ض ُل ه " َولَ ْو ََل فَ ْ ض ُّرونَ َكس ُه ْم ۖ َو َما يَ ُون ِإ هَل أ َ ْنفُ َ وك َو َما يُ ِضلُّ َ أ َ ْن يُ ِضلُّ َ عله َم َك اب َوا ْل ِح ْك َمةَ َو َ علَ ْي َك ا ْل ِكت َ َ ِم ْن ش َْي ٍء ۚ َوأ َ ْن َز َل ه َّللاُ َ علَ ْي َك ع َِظي ًما" َّللاِ َ ض ُل ه َان فَ ْ َما لَ ْم تَك ُْن ت َ ْعلَ ُم ۚ َوك َ صدق هللا العظيم آية رقم 113من سورة النساء Chapter (2): The Audit Sampling The First topic “Monetary Unit Sampling” for test of details of balance BY DR:MOHAMMED SHAABAN Lecture. Nine Comparisons of Audit Sampling for Tests of Details of Balances and for Tests of Controls and Substantive Tests of Transactions The main differences among tests of controls, substantive tests of transactions, and tests of details of balances are in what the auditor wants to measure Type of Test What It Measures Tests of controls • The operating effectiveness of internal controls
Substantive tests of • The operating effectiveness of internal controls
transactions • The monetary correctness of transactions in the accounting system Tests of details of balances • Whether the dollar amounts of account balances are materially misstated Type one (Alpha)& Type two(Beta)in Substantive test of transactions or details of balances Sample results True or Actual Value of Population of the balance Value of Pop. Is fair (o.k.) Value of Pop. Is not fair (not o.k.) Sample results O.K. .(good Correct decision Type 2 /Beta error results) “Acceptable Risk of incorrect acceptance of the balance ”(ARIA) Not effective/incorrect conclusion Sample results not O.K( bad Type 1/Alpha error Correct decision results) Not efficient “Acceptable Risk of incorrect Rejection of the balance”(ARIR) Costly as more un necessary audit procedure is required to test the fairness of the balance Monetary Unit Sampling(MUS): Monetary unit sampling (MUS) provides an estimate of the amount of misstatement in the account balance or class of transactions. The distinguishing feature of MUS is that it tends to select higher dollar transactions or components within an account balance for examination. Auditors use MUS sampling to determine the fairness of the client’s financial statements. auditors examine transactions or components of clients’ account balances or class of transactions. Based on this sample of transactions or components and analytical procedures, auditors then assess the overall fairness of the account balance or class of transactions. MUS is designed primarily to test for overstatement errors. Factors Affecting Required Sample Size for Audit Sampling for Tests of Details of Balances
Factor Affecting Sample
Smaller sample size Larger sample size size
Effectiveness of internal controls Low High
(control risk) (Direct)
Likelihood of misstatements Low High
(inherent risk) (Direct)
Acceptable risk of over reliance High Low
(ARO) (inverse)
Acceptable risk of incorrect High Low
acceptance (ARIA) (inverse) Factors Affecting Required Sample Size for Audit Sampling for Tests of Details of Balances
Factor Smaller Sample Size Larger Sample Size
Tolerable misstatement for a specific account High Low
(inverse) Expected size and frequency of Low High misstatements—Affect estimated misstatements in the population/before test (Direct) Dollar amount of population (Direct) Low High
Number of items in the population Not proportional
(Minor) Monetary-unit Sampling phases Phase one (Planning the Sample): Step1:State the Objectives of the Audit Test: Sampling may be used for substantive testing to test the reasonableness of assertions about a financial statement amount (e.g., accuracy, existence) . Step2: Define the population: The auditor must define the population so that the selected sample is appropriate for the assertions being tested, because sample results can be projected only to the population from which the sample was selected. For example, if the auditor is concerned about goods shipped but not billed, the population of shipping documents rather than sales invoices is the appropriate population for drawing the sample. Step 3:Define Sampling Unit and Logical Unit: Define the Sampling Unit.With MUS, an individual dollar represents the sampling unit. In fact, this is where monetary-unit (or dollar-unit) sampling gets its name. For example, if the population to be sampled is the accounts receivable balance of $2.5 million, then there are 2.5 million sampling units in the population. However, because the accounts receivable balance is organized by customer or transaction (e.g., customer account or invoice number) and not individual dollars, the auditor does not audit the individual dollar but the customer account or transaction that contains the selected dollar. In other words, while the sampling unit is an individual dollar in a customer account (or invoice), the auditor can’t very well audit a single dollar; instead, the auditor will audit the entire customer account (or transaction) that contains the selected dollar. The customer account or transaction that contains the selected dollar is called the logical unit. In essence, by selecting a dollar contained in a customer account (or transaction), the auditor by extension selects the logical unit that contains the selected monetary unit to audit. Cont.Phase one (Planning the Sample): Step 4: Define the Misstatement: Define a Misstatement. For MUS a misstatement is defined as the difference between monetary amounts in the client’s records (Recorded value) and amounts supported by audit evidence (Audited value). Step 5 : define Desired Confidence Level or Acceptable Risk of Incorrect Acceptance: •There is a direct relationship between the confidence level and sample size.The basic idea is fairly simple: To increase confidence, more work is required, which is reflected in a larger sample size. Confidence level and the risk of incorrect acceptance are complements. •If the auditor wants to be 95 percent confident in the sampling conclusion, then he or she must be willing to accept a 5 percent risk of incorrect acceptance. The risk of incorrect acceptance is the risk that the sample supports the conclusion that the recorded account balance is fairly stated when in fact it is not (a Type II error). •This risk relates to the effectiveness of the audit. In determining an acceptable risk of incorrect acceptance, the auditor should consider the components of the audit risk model: the acceptable level of audit risk and risk of material misstatement. For practical purposes, the acceptable risk of incorrect acceptance is the same as detection risk (DR) after considering the assessed level of detection risk based on other substantive procedures such as substantive analytical procedures. If the auditor incorrectly accepts an account balance as being fairly stated when it is actually materially misstated, he or she will allow the issuance of financial statements that are not fairly presented. The users of those financial statements may then sue the auditor for damages that result from relying on those financial statements. There is an inverse relationship between the risk of incorrect acceptance and sample size. The lower the acceptable risk of incorrect acceptance, the larger the sample size must be. Cont.Phase one (Planning the Sample): Step 6 :Define Tolerable Misstatement in population(TM): •Tolerable misstatement is the maximum amount by which the account can be misstated and still be acceptable to the auditor as being fairly presented. For an audit to be economically feasible, the auditor and users of the financial statements must tolerate some margin for misstatement (i.e., the auditor provides reasonable assurance that the financial statements are fair, not absolute assurance that the financial statements are error-free). •Tolerable misstatement is also inversely related to sample size—the lower the amount of tolerable misstatement, the more precise the test the auditor needs, and the larger the sample size must be. Step 7 :Define expected Misstatement:(what the auditor guesses) •The expected misstatement is the dollar amount of misstatement that the auditor believes exists in the population (i.e. Before test is made). The auditor can develop this expectation based on the assessment of inherent risk, prior years’ results, a pilot sample, the results of related substantive procedures, or the results of tests of controls. •. There is a direct relationship to sample size: The larger the expected misstatement, the larger the sample size must be. Step 8 :Define ratio of expected population misstatement to tolerable misstatement: Is the percentage of expected misstatement in the population to the tolerable misstatement Ratio of Exp.Misstat.Pop=Exp.Misstat.Pop/T.M Cont.Phase one (Planning the Sample): Step 9 :Define Tolerable misstatements % of population: Is the percentage of tolerable misstatement in the population to the recorded value of population(i.e. un audited value of pop.) %T.M=T.M/Recorded value of Pop. Step 10 :Determine the sample size: Two ways: A- Using statistical formula : The sample size is determined using the following formula: N=Confidence factor(R)/TM% R will be given for simplicity same as attribute sampling Example: R=10 TM=2000 Recorded value of pop=200000 So TM%-= 2000/20000=0.1 therefore N=10/0.1=100 B- Using statistical Table: Using three factors that affect attribute sampling discussed earlier are: 1- Expected misstatement to tolerable misstatement and; 2-TM% and; 3-ARIA at 5% or10% End of lecture Nine wish you good luck