Scribd
Upload
100 views14 pages

CH 9: Audit Sampling: An Application To Substantive Tests of Account Balances

This document discusses audit sampling techniques for substantive tests of account balances. It covers determining test objectives, defining the population characteristics, selecting the sample, performing audit procedures, evaluating findings, and projecting misstatements. It also addresses advantages and disadvantages of systematic selection and risks in evaluating account balances.

Uploaded by

ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
100 views14 pages

CH 9: Audit Sampling: An Application To Substantive Tests of Account Balances

This document discusses audit sampling techniques for substantive tests of account balances. It covers determining test objectives, defining the population characteristics, selecting the sample, performing audit procedures, evaluating findings, and projecting misstatements. It also addresses advantages and disadvantages of systematic selection and risks in evaluating account balances.

Uploaded by

ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 14

CH 9: Audit Sampling: An

Application to Substantive
Tests of Account Balances
Notes
We mean by substantive tests

substantive test of

details.
Account balance

reported value (B.V) of certain

account like A/R, inventory, cash.


We need to examine [test] the details of that balance
whether it is fair or not, whether it is materially misstated or
not.
EX
Balance of A/R

Several
assertions
applied to that
balance

1) Due to difference in importance of every assertion to the account


So we may make a test for each assertion (we can't combine all
assertions at one test)
2) Population may differs from one assertion to another
So it needs different evidence and different tests

EX

14

Some assertion require examining sales invoice , some


assertion require examining dates, some assertion require
examining customer order
So we can't combine all assertions at one test (each assertion
may acquire different test)

Steps in MUS sampling

1.

determine the test objectives: - whether the balance is fair or not


[materially misstated or not]

2.

define the population characteristics


a) define

the population: - the monetary value of an account


balance (B.V, reported value) such as A/R, inventory, cash
EX

A/R balance is $7,000,000 represents 5200 customer

b) define

sample unit: - an individual dollar represent the sample


unit [i.e breaking the full population into equal individual units]

NOTE
How can we examine the sample unit which is one dollar by
audit procedures like observation or inquiry? So it is illogical
c)

logical unit: - used to come up with the sample and depends on


the item it self
14

if the account is inventory


if the account is A/P

logical unit is a product


logical unit is a supplier

In our EX A/R the logical unit is a customer


If customer Z balance = $910
Logical unit

910 sample unit

d) define

a misstatement: - is the difference between monetary


amounts in the client's records and amounts supported by audit
evidence
misstatement = B.V audit value
What
By your
your client
audit say
evidence and
examining details

+ over statement
misstatement = under statement
misstatement =

Customer Z (B.V) $910

- $895

(given)

= + 15
Before saying that this difference is misstatement we need to be
sure of that difference

1st an explanation (clarification, quantification)

the client

may have reasons for that difference

2nd corroboration (supporting evidence)

very decisive
evidence to be convinced with the manager explanation
If ok

so it is not a misstatement

If not ok [un explained difference]


misstatement

so it is a

14

NOTE
To change the tolerable misstatement or expected
misstatement into tolerable rate or expected rate
You divide the tolerable misstatement by the balance the
account (the population)

Performance
4. Select sample items: - select the items by random way or
systematic
5. Perform audit procedures: - perform audit procedure from the 9
procedures and it depends on the item it self
EX
FOR A/R

confirmation

NOTE
After performing the audit procedure auditor get the audit
value

14

Sample interval: - division of populati0n into equal parts


Population = $2,500,000
Sample size = 93 customer
So sampling interval = 2,500,000/93 = $26,882
x

$26,882

$26,882

Start selection from any point < $26,882 [interval]


Assume we select $3,977
So I will choose the customer whose cumulative dollars include
$3,977 [and this customer is the first select customer of the 93]
And to select the second item we add the sampling interval to
$3,977 (26,882 + 3,977 = $30,859) and select the customer
whose cumulative dollar include $30,859.
We complete selecting the 93 customer by this systematic way.

14

14

Continue CH 9: Audit Sampling:


An Application to Substantive
Tests of Account Balances
What are the advantages of systematic selection method?
1. We end up selecting customers with large balances [we skip
customers with small balances]
So by this systematic selection method we take big part of the
population to be examined
2. Large balances sometimes are large because they are
overstated and when the auditor examine these balances he
may detect material misstatement
What is the disadvantage of systematic selection method?
Small balances has very small chances to be selected and may
be these small balances are very small because it is understated
So this method will not be able to detected understatement

NOTE
14

Systematic selection method can be called probability


proportional to size method which means that the chance of
any item (customer) to be selected depends on its size

i.e.
Customer with large balance will have large chance to be
selected
Customer with small balance will have small chance to be
selected
Customer with zero balance will have zero chance to be selected

Evaluation

to reach opinion about the fairness of the


account

Planning: Tolerable misstatement$ = expected misstatement$


+
allowance
for
sampling
risk $

14

Findings: -

A+B

Non-zero

zero or Non-zero

Non-

zero
Upper limit $ =

-Projected misstatement$
-best estimate misstatement $
-most likely misstatement $

Allowance for
sampling risk $

Minimum upper limit or basic


precision (for the population)

For the population =


(aggregate)

Minimum
upper limit
of
population
Projected

about the population

Upper limit
for each
misstatement
(each case)

misstatement for
+
each case

What I found as a misstatement in


the sample project it to the
population

[If I found zero misstatements in the


sample so the best estimate equal
Allowance
for
zero, but it doesn't mean that the
each whole
case population is clean]

(can be zero)

Can't be zero
because if I found
the sample is
clean it doesn't
mean that the
whole population
is clean

14

Summary of findings
Population upper limit $ = total projected misstatement $ + total allowance for
sampling risk $
CASES
Case 1

case 2

Minimum
upper limit
( 0)

Case 1

Allowance for
each case

case 2

Case1 B.V < Interval


Upper limit for this case = projected misstatement for this case $ + allowance for
sampling risk for
this case ( 0)

Case 2

B.V Interval

Upper limit for this case =misstatement $ = projected misstatement $


allowance for sampling risk for this case= zero

Misstatements Detected
In the sample of 93 items, the following misstatements were found

14

Projection of misstatement: - projecting misstatement of each


case to its interval [every customer represents its interval so we
project the misstatement of each case to its related interval].
We should classify each case [each misstatement] into one of
two types

1st if the case has B.V lower than the interval


Interval
Customer

10,753
projected to interval

Misstatement %

Ex for Marva medical it has misstatement = $ 2,682 (40%) so the


projected misstatement to the interval = 40% x26,882=10,753

NOTE
In this case there is an allowance for sampling risk as we didn't
examine the whole interval

2nd if the case has B.V more than the interval


Projected misstatement

Misstatement

Ex for Axa corporation projected misstatement to the interval


=2,500 [because the customer is the whole interval]
So misstatement for this case = projected misstatement for this
case = upper limit for this case

Note

14

In this case there is no allowance for sampling risk [allowance


for sampling risk =zero]

Basic Precision
If no misstatements are found in the sample, the best estimate of
the population misstatement would be zero dollars

$26,882 3.0 = $80,646 minimum upper limit or basic precision


Compute the Upper Misstatement Limit
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.

NOTE

14

We must rank the cases according to the tainting factor in


descending order

In our example, the final decision is whether the


accounts receivable balance is materially misstated or not.
We compare the tolerable misstatement to the upper misstatement
limit. If the upper misstatement limit is less than or equal to the
tolerable misstatement, we conclude that the balance is not
materially misstated.
In 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 (not fair).
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.

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.
14

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


Over statement cases
150,621
Projected under misstatement
Final aggregate upper limit

(2,688)
147,933

NOTE
I will compare the tolerable misstatement with the final
aggregate upper limit

Risk When Evaluating Account Balances

TO BE
CONTINUE ..

14

You might also like