Basic Steps in Sampling Account Balances and Assertions PDF

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Basic Steps in Sampling Account Balances and Assertions...

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Basic Steps in Sampling Account Balances and Assertions 1. Specify the audit objective of the test and define a misstatement Factual + projected misstatements = estimated misstatement Compare to performance materiality (tolerable error) 2. Define the population from which the auditor takes the sample Define the Sampling Unit Ensure completeness of the population Identify Individually Significant Items Top Stratum Items: Large dollar amount items that are significant Lower Stratum Items: All other items 3. Choose and appropriate sampling method Probability proportional to size sampling (MUS) 4. Determine the sample size 5. Select sample items and perform the substantive procedure 6. Evaluate the sample results 7. Document all phases of the sampling process Steps 4.5.6 have to be done depending on the type of sampling method used When the total estimated misstatement exceeds the tolerable misstatement • Ask client to correct the factual misstatements • Analyze the detected misstatements for common problem(s) • Design an alternative audit strategy • Expand the sample • Change the audit objective to estimating the correct value Monetary Unit Sampling (MUS), Probability Proportional to Size (PPS) Sampling MUS is a sampling method based on attributes sampling but involving dollar misstatements rather than control failure rates. It is a statistical sampling method. Strengths of MUS include: • Easier to apply than other statistical sampling approaches • Automatic selection of sample in proportion to an items dollar amount providing automatic stratification • If low amounts of misstatements are expected, MUS provides very efficient sample size Situations in which MUS might be used: • Accounts receivable confirmations (when credit balances are not significant) • Loans receivable confirmations • Inventory price tests when low amount of misstatements are expected and no significant amounts of understatements are expected • Fixed-asset additions tests where existence is the relevant assertion Difficulties using MUS: • MUS not designed for testing for understatement • If understatements are identified in the MUS sample, special considerations are

necessary when evaluating the sample • Selection of zero or negative balances requires special design considerations Situations in which MUS might not be the most appropriate • Accounts receivable balances with large credit balances • Inventory test counts and price tests in which large amounts of under and overstatements are expected Designing an MUS Sample Population: Amount of Dollars in the population Sample Size: Selected on the basis of Risk of Incorrect Acceptance, ratio of expected to tolerable misstatement, and ratio of tolerable misstatements to population When using a table to determine sample size, always round in a manner that yields a bigger sample size. Round up for Ratio of Expected to tolerable, round down the tolerable to population Sampling Interval is a dollar value = Population Size / Sample Size Every nth dollar is selected based on sampling interval with a random start Page 370 in the book for exact procedure of selecting the sample under MUS Zero and negative balances Zero balances should be excluded from the sample and evaluated separately Negative balances can be changed to positive and included in the population but only if there are only few negative balances and few or no misstatements are expected. Otherwise, exclude from population and test separately. Evaluating a MUS Sample Total Estimated Misstatement: Basic Precision x Sampling Interval + Factual misstatement in Top Stratum + Cumulative Tainting Percentage found in Lower Stratum Factual Misstatements x Sampling Interval + Incremental allowance for sampling risk in lower stratum Basic Precision x Sampling Interval: Due to only testing a sample, one must account for an allowance for sampling risk. Basic precision is the confidence factor for a given Risk of Incorrect Acceptance, when no misstatements were detected. At such a risk of 5% one is 95% confident that the population misstatement will not exceed 3.00 x Sampling Interval Factual misstatement in Top Stratum: Since all items in the top stratum were tested, no allowance must be made for sampling risk

Cumulative Tainting % found in Lower Stratum: If a detected Book value was deemed to be overstated by X (X=Book Value – Audit Value), the Tainting % is X/Book Value. Add all the tainting % and multiply it by the Sampling Interval. Incremental allowance for sampling risk in lower stratum: To account for sampling risk of not testing every item in the lower stratum, an allowance has to be made. Add up the projected misstatements (Sampling Interval x Individual Tainting %) from high to low and multiply them with the incremental change in confidence factor for each expected misstatement. Understatements in the Sample When understatements are only scarce one can simply omit them. When they are more regular they can be analyzed the same way individually. However, no solid conclusions should be drawn from this as MUS is not designed for understatements. One should consider additional procedures for understatements...