expected The tolerable misstatement is $40,000, and the expected misstatement is $15,000.misstatement is $15,000.

o There is a moderate risk that other auditing procedures There is a moderate risk that other auditing procedures will fail to detect material misstatements.will fail to detect material misstatements.

o All customer account balances greater than $25,000 are All customer account balances greater than $25,000 are to be audited.to be audited.

The auditor’s decide . . .The auditor’s decide . . .o There is a low assessment for inherent and control risk.There is a low assessment for inherent and control risk.

o The tolerable misstatement is $40,000, and the expected The tolerable misstatement is $40,000, and the expected misstatement is $15,000.misstatement is $15,000.

o There is a moderate risk that other auditing procedures There is a moderate risk that other auditing procedures will fail to detect material misstatements.will fail to detect material misstatements.

o All customer account balances greater than $25,000 are All customer account balances greater than $25,000 are to be audited.to be audited.

LO# 4

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SampleSize

=Sampling population book value

Tolerable - Estimated misstatement × Assurance factor

SampleSize

=$3,167,900

$40,000 × 1.2 = 9595 (rounded)

Combined Assessment of Slightly BelowInherent and Control Risk Maximum Maximum Moderate LowMaximum 3.0 2.7 2.3 2.0Slightly below maximum 2.7 2.4 2.0 1.6Moderate 2.3 2.1 1.6 1.2Low 2.0 1.6 1.2 1.0

Risk That Other Substantive Procedures Fail to Detect Material Misstatement

$3,717,900 $3,717,900 – $550,000– $550,000$3,717,900 $3,717,900 – $550,000– $550,000

LO# 4

$55,000 $55,000 – $15,000– $15,000$55,000 $55,000 – $15,000– $15,000

9-38


Amount ofBook Value Audit Value Over-

Stratum Book Value of Sample of Sample Statement>$25,000 550,000$ 550,000$ 549,500$ 500$ >$3,000 850,500 425,000 423,000 2,000 <$3,000 2,317,400 92,000 91,750 250

The auditor sent positive confirmations to each of the 110 (95 + 15) accounts selected. Either the confirmations were returned or alternative procedures were successfully used.

Four customers indicated that their accounts were overstated and the auditors determined that the

misstatements were the result of unintentional error by client personnel. Here are the results of the audit testing:

LO# 4

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As a result of the audit procedures, the following projected misstatement was prepared:

Amount of ProjectedStratum Misstatement Misstatement

>$25,000 500$ 500$ >$3,000 2,000 4,002 <$3,000 250 6,298 Total projected misstatement 10,800$

$250 ÷ 92,000 × $2,317,400

Ratio of Misstatementin Stratum Tested

Not Applicable--100% Tested$2,000 ÷ 425,000 × $850,500

The total projected misstatement of $10,800 is less than The total projected misstatement of $10,800 is less than the expected misstatement of $15,000, so the auditors the expected misstatement of $15,000, so the auditors may conclude that there is an acceptably may conclude that there is an acceptably low risklow risk that that

the true misstatement exceeds the tolerable the true misstatement exceeds the tolerable misstatement.misstatement.

The total projected misstatement of $10,800 is less than The total projected misstatement of $10,800 is less than the expected misstatement of $15,000, so the auditors the expected misstatement of $15,000, so the auditors may conclude that there is an acceptably may conclude that there is an acceptably low risklow risk that that

the true misstatement exceeds the tolerable the true misstatement exceeds the tolerable misstatement.misstatement.

LO# 4

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Why Did Statistical Sampling Fall Out Of Favor?

1.Firms found that some auditors were over relying on statistical sampling techniques to the exclusion of good judgment.

2.There appears to be poor linkage between the applied audit setting and traditional statistical sampling applications.

LO# 4

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Classical Variable Sampling

Classical variables sampling uses normal distribution theory to evaluate the characteristics of a population based on sample data. Auditors most commonly use classical variables sampling to estimate the size of

misstatement.

Sampling distributions are formed by plotting the Sampling distributions are formed by plotting the projected misstatements yielded by an infinite projected misstatements yielded by an infinite

number of audit samples of the same size taken number of audit samples of the same size taken from the same underlying population.from the same underlying population.

Sampling distributions are formed by plotting the Sampling distributions are formed by plotting the projected misstatements yielded by an infinite projected misstatements yielded by an infinite

number of audit samples of the same size taken number of audit samples of the same size taken from the same underlying population.from the same underlying population.

LO# 5

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Classical Variables Sampling

A sampling distribution is useful because it allows us to estimate the probability of observing any single

sample result.

LO# 5

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In classical variables sampling, the sample mean is the best estimate of the population mean.

LO# 5

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1.1. When the auditor expects a large number of When the auditor expects a large number of differences between book and audited values, this differences between book and audited values, this method will result in smaller sample size than method will result in smaller sample size than MUS.MUS.

2.2. The techniques are effective for both The techniques are effective for both overstatements and understatements.overstatements and understatements.

3.3. The selection of zero balances generally does not The selection of zero balances generally does not require special sample design considerations.require special sample design considerations.

1.1. When the auditor expects a large number of When the auditor expects a large number of differences between book and audited values, this differences between book and audited values, this method will result in smaller sample size than method will result in smaller sample size than MUS.MUS.

2.2. The techniques are effective for both The techniques are effective for both overstatements and understatements.overstatements and understatements.

3.3. The selection of zero balances generally does not The selection of zero balances generally does not require special sample design considerations.require special sample design considerations.

LO# 5

AdvantagesAdvantages

9-45


1.1. Does not work well when little or not misstatement Does not work well when little or not misstatement is expected in the population.is expected in the population.

2.2. To determine sample size, the auditor must To determine sample size, the auditor must estimate the standard deviation of the audited estimate the standard deviation of the audited value or differences.value or differences.

3.3. If few misstatements are detected in the sample If few misstatements are detected in the sample data, the true variance tends to be data, the true variance tends to be underestimated, and the resulting projection of the underestimated, and the resulting projection of the misstatements to the population is likely not to be misstatements to the population is likely not to be reliable.reliable.

1.1. Does not work well when little or not misstatement Does not work well when little or not misstatement is expected in the population.is expected in the population.

2.2. To determine sample size, the auditor must To determine sample size, the auditor must estimate the standard deviation of the audited estimate the standard deviation of the audited value or differences.value or differences.

3.3. If few misstatements are detected in the sample If few misstatements are detected in the sample data, the true variance tends to be data, the true variance tends to be underestimated, and the resulting projection of the underestimated, and the resulting projection of the misstatements to the population is likely not to be misstatements to the population is likely not to be reliable.reliable.

LO# 5

DisadvantagesDisadvantages

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End of Chapter 9

Chapter 9 Audit Sampling: An Application to Substantive Tests of Account Balances McGraw-Hill/Irwin...

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Transcript of Chapter 9 Audit Sampling: An Application to Substantive Tests of Account Balances McGraw-Hill/Irwin...