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Case 5

This document summarizes the steps to calculate sample size, projected misstatements, and precision needed to determine if the population of receivables contains a tolerable misstatement. It outlines calculating sample size based on population size, reliability factor, and tolerable/expected misstatements. It then shows how to determine the projected misstatement amounts based on the sample results and calculate the upper limit of misstatement by adding the projected misstatement, basic precision, and incremental allowance.

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Jamil John Gatan
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© Attribution Non-Commercial (BY-NC)
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13 views

Case 5

This document summarizes the steps to calculate sample size, projected misstatements, and precision needed to determine if the population of receivables contains a tolerable misstatement. It outlines calculating sample size based on population size, reliability factor, and tolerable/expected misstatements. It then shows how to determine the projected misstatement amounts based on the sample results and calculate the upper limit of misstatement by adding the projected misstatement, basic precision, and incremental allowance.

Uploaded by

Jamil John Gatan
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Case 5. a.

(1)Required sample size is calculated as follows: Sample size = Recorded amount of population x Reliability factor Tolerable misstatement (Expected misstatement x Expansion factor)

Sample size =

P500,000 x 3 P25,000 (P2,000 x 1.6) = 68.81 or 69

Note: The reliability factor is from the zero misstatements row of the PPS sampling table given in the case. (2)The sampling interval is calculated simply by dividing the book value of receivables by the sample size, as follows: Sampling interval = Recorded receivables / Sample size = P500,000 / 69 = P7,246 b. The results may be evaluated as follows: (1)Projected misstatement Book Value Audited Value P 50 P 47 800 760 8,500 8,100 Misstatement Tainting % Sampling Interval Projected Mist. P 3 6% P7,246 P 435 40 5% 7,246 362 400 NA NA 400 P1,197

(2)Basic precision =Reliability factor x Sampling interval = 3.0 x P7,246 = P21,738 (3)Incremental allowance = Reliability Factor Increment (Increment 1) Projected Misstatement Incremental Allowance 3.00 4.75 6.30

1.75 1.55

.75 .55

P435 362

P326 199 P525

(4)Upper limit on misstatement =P1,197 + P21,738 + P525= P23,460

NOTES: Projected misstatement (a)Tainting percentages are calculated as the difference between book and audited value divided by book value (e.g., (P50 P47) / P50=6%). (b)No tainting percentage is calculated for items in excess of the sample interval and the actual misstatement is extended to projected misstatement (as for the third error). Basic precision is always the reliability factor for zero misstatements multiplied times the sampling interval. Incremental allowance (a)Reliability factors are read from the PPS sampling table given in the case, starting at zero misstatements. (b)Increment 1 is the difference in the two adjacent reliability factors minus 1 (e.g., 4.75 3.00 1.00 = .75). (c)Misstatements in excess of the sampling interval are not considered in the incremental allowance. This is because the nature of the process requires that all items in excess of the sampling interval be included in the sample therefore no allowance for items not in the sample is necessary. c. The results obtained in part b would indicate that the auditors may accept the population as not containing a tolerable misstatement at the 5 percent level of risk of incorrect acceptance. The auditors would also consider the results obtained in conjunction with other audit tests.

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