Chapter 17:
Audit Sampling for tests of Details of balances.
Learning Objectives:
- Differentiate audit sampling for tests of details of balances and for tests of controls and substantive tests of transactions.
- Apply non-statistical sampling to tests of details of balances.
- Apply monetary unit sampling.
Tests of controls and substantive tests of transactions versus tests of details of balances:
Tests of controls and substantive tests of transactions Tests of details of balances
• The primary concern is testing the effectiveness of internal controls and the rate of monetary misstatements.
• The purpose is to determine if the exception rate in the population is sufficiently low to justify reducing assessed control risk to reduce substantive tests. • The concern is determining whether the monetary amount of an account balance is materially misstated.
• Attributes sampling, therefore, is seldom useful for tests of details of balances.
Steps of audit sampling for tests of details of balances versus Steps of audit sampling for tests controls and substantive tests of transactions:
Tests of controls and substantive tests of transactions Tests of details of balances
Plan the Sample
1- State the objectives of the audit test.
2- Decide whether audit sampling applies.
3- Define attributes and exception conditions.
4- Define the population.
5- Define the sampling unit.
6- Specify the tolerable exception rate.
7- Specify acceptable risk of assessing control risk too low.
8- Estimate the population exception rate.
9- Determine the initial sample size. 1- State the objectives of the audit test.
2- Decide whether audit sampling applies.
3- Define misstatement conditions.
4- Define the population.
5- Define the sampling unit.
6- Specify the tolerable misstatement.
7- Specify acceptable risk of incorrect acceptance ARIA.
8- Estimate misstatement in the population.
9- Determine the initial sample size.
Select the sample and perform the audit procedures
10- Select the sample.
11- Perform the audit procedures. 10- Select the sample.
11- Perform the audit procedures.
Evaluate the results
12- Generalize from the sample to the population.
13- Analyze the exceptions.
14- Decide the acceptability of the population. 12- Generalize from the sample to the population.
13- Analyze the misstatements.
14- Decide the acceptability of the population.
Acceptable Risk of Incorrect Acceptance (ARIA):
• It is the risk tat the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is greater than tolerable misstatement.
• It is a measure of the auditor’s desired assurance for an account balance, if the auditor wants more assurance for an account balance ARIA is set lower.
• ARIA is the equivalent term to ARACR for tests of control and substantive test of transactions.
• There is an inverse relationship between ARIA and required sample size.
Factors affecting ARIA:
Factors Example Effect on ARIA Effect on
Sample size
Effective internal control Reduced control risk increase Decrease
Substantive tests of transactions No exceptions were found increase Decrease
Acceptable audit risk Increased Accep-table audit risk increase Decrease
Analytical procedures No indication of misstatement increase Decrease
The point estimate:
is an estimate of the total amount of misstatement in the population as projected from the known misstatements found in the sample. The projection is based on either the average misstatement in the sample times the population size, or the net percent of misstatement in the sample times the population book value.
Determining the initial sample size:
17-27 P: 545
You are planning to use non-statistical sampling to evaluate the results of accounts receivable confirmation for Meridian Company. You have already performed tests of controls for sales, sales returns and allowances, and cash receipts, and they are considered excellent. Because of the quality of the controls, you decide to use an acceptable risk of incorrect acceptance of 10%. There are 3,000 accounts receivable with gross value of $6,900,000. The accounts are similar in size and will be treated as a single stratum. An overstatement or understatement of more than $150,000 would be considered material.
a. Calculate the required sample size. Assume your firm uses the following non-statistical formula to determine sample size.
Sample size = (Book value of population ÷Tolerable misstatement)× Assurance factor:
5% ARIA = 3
10% ARIA = 2
20% ARIA = 1
b. Assume that instead of good results, poor results were obtained for tests of controls and substantive tests of transactions. How would this affect your required sample size? How would you use this information in your sample size determination?
c. Assume a total book value of $230,000 for the 100 accounts selected for testing. You uncover three overstatements totaling $1,500 in the sample. evaluate whether the population is fairly stated.
a.
Sample size = (Book value of population ÷Tolerable misstatement)× Assurance factor
Assurance factor that related to ARIA of 10% = 2
Sample size = ($6,900,000 ÷150,000)× 2
= 92 items
b. If poor results were obtained for testes of controls and substantive tests of transactions for sales, sales returns, allowances, and cash receipts, the required sample size for tests of details of balances would need to be increased. Using the formula of determining sample size the auditor would increase sample size by increasing assurance factor (lowering ARIA).
c. The direct projection of error for the sample can be computed as follows:
(Errors in sample ÷ sample book value)
× population book value
= $1,500÷ 230,000)× 6,900,000
= $45,000 overstatement
The projected error of $45,000 is below tolerable misstatement of $150,000 and provides an allowance for sampling risk of $105,000 (150,000 – 45,000). Accordingly, the population is deemed to fairly stated.
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