Chapter 17 Audit Sampling for Tests of Details of Balances. Presentation Outline. The 14 Steps of Audit Sampling for Tests of Details of Balances The 7 Steps of Monetary Unit Sampling Alternative Procedures When a Population is Projected ARACR and ARIA.
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The 14 steps required in audit sampling for tests of details of balances parallel the 14 steps used for sampling for tests of controls and substantive tests of transactions. Any differences are noted on the following slides.
When auditors sample for tests of details of balances, the objective is to determine whether the account balance being audited is fairly stated.
Audit sampling applies whenever the auditor plans to reach conclusions about a population based on a sample.
Misstatement conditions are any conditions that represent a monetary misstatement in a sample item.
Step 3 for Tests of Controls and Substantive Tests of
Transactions would be: Define attributes and exception conditions.
In testing for the existence objective, the recorded dollar population is the population. If the completeness objective is a concern, the sample should be selected from a different source.
As discussed in Chapter 9, the auditor starts with a preliminary judgment about materiality and uses that total in deciding tolerable misstatement for each account.
Step 6 for Tests of Controls and Substantive Tests of
Transactions would be: Specify the tolerable exception rate.
Step 7 for Tests of Controls and Substantive Tests of
Transactions would be: Specify acceptable risk of assessing control
risk too low.
Step 8 for Tests of Controls and Substantive Tests of
Transactions would be: Estimate the population exception rate.
Auditor applies the appropriate audit procedures to each item in the sample to determine whether it is correct or contains a misstatement.
The reason for the misstatement must be considered. It could be from an isolated error. However, it could have arisen from the consistent misapplication of accounting procedure. Such causes could represent a large effect on the financial statements.
Step 13 for Tests of Controls and Substantive Tests of
Transactions would be: Analyze the exceptions.
Monetary unit sampling (MUS) is a statistical method of sampling that is also called dollar unit sampling, cumulative monetary amount sampling, and sampling with probability proportional to size. This section discusses the seven steps of MUS and the MUS decision rule.
Note: The computation of the appropriate sample size for MUS is illustrated on page 538.
Monetary Unit Sampling (MUS) BalancesStep 3: Layer misstatements per dollar unit from highest to lowest, including the percent misstatement assumption for sample items not misstated.
* See Appropriate Percent of Misstatement Assumption on page 533.
Monetary Unit Sampling (MUS) BalancesStep 4: Determine upper precision limit from attributes sampling table (Table 15-9 on page 470) and calculate the percent misstatement bound for each misstatement (layer).
* ARIA OF 5%. Sample size of 100.
Totals .090 51,220
Totals .047 36,612
Sum of Unit Misstatement Assumptions Balances
Recorded Population Value
Overstatement Point Estimate:
( .671 +.07 +.016 + .0002 )
1,200,000 = 9,086
Understatement Point Estimate:
1,200,000 = 360
100Monetary Unit Sampling (MUS) Step 6: Calculate point estimate for overstatements and understatements.
Most MUS users believe that the approach is overly conservative when there are offsetting amounts. The adjustment of bounds for offsetting amounts is made by reducing each bound by the opposite point estimate.
Initial understatement bound 36,612
Less overstatement point estimate (9,086)
Adjusted understatement bound 27,526
Initial overstatement bound 51,220
Less understatement point estimate (360)
Adjusted overstatement bound 50,860
If both the lower misstatement bound (LMB) and upper misstatement bound (UMB) fall between the understatement and overstatement tolerable misstatement amounts, accept the conclusions that the book value is not misstated by a material amount. Otherwise, conclude that the book value is misstated by a material amount.
Offsetting misstatements in other parts of the audit may make a balance acceptable.
After a problem area is corrected, the remaining misstatements may be within an acceptable range. May be effective when errors are of a specific type.
When the auditor increases sample size, sampling error is reduced if the rate of misstatements in the expanded sample, their dollar amount, and their direction are similar to those in the original sample. This could satisfy the auditor’s tolerable misstatement requirements. May be helpful when initial sample is not representative of the population.
When the client’s records are filled with significant misstatements, the auditor may request the client to correct the population before an effective audit process can begin.
The audit process must have some teeth in it!
If the auditor believes that there is a reasonable chance that the financial statements are materially misstated, it would be a serious breach of auditing standards to issue an unqualified opinion.