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McGraw-Hill/Irwin
Purpose
Sampling Techniques
Statistical - Monetary Unit Sampling ( MUS) - Classical variable sampling
Non-statistical
LO# 1
2. Tolerable misstatement.
3. Estimated misstatement. Population plays a bigger role in some of the sampling techniques used for substantive testing. Misstatements discovered in the audit sample must be projected to the population, and there must be an allowance for sampling risk. 9-4
LO# 1
LO# 1
LO# 2
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LO# 2
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LO# 2
LO# 2
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LO# 2
LO# 2
Sampling may be used for substantive testing to: 1. Test the reasonableness of assertions about a financial statement amount (i.e., is the amount fairly stated). This is the most common use of sampling for substantive testing. 2. Develop an estimate of some amount.
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LO# 2
For MUS the population is defined as the monetary value of an account balance, such as accounts receivable, investment securities, or inventory.
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LO# 2
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LO# 2
A misstatement is defined as the difference between monetary amounts in the clients records and amounts supported by audit evidence.
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LO# 2
Factor Desired confidence level Tolerable mistatement Expected mistatement Population size
LO# 2
The auditor selects a sample for MUS by using a systematic selection approach called probabilityproportional-to-size selection. The sampling interval can be determined by dividing the book value of the population by the sample size. Each individual dollar in the population has an equal chance of being selected and items or logical units greater than the interval will always be selected. 9-17
LO# 3
(93)
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LO# 3
After the sample items have been selected, the auditor conducts the planned audit procedures on the logical units containing the selected dollar sampling units.
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LO# 3
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LO# 3
LO# 3
Because the Axa balance of $32,549 is greater than the $3,284 $21,893 = 15% interval of $26,882, no sampling risk is added. Since all the dollars in the large accounts are audited, there is no sampling risk associated with large accounts.
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LO# 3
NA
2,500 150,621
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LO# 3
In our example, the final decision is whether the accounts receivable balance is materially misstated or not. We compare the tolerable misstatement to the upper misstatement limit. If the upper misstatement limit is less than or equal to the tolerable misstatement, we conclude that the balance is not materially misstated.
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LO# 3
LO# 3
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Why is the Sampling Interval Rather than the Sample Size Used in Evaluating MUS Results?
LO# 3
Due to simplifying assumptions about accounting populations, the misstatement factors used in most MUS evaluation approaches are nearly identical to the misstatement factors associated with a sample size of 100, regardless of the actual sample size used by the auditor. Always use these factors:
Number of Errors 0 1 2 3 4 95% Confidence Level Misstatement Incremental Factor Increase 3.0 4.7 1.7 6.2 1.5 7.6 1.4 9.0 1.4 90% Confidence Level Misstatement Incremental Factor Increase 2.3 3.9 1.6 5.3 1.4 6.6 1.3 7.9 1.3
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LO# 3
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LO# 4
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LO# 4
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LO# 4
Assessment of Risk of Material Misstatement Maximum Slightly below maximum Moderate Low
Desired Level of Confidence Slightly Below Maximum Maximum Moderate 3.0 2.7 2.3 2.7 2.4 2.0 2.3 2.1 1.6 2.0 1.6 1.2
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LO# 4
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LO# 4
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LO# 4
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LO# 4
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LO# 4
o The tolerable misstatement is $40,000, and the expected misstatement is $15,000. o There is a moderate risk that other auditing procedures will fail to detect material misstatements. o All customer account balances greater than $25,000 are to be audited.
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LO# 4
Sampling population book value Sample = Tolerable - Estimated misstatement Assurance factor Size $3,717,900 $550,000
Sample = Size
$55,000 $15,000
$3,167,900 $40,000
1.2 = 95 (rounded)
Combined Assessment of Inherent and Control Risk Maximum Slightly below maximum Moderate Low
Risk That Other Substantive Procedures Fail to Detect Material Misstatement Slightly Below Maximum Maximum Moderate Low 3.0 2.7 2.3 2.0 2.7 2.4 2.0 1.6 2.3 2.1 1.6 1.2 2.0 1.6 1.2 1.0
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LO# 4
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 client personnel. Here are the results of the audit testing:
Stratum >$25,000 >$3,000 <$3,000 Book Value $ 550,000 850,500 2,317,400 Book Value of Sample $ 550,000 425,000 92,000 Audit Value of Sample $ 549,500 423,000 91,750 Amount of OverStatement $ 500 2,000 250
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LO# 4
The total projected misstatement of $10,800 is less than the expected misstatement of $15,000, so the auditors may conclude that there is an acceptably low risk that the true misstatement exceeds the tolerable misstatement. 9-39
LO# 4
LO# 5
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LO# 5
A sampling distribution is useful because it allows us to estimate the probability of observing any single sample result.
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LO# 5
In classical variables sampling, the sample mean is the best estimate of the population mean.
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LO# 5
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LO# 5
End of Chapter 9
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