Chapter (17)

Audit Sampling for Tests of Details of Balances

Non-Statistical Sampling
Stratum Sample
The auditor Divided the population into two or three subpopulations
For example, the recorded population of accounts receivable consists of 40
accounts totalling $ 207,295, the auditor separates the population into two or three
subpopulations (Categories), this called Stratified Sampling
Stratified Sampling table
Stratum Stratum Criteria No. of accounts in Dollars in
(Balance amount) population population
1 > $15,000 3 $ 88,955
2 $5000 - $ 15,000 12 $ 71,235
3 < $ 5000 25 $ 47,105
Tolerable Misstatement
There is an inverse relationship between Tolerable misstatement and
sample size
Acceptable Risk of Incorrect Acceptance (ARIA)
ARIA is the risk that a sample supports that the recorded account balance is not
materially misstated when it is materially misstated when the true misstatement in
the balance exceeds tolerable misstatement
ARIA as 5% 0r 10% (given)
There is an inverse relationship between ARIA and sample size
Steps In stratum Sample
1-Determine Initial Sample Size
AICPA formula for computing Sample Size
Population Recorded Amount x Confidence Factor .... Given
Sample Size = ------------------------------------------------------------
Tolerable Misstatement
Exercise (1):
1- The recorded population of accounts receivable consists of 40 accounts
totalling $ 207,295, and the Stratified Sampling table is as follows
Stratified Sampling table
Stratum Stratum Criteria No. of accounts Dollars in
(Balance amount) in population population
1 > $15,000 3 $ 88,955
2 $5000 - $ 15,000 12 $ 71,235
3 < $ 5000 25 $ 47,105
40 $ 207,295
2- Tolerable misstatement is $ 15,000

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3- The auditor decided to eliminate from the recorded population the three making
up the first stratum ($ 88,955), because they exceed tolerable misstatement, and
the three individually material accounts will be tested separately
4- Confidence factor is 2
Required
What is the sample size
Answer
1- The remaining population = 207,295 – 88,955 = 118,340
Population Recorded Amount x Confidence Factor
Sample Size = ----------------------------------------------------------------------
Tolerable Misstatement
= (118,340 x 2) / 15,000 = 15.8 = 16 Accounts
Sample size must be allocated among the Strata
Stratum 1 = 3 accounts (Not in audit sampling)
Stratum 2 = 71,235 / 118,340** X 16 =9.6 = 10accounts
Stratum 3 = 47,105 / 118,340 X 16 = 6.3 = 6 accounts
**118,340 = 71,235 + 47,105
Or = 207,295 -88,955 = 118,340
2- Generalize from the Sample to the
Population
Calculate The Point Estimate of Misstatement in the Population
(Direct Projection of Misstatement)
Client Misstatement
= ------------------------------------------------ X Recorded Book
Recorded Value of the sample Value for the stratum
1- Client Misstatement = Recorded Value - Audited Value
The auditor compares between the Tolerable misstatement and the point
estimate.
Tolerable Misstatement > The Point Estimate, the population is ……. Accepted
The Point Estimate > Tolerable Misstatement the population is ……. Reject
Exercise (2)
The auditor performed the audit procedures and he reached to the following
conclusions about the sample
Stratum Sample Dollars Audited Population
Size Recorded Value Audited Value Recorded
1 2 3 4

1 3 *$ 88,955 $ 91,695 $ 88,955

2 10 **53,999 52,807 $ 71,235
3 6 **13,105 10,947 $ 47,105
Total 19 $ 156,059 $ 155,449 $ 207,295
Note: 610 = 156,059 - 155,449
* Understated
** Overstated
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Required:
Generalize from the sample to population, T.M = 15,000
Answer
The Auditor must Generalize from the Sample to the Population by :
1- Projecting misstatements from the sample results to the population
2- Considering sampling error and sampling risk ARIA
Answer
Calculate The Point Estimate of Misstatement in the Population
Stratum Client Client Misstatement Recorded Point
Misstatement Divided Book value = Estimate of
= Recorded value of X for the Misstatement
Recorded the sample Stratum Direct
Value 5/2 4 Projection of
Minus Misstatement
Audited Value
5= (2-3)
1 $ (2,740) $ (2,740) / 88,955 X $ 88,955 = $ (2,740)
88,955 - 91,695

2 $ 1,192 1,192 / 53,999 X 71,325 = 1,572

53,999 - 52,807

3 $ 2,158 2,158 / 13,105 X 47,105 = 7,757

13,105 - 10,947
Total $ 610 207,295 $ 6,589
In this Case:
The auditor accepts the population
(Tolerable Misstatement $ 15,000 > The Point Estimate $ 6,589)
Comment:
Sampling error = Point Estimate of Misstatement – Tolerable misstatement

Rule:
In non-statistical sampling, the greater the difference between Tolerable
Misstatement – The Point Estimate (The projected misstatement in the
population), the auditor will be more willing to accept population
Actions When a Population is Rejected:
The auditor in that case, has several courses of actions:
1- Take no action until test of other audit areas are completed
2- Perform expanded audit tests in specific areas
3- Increase the sample size
4- Adjust the account balance
5- Request the client (Audited Company) to correct the population
6- Refuse to give unqualified opinion. (Qualified Or Adverse)

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 Confirmation Response& Auditor – Follow up
Notes:
Auditor – Follow up(Given) Types of Errors(Answer)
1-Customer was charged the wrong price Pricing error
2- $.... Shipment recorded on Dec,30, goods Cut-off error
were not shipped until Jan,3
3- Customer sent $ …. payment on Dec,29, received Timing difference
on Jan,2 Misstatement = Zero
4- Customer received less than the full quantity Error is quantity shipped
ordered
5- $.... Customer sent payment on Dec,29, received Timing difference
on Jan,2, and goods were shipped on Jan,2, and Misstatement = Zero
were received by customer on Jan,5
6- $.... shipment made on Dec,31, & $.... Customer Timing difference & wrong
was charged the wrong price price
Note ... Shipment recorded.......Cut-off-error
Shipment Made ............Time difference
Time difference (Shipment Made & Customer sent payments)
Exercise (1):
You are evaluating the results of a non-statistical sample of 73 accounts
receivable confirmations for the Brother Company. Information on the sample and
population are included below. An overstatement or under misstatement of more
than $ 100,000 is considered material
Stratum Sample Population

# of Recorded # of Recorded
Accounts Value Accounts Value
1- > $75,000 8 $ 1,287,643 8 $ 1,287,643
2 - $10,000 – 74,999 40 1,349,678 257 4,348,268
3- < $ 10,000 25 94,637 712 947,682

73 $ 2,731,958 977 $ 6,583,593

The confirmation responses were received without exception, other than the
following items:
ACC. Recorded Confirmation Auditor – Follow up
No Value Response
147 $24,692 $23,597 Customer was charged the wrong price
228 183,219 157,216 $26,003 shipment recorded on Dec,30,
goods were not shipped until Jan,3
278 7,546 5,546 Customer sent $ 2,000 payment on Dec,29,
received on Jan,2

497 15,319 0 $ 15,319 shipment recorded on Dec,30,

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 goods were not shipped until jan,2
564 8,397 7,858 Customer received less than the full
quantity ordered
653 32,687 19,328 $ 13,359 shipment recorded on Dec,30,
goods were not shipped until jan,2
830 5,286 0 $ 5,286 shipment made on Dec, 30, goods
were received by the customer on Jan,4

Required
1- Evaluate each of the confirmation exceptions to determine whether they
represent misstatements
2- Estimate the total misstatement in the accounts receivable population, Ignore
sampling risk in the calculations
3- Is the population acceptable? If no, indicate what follow-up action(s)
you consider appropriate in the circumstances
Answer
1- Summarizes the Confirmation Reponses:
Account Recorded Confirmation Misstatement Notes
Number Value Responses
Account 147 $ 24,692 $ 23,597 $ 1,095 Pricing error
Stratum 2
Account 228 183,219 157,216 26,003 Cut-off error
Stratum 1
Account 278 7,546 5,546 0 Timing difference
Account 497 15,319 0 15,319 Cut-off error
Stratum 2
Account 564 8,397 7,858 539 Error is quantity
Stratum 3 shipped
Account 653 32,687 19,328 13,359 Cut-off error
Stratum 2
Account 830 5,286 0 0 Timing difference
Total Misstatement $ 56,315
Stratum 1 26,003
Stratum 2 29,773
Stratum 3 539

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2- Estimate of Total Misstatement (Projected Misstatement)
Stratum Sample Value Sample Population Projected
Misstatement Value Misstatement
2 1 3 4 = 1/2*3
Stratum 1 $ 1,287,643 $ 26,003 $ 1,287,643 $ 26,003
Stratum 2 1,349,678 29,773 4,348,268 95,920
Stratum 3 94,637 539 947,682 5,397
Total $ 2,731,958 $ 56,315 $ 6,583,593 $ 127,320

Projected Misstatement
= Sample misstatement / Sample Value x Population Value
Stratum 1 = 26,003 /1,287,643 x 1,287,643 = 26,003
Stratum 2 = 29,773 /1,349,678 x 4,348,268 = 95,920
Stratum 3 = 539 /94637x947682 = 5,397
3- The population is not acceptable since the projected misstatement
$ 127,320 exceeds tolerable misstatement of $ 100,000
The auditor is likely
1- To propose an adjustment
2- Increase testing
3- In this situation, many of the errors involved Cut-off, so auditor could expand
testing the Cut-off errors
Exercise (2)
The auditor of ABC Company evaluated evaluating the results of a non-statistical
sample of 88 accounts receivable confirmations. Information on the sample and
population are included below.
Stratum Sample Population

No. of Recorded No of Recorded

Accounts Value Accounts Value
1- > $90,000 10 1,545,172 10 1,545,172
2 -12,000 – 89,999 48 1,619,614 308 5,217,922
3 - < $ 12,000 30 113,564 854 1,137,218

88 3,278,350 1,172 7,900,312

The confirmation responses were received without exception, other than the
following items:
ACC. Recorded Confirmation Auditor – Follow up
No Value Response
176 9,055 6,655 Customer sent 2400 payment on Dec,30,
received on Jan,3
274 10,076 9,420 Customer received less than the full
quantity ordered

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 337 29,630 28,316 Customer was charged the wrong price
677 6,343 0 6,343 shipments made on Dec,31, goods
were received by customer on Jan,5
996 219,863 188,659 31,204 shipments recorded on Dec,31,
goods were not shipped until Jan,5
If you know that the tolerable misstatement is L.E 60,000 and ignore the sampling
risk in the calculation
Required:
1- Evaluate each of the confirmation exceptions to determine whether they
represent misstatements
2- Is the population acceptable?
Answer
1- The Following are summarizing the confirmation Reponses:
Account Recorded Confirmation Misstatement Notes
Number Value Responses
Account 176 9,055 6,655 0 Timing
difference
Account 274 10,076 9,420 656 Error is
Stratum 3 quantity
shipped
Account 337 29,630 28,316 1,314 Pricing error
Stratum 2
Account 677 6,340 0 0 Timing
difference
Account 996 219,863 188,569 31,204 Cut-off error
Stratum 1

Total Misstatement $ 33,174

Stratum 1 31,204
Stratum 2 1,314
Stratum 3 656
2- Estimate of total Misstatement
Stratum Sample Value Sample Book Value Projected
Misstatement Misstatement
Stratum 1(996) 1,545,172 31,204 1,545,172 31,204
Stratum 2(337) 1,619,614 1,314 5,217,922 4,233
Stratum 3(274) 113,564 656 1,137,218 6,569
Total 3,278,350 33,174 7,900,312 42,006
Projected Misstatement
= Sample misstatement / Sample Value x Population Value
Stratum 1 = 31,204 /1,545,172 x 1,545,172 = 31,204
Stratum 2 = 1,314 /1,619,614 x 5,217,922 = 4,233
Stratum 3 = 656 /113,564 x 1,137,218 = 6,569
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The population is acceptable since the projected misstatement of 42,006 does not
exceed the tolerable misstatement of 60,000
Exercise (3)
The auditor of ABC Company evaluated the results of a non-statistical sample of
88 accounts receivable confirmations. Information on the sample and population
are included as Follows.
Stratum Sample Population
No. of Recorded No of Recorded
Accounts Value Accounts Value
1- > $80,000 10 1,500,100 10 1,500,100
2 - $12,000 – 79,999 48 1,615,400 308 5,210,200
3 - < $ 12,000 30 125,555 854 1,137,218
88 3,241,055 1,172 7,847,518

The confirmation responses were received without exception, other than the
following items:
Acc. No Recorded Confirmation Auditor – Follow up
Value Response
272 10,076 9,420 Customer received less than the full
quantity ordered
245 29,630 28,316 Customer was charged the wrong price
677 6,500 0 3,500 Customer sent payment on
Dec,29, received on Jan,2 , and goods
were recorded on Dec,28, were not
shipped until Jan,3
999 219,500 188,500 20,000 shipments made on Dec;31, &
11,000 Customer was charged the
wrong price
If you know that the tolerable misstatement is L.E 55,000 and ignore the sampling
risk in the calculation
Required:
1- Evaluate each of the confirmation exceptions to determine whether they
represent misstatements
2- Is the population acceptable?
Answer
1- The Following are summarizes the confirmation Response:
Account Recorded Confirmation Misstatement Notes
Number Value Responses
Account 272 10,076 9,420 656 Error quantity
Stratum 3 shipped
Account 245 29,630 28,316 1,314 Pricing error
Stratum 2
Account 677 6,500 0 3,000 Timing
Stratum 3 difference &
cut off error
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Account 999 219,500 188,500 11,000 Timing
Stratum 1 difference &
wrong price
Total Misstatement $ 15,970

Stratum 1 11,000
Stratum 2 1,314
Stratum 3 3, 656

2- Estimate of total Misstatement

Stratum Sample Value Sample Book Value Projected
Misstatement Misstatement
Stratum 1 1,500,100 11,000 1,500,100 11,000
Stratum 2 1,615,400 1,314 5,210,200 4,238
Stratum 3 125,555 3,656 1,137,218 33,114
Total 3,241,055 15,970 7,847,518 48,352

Projected Misstatement
= Sample misstatement / Sample Value x Population Value
Stratum 1 = 11,000/1,500,100 x 1,500,100 = 11,000
Stratum 2 = 1,314 /1,615,400 x 5,210,200 = 4,238
Stratum 3 = 3,656/125,555 x 1,137,218 = 33,114
The population is acceptable since the projected misstatement of 42,006 does not
exceed the tolerable misstatement of 55,000