0% found this document useful (0 votes)
6 views14 pages

lect 9

Audit

Uploaded by

kerolossamuel123
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
6 views14 pages

lect 9

Audit

Uploaded by

kerolossamuel123
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 14

‫بسم هللا الرحمن الرحيم‬

‫علَ ْي َك َو َر ْح َمتُهُ لَ َه همتْ َطا ِئفَةٌ ِم ْن ُه ْم‬ ‫َّللاِ َ‬


‫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

You might also like