Section 2a The Use of Audit Sampling Test of Balances Statistical Tests of Balances Monetary Unit Sampling (MUS) or (PPS) Involves the same previously seen 14 steps
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An auditor has been assigned the responsibility of auditing the trade accounts receivable of Athens Corporation as of December 31, 200X. The total amounts to $2,400,000 and consists of 800 accounts. The auditor tested controls that relate to the existence of Athens Corporation’s trade accounts receivable during November 200X. After reviewing the work, the audit manager agreed with the auditor’s assessment that assessing control risk at 80 percent was appropriate. The manager indicated that the planned audit risk should be limited to 5 percent, inherent risk should be assessed to be 100 percent, and the risk that analytical procedures will not detect material misstatements should be assessed to be 60 percent. The manager also decided that $100,000 should be used as tolerable misstatement for purposes of confirming trade accounts receivable. During last year’s audit, the auditors found misstatements amounting to only $10,000, which the manager suggests should be used this year as an estimate of the misstatement for the purposes of determining sample size. A review of the listing of accounts indicates that it includes no accounts that have credit balances or zero balances.
Athens Corporation Case
Must relate to the audit procedure
1. Determine the Objective of MUS Sampling
For Athens Corporation, the population is all 800 customer accounts with debit balances, and the recorded book value of the accounts is $2,400,000. The audit manager decided that customers' accounts rather than individual invoices are to be confirmed. Accounts receivable has 2,400,000 sampling units and 800 logical sampling units.
7. Specify the reliability factor (RF) for acceptable risk of incorrect acceptance (ARIA)
(n)
=
Book value (BV)
x
Reliability factor (RF) for risk of overstatement
Tolerable misstatement (TM)

Anticipated Misstatement (AM)
x
Expansion factor for anticipated misstatement (EF)
n =
x

x
9. Determine the sample size
n =
=
Book value of the population (BV) Sample size (n)
10. Select Sample
What is the sampling interval?
Upper misstatement limit
Projected misstatement
Basic precision
Incremental allowance
=
+
+
12. Generalize from the sample to the population
(a) Computing Projected Misstatements
Book value – Audited value
Sampling interval
Project misstatement for each audited item
x
=
Book value
Book value – Audited value = Projected misstatement for each audited item
(b) Computing Allowance for Sampling Risk
Incremental allowance for sampling risk
Upper misstatement limit
Projected misstatement
Basic precision
Incremental allowance
=
+
+
Thus upper misstatement limit (UML) is
UML =
To evaluate results the auditor compares the estimate of upper misstatement limit with the tolerable misstatement
13. Evaluating results
When upper misstatement limit exceeds the tolerable misstatement
14. Decide the acceptability of the population
If upper misstatement limit exceeds the tolerable misstatement
Consider whether the projected amount of misstatement in the population based on the audit is greater than the amount anticipated when sample size was determined.
2. Consider whether the sample is representative of the population.
1. Increases likelihood of including highdollar value items
2. Easy to use
Advantages and Disadvantages of MUS Sampling
1. Assumption is that the audited value of a sampling unit is neither less than zero nor greater then book value.
2. Upper misstatement limit.
3. Enables auditor to state a conclusion
Problem 16. MUS Sampling. Edwards has decided to use MUS sampling in the audit of a client’s accounts receivable balance. Few, if any, overstatements of account balance are expected. Edwards plans to use the following MUS sampling table:
Reliability Factors for Overstatement
Calculate the total projected misstatement if the following three misstatements were discovered in a MUS sample:
Problem 2.MUS Sampling. Tim Dolan plans to use MUS sampling in auditing the Repairs and Maintenance account for Daco International to determine whether the accounts includes items that should be capitalized rather than expensed. Daco has recorded 2,000 invoices in arriving at the $800,000 expense for the year. Tim has decided to use $4,000 as the anticipated misstatement, and $50,000 as tolerable misstatement. After reviewing Tim’s work, the audit manager agreed with him that assessing control risk at 80 percent was appropriate. The manager indicated that the planned audit risk should be limited to 2 percent, inherent risk should be assessed to be 100 percent, and the risk that analytical procedures will not detect material misstatements should be assessed to be 50 percent.