the misstatements are less than tolerable 𝑆𝑁𝑀

𝑃𝑀 = 𝑃
misstatement amount. 𝑆
RATIO ESTIMATION SNM = sample net misstatement (Table 10.9)
S = Sample items
In ratio estimation, the auditor uses a sample to P = Population items
estimate the ratio of the misstatement in a
sample to its book value and project it to the ILLUSTRATION OF DIFFERENCE ESTIMATION
entire population. The ratio of misstatements is 𝑆𝑁𝑀
simply the sample net misstatement divided by 𝑃𝑀 = 𝑃
𝑆
the book value of the items in the sample:
𝑃450
The projected misstatement (PM) is obtained by: 𝑃𝑀 = 𝑃100,000
𝑃225
𝑆𝑁𝑀 𝑃𝑀 = 𝑃200,000
𝑃𝑀 = 𝑃𝐵
𝐵𝑆
The estimated total audited value (ETAV) is
SNM = sample net misstatement (Table 10.9) P6,050,000 obtained from
BS = Book value sample (Table 10.9)
PB = Population book value ETAV = PB +/- PM

The estimated total audited value (ETAV) is equal ETAV = P6,250,000 – P200,000
to the book value of the account plus/minus the
ETAV = P6,050,000
projected misstatement
Because the PM indicates an overstatement, this
ILLUSTRATION OF RATIO ESTIMATION
difference is subtracted from the book value
𝑆𝑁𝑀 (Table 10.9)
𝑃𝑀 = 𝑃𝐵
𝐵𝑆
USING OF RATIO AND DIFFERENCE ESTIMATION
𝑃450
𝑃𝑀 = 𝑃6,250,000 In using ratio and difference estimation
𝑃14,175
technique, the following are required:
𝑃𝑀 = 𝑃198,413
 Each population item has a book value
The estimated total audited value (ETAV) is  An audited value may be determined for
P6,051,587 obtained from each sample item
ETAV = PB +/- PM  Differences between audited and book
values (misstatements) are relatively
ETAV = P6,250,000 – P198,413 frequent
ETAV = P6,051,587 When these requirements are met, ratio
estimation or difference estimation is often
Because the PM indicates an overstatement, this
more efficient than mean-per-unit estimation.
difference is subtracted from the book value.
Ratio estimation is most appropriate when the
(Table 10.9)
size of misstatements is nearly proportional to
DIFFERENCE ESTIMATION the book value of the items. Larger accounts have
large misstatements and smaller accounts have
In difference estimation, the auditor uses a smaller misstatements. Difference estimation is
sample to estimate the average difference more appropriate when the size of the
between the audited value and the book value of
misstatements is not approximately
the items in the population. The average proportional to book value.
difference is estimated by dividing the net
misstatement in the sample by the number of NON-STATISTICAL SAMPLING FOR SUBSTANTIVE
the items in the sample. The total difference TESTS
between the population book value and its
When conducting a nonstatistical sampling for
estimated total audited value is determined by
substantive tests, the auditor considers each of
multiplying the estimated average difference by
the steps in the application using statistical
the number of items in the population.
technique of sampling in substantive tests. The
sampling unit for nonstatistical sampling is
usually a customer account, an individual understanding of the nature of a computer and
transaction, or a line item on a transaction. The capabilities is needed.
following items need further explanation when
Hardware
using nonstatistical sampling:
A computer is a machine that can be
 Identifying individually significant items
programmed to accept data (input), process it to
 Determining the sample size
useful information (output), and store it away (in
 Selecting sample items a secondary storage device) for safekeeping or
 Calculating the sample results later reuse. The processing of input to output is
Identifying individually significant items. The directed by the software but performed by the
auditor determines which items should be hardware. To function, a computer system
tested and which items should be subjected to requires four main aspects of data handling:
sampling. The items that will be tested input, processing, output, and storage. The
individually are items that may contain potential hardware responsible for these four areas is as
misstatements that individually exceed the follows:
tolerable misstatement. These items are tested  Input devices accept data or commands
100% because the auditor is not willing to accept in a form that the computer can use; they
any sampling risk. send the data or commands to the
Determining the sample size. The formula used processing unit.
by auditor based on AICPA Audit Guide, audit  The processor (CPU) has electronic
sampling is circuitry that manipulates input data
into the information people want.
𝑃𝐵
𝑆= 𝐴𝐹  Output devices show people the
𝑇𝑀 processed data – information – in
PB = Population book value understandable and usable form.
TM = Tolerable Misstatement  Storage (secondary storage) which
AF = Assurance factor consists of secondary storage devices
such as disk.
Selecting sample items. When using
nonstatistical sampling, the auditor may use Software
some form of random sampling or systematic
The software really makes the computer useful.
selection method including the haphazard
Generally, it is categorized as systems software
sampling.
or application software.
Calculating the sample results. The AICAP Guide,
 System software (operating system) is
Audit sampling described to accept the methods
the underlying software found on all
of projecting the amount of misstatement found
in the nonstatistical sample. These methods are: computers. It serves as intermediary
software between the application
 Ratio method (ratio estimation) software and hardware. Some important
 Average difference method (difference tasks of an operating system are
estimation) managing the computer’s resources
(CPU, disk drives, printers) and running
the applications software.
CHAPTER 11  Application software may be either
AUDITING IN A COMPUTERIZED SYSTEMS custom or packaged.
ENVIRONMENT UNIQUE CHARACTERISTICS OF SPECIFIC EDP
THE COMPUTER ENVIRONMENT SYSTEMS

INTRODUCTION TO AN ELECTRONIC DATA Computer information systems differ as to their