Chapter 9 - Audit Sampling - Substantive Tests of Account Balances - Answers
Chapter 9 - Audit Sampling - Substantive Tests of Account Balances - Answers
Chapter 9 - Audit Sampling - Substantive Tests of Account Balances - Answers
1
Substantive Tests of Details of Account
Balances
Four important determinants of sample size are:
1. Desired confidence level.
2. Tolerable misstatement.
3. Estimated misstatement.
4. Population size (for non-statistical sampling)
2
Substantive Tests of Details of Account Balances
Consider the following information about the inventory
account balance of an entity:
Book value of inventory account balance $ 3,000,000
Book value of items sampled $ 100,000
Audited value of items sampled 98,000
Total amount of overstatement observed in audit sample $ 2,000
3
Substantive Tests of Details of Account
Balances
The results of our audit test depend upon the tolerable
misstatement associated with the inventory account.
If the tolerable misstatement is $50,000, we cannot conclude
that the account is fairly stated because our best estimate of the
projected misstatement is greater than the tolerable
misstatement.
$50k TM < $60k projected error (Conclusion is account is not
fairly stated)
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Monetary Unit Sampling (MUS)
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Monetary-Unit Sampling (MUS)
It is commonly used by auditors to test accounts such as
• accounts receivable
• inventory
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Monetary-Unit Sampling (MUS)
• MUS uses attribute-sampling theory (used primarily to test
controls) to express a conclusion in a $ amount (rather than
a rate of occurrence).
• In attribute sampling, the control either works or doesn’t,
so all items sampled are either correct or an error/
deficiency.
• In MUS sampling, a small deviation in a dollar amount (e.g.
recording a $2565 invoice as $2655) won’t count as a 100%
misstatement. The fact that the misstatement is only 3.5%
of the balance is taken into consideration.
• The point of this is to let us calculate a “best estimate” of
the population misstatement (in dollars).
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MC Question
Which of the following is NOT true with respect to MUS
Sampling:
A. Every dollar has an equal chance of being selected
B. Every transaction has an equal chance of being selected
C. Higher dollar value items have a higher chance of getting
selected for the sample
D. A small deviation in dollar amount won’t count as a 100%
misstatement
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MC Question
Which of the following is NOT true with respect to MUS
Sampling:
A. Every dollar has an equal chance of being selected
B. Every transaction has an equal chance of being selected
C. Higher dollar value items have a higher chance of getting
selected for the sample
D. A small deviation in dollar amount won’t count as a 100%
misstatement
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Monetary-Unit Sampling (MUS)
Advantages of MUS
1. When the auditor expects little misstatement, MUS usually
results in a smaller sample size than more traditional methods of
sampling.
2. MUS does not require the user to make assumptions about the
distribution of misstatements (e.g. misstatements are normally
distributed throughout the population).
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Monetary-Unit Sampling (MUS)
Disadvantages of MUS
1. The selection of zero or negative balances generally requires
special design consideration. (Think about tests of completeness
– MUS is not a good approach).
2. The general approach to MUS assumes that the audited amount
of the sample item is not in error by more than 100%.
3. When more than a few misstatements are detected, the sample
results calculations may overstate the allowance for sampling
risk. An auditor = more likely to incorrectly reject an appropriate
book value & over-audit the balance.
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Steps in MUS
Steps in MUS Application
Planning
1. Determine the test objectives.
2. Define the population characteristics:
• Define the population.
• Define the sampling unit.
• Define a misstatement.
3. Determine the sample size, using the following inputs:
• The desired confidence level or risk of incorrect acceptance.
• The tolerable misstatement.
• The expected population misstatement.
• Population size.
Performance
4. Select sample items.
5. Perform the auditing procedures.
• Understand and analyze any misstatements observed.
Evaluation
6. Calculate the projected misstatement and the upper limit on misstatement.
7. Draw final conclusions.
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Steps in MUS
Steps in MUS Application
Planning
1. Determine the test objectives.
2. Define the population characteristics.
• Define the population.
• Define the sampling unit.
• Define a misstatement.
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Steps in MUS
Steps in MUS Application
Planning
1. Determine the test objectives.
2. Define the population characteristics.
• Define the population.
• Define the sampling unit.
• Define a misstatement.
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Steps in MUS
Steps in MUS Application
Planning
1. Determine the test objectives.
2. Define the population characteristics.
• Define the population.
• Define the sampling unit.
• Define a misstatement.
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Steps in MUS
Steps in MUS Application
Planning
1. Determine the test objectives.
2. Define the population characteristics.
• Define the population.
• Define the sampling unit.
• Define a misstatement.
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Steps in MUS
Steps in MUS Application
3. Determine the sample size, using the following inputs:
• The desired confidence level or risk of incorrect acceptance.
• The tolerable misstatement.
• The expected population misstatement.
• Population size.
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MC Question:
Sample size increases as…
A. Confidence level decreases (SS decreases)
B. Population size decreases (SS decreases)
C. Expected misstatement increases
D. Tolerable misstatement increases (SS decreases)
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Steps in MUS
Steps in MUS Application
Performance
4. Select sample items.
5. Perform the auditing procedures.
Evaluation
6. Calculate the projected misstatement and the upper limit on misstatement.
7. Draw final conclusions.
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Steps in MUS – Example for purposes of the lecture
notes
Assume an entity’s book value of accounts receivable is $2,500,000, and
the auditor determined a sample size of 93. The sampling interval will be
$26,882 ($2,500,000 ÷ 93). The random number selected is $3,977, so the
auditor would select the following items for testing:
Cumulative Sample
Account Balance Dollars Item
1001 Ace Emergency Center $ 2,350 $ 2,350 $ 3,977
1002 Admington Hospital 15,495 17,845 $ 3,977 (1) 26,882
1003 Jess Base, Inc. 945 18,790 $ 30,859
1004 Good Hospital Corp. 21,893 40,683 30,859 (2)
1005 Jen Mara Corp. 3,968 44,651
1006 Zippy Corp. 32,549 77,200 57,741 (3)
1007 Green River Mfg. 2,246 79,446
1008 Bead Hospital Centers 11,860 91,306 84,623 (4)
• • • •
• • • •
1213 Andrew Call Medical - 2,472,032
1214 Lilly Heather, Inc. 26,945 2,498,977 2,477,121 (93)
1215 Janyne Ann Corp. 1,023 $ 2,500,000
Total Accounts Receivable $ 2,500,000
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Steps in MUS
Steps in MUS Application
Performance
4. Select sample items.
5. Perform the auditing procedures.
Evaluation
6. Calculate the projected misstatement and the upper limit on misstatement.
7. Draw final conclusions.
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Reminder:
• Hand out the handout
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Steps in MUS
Steps in MUS Application
Evaluation
6. Calculate the projected misstatement and the upper limit on misstatement.
7. Draw final conclusions.
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Steps in MUS
Misstatements Detected
In the sample of 93 items, the following misstatements were found:
Tainting
Factor
Customer Book Value Audit Value Difference Diff/BV
Good Hospital Corp. $ 21,893 $ 18,609 $ 3,284 0.15
Marva Medical Supply 6,705 4,023 2,682 0.40
Learn Heart Centers 15,000 0 15,000 1.00
Axa Corp. 32,549 30,049 2,500 NA
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Steps in MUS
Computed 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.
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Steps in MUS
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.
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In-Class Problems
• MUS Sampling example – see your handout (we
will go through this together)
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Evaluation
True State of Account Balance
Auditor’s Decision Based on Not Materially Materially
Sample Evidence Misstated Misstated
Supports fairness of account Risk of incorrect
balance Correct decision acceptance (Type II or
(i.e. account is NOT materially Beta Risk)
misstated)
“Under-auditing”
Does not support fairness of Risk of incorrect
account balance rejection (Type 1 or Correct decision
(i.e. account is materially Alpha Risk)
misstated)
“Over-auditing”
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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 (since each dollar has = likelihood of selection, not each
account).
Because of this, MUS isn’t very helpful in testing management’s
assertion of completeness
Book Audit Tainting
Customer Value Value Difference Factor
Wayne County Medical $ 2,000 $ 2,200 $ (200) -10%
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Nonstatistical Sampling for Tests of
Account Balances
-Very common in practice
-The sampling unit for nonstatistical sampling is normally a customer
account, an individual transaction, or a line item on a transaction. When
using nonstatistical sampling, the following items must be considered:
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Identifying Individually Significant Items
100% of these items are tested because the auditor is not willing to
accept any sampling risk with respect to these items.
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Determining the Sample Size and
Selecting the Sample
Sample Sampling Population book value
= Tolerable – Expected misstatement × Confidence factor
Size
Auditing standards require that the sample items be selected in such a way that
the sample can be expected to represent the population.
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Calculating the Sample Results
In non-statistical sampling, one way of projecting the sampling results to
the population is to simply apply the misstatement ratio in the sample to
the population. This approach is known as ratio projection.
37
MC Question:
The auditor finds a $3,000 misstatement in a sample of
$100,000. The population total is $1,000,000. What is the
total projected misstatement (using ratio projection)?
A. $300,000
B. $3,000
C. $30,000
D. $100,000
E. $1,000,000
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MC Question:
The auditor finds a $3,000 misstatement in a sample of
$100,000. The population total is $1,000,000. What is the
total projected misstatement (using ratio projection)?
A. $300,000
B. $3,000
C. $30,000 (3,000/100,000)*1,000,000
D. $100,000
E. $1,000,000
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Calculating the Sample Results
A second method is the difference projection. This method projects
the average misstatement of each item in the sample to all items in
the population (this method is applied if you look @ the advanced
module @ end of chapter).
Assume
misstatements in a
sample of 100 items The projected
total $300 (for an misstatement would be
average $30,000 ($3 × 10,000).
misstatement of $3),
and the population
contains 10,000
items. 40
Nonstatistical Sampling Example
The auditor’s of Calabro Wireless Service have
decided to use nonstatistical sampling to examine the
accounts receivable balance. Calabro has a total of
11,800 (15 + 250 + 11,535) accounts with a balance of
$3,717,900. The auditor’s stratify the accounts by size
as follows:
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Nonstatistical Sampling Example
The auditor decides . . .
• Based on the results of the tests of controls, the risk of
material misstatement is assessed as low.
• The tolerable misstatement is $55,000, and the expected
misstatement is $15,000.
• The desired level of confidence is moderate based on the other
audit evidence already gathered.
• All customer account balances greater than $25,000 are to be
audited.
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Nonstatistical Sampling Example
$3,717,900 – $550,000
Sample $3,167,900
Size = $40,000 × 1.2 = 95 (rounded)
$55,000 – $15,000
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Nonstatistical Sampling Example
The auditor sent positive confirmations to each of the 110 (95 + 15)
accounts selected. Either the confirmations were returned or
alternative procedures were successfully used. Four customers
indicated that their accounts were overstated and the auditors
determined that the misstatements were the result of unintentional
error by entity personnel. Here are the results of the audit testing:
Amount of
Book Value Audit Value Over-
Stratum Book Value of Sample of Sample Statement
>$25,000 $ 550,000 $ 550,000 $ 549,500 $ 500
>$3,000 850,500 425,000 423,000 2,000
<$3,000 2,317,400 92,000 91,750 250
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Nonstatistical Sampling Example
As a result of the audit procedures, the following projected
misstatement was prepared:
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Let’s do
• Non-stats sampling example – see back page
of your handout (we will go over together in
class)
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CPA MCQ:
In sampling methods used in substantive testing, an
auditor most likely would stratify a population into
meaningful groups if:
• A) probability proportional to size (PPS) sampling
is used.
• B) The population has highly variable recorded
amounts.
• C) The auditor’s estimated tolerable
misstatement is extremely small.
• D) The standard deviation of recorded amounts is
relatively small.
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CPA MCQ:
In sampling methods used in substantive testing, an
auditor most likely would stratify a population into
meaningful groups if:
• A) probability proportional to size (PPS) sampling
is used.
• B) The population has highly variable recorded
amounts.
• C) The auditor’s estimated tolerable
misstatement is extremely small.
• D) The standard deviation of recorded amounts is
relatively small.
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Next:
• Exam 2 review.
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