Details of Balances

1. Details of Balances Is the balance misstated? result is in dollars!

3. Details of Balances Nonstatistical sampling 14 steps (cont.) 8. Estimate misstatements in the population 9. Determine sample size 10. Select sample 11. Perform tests 12. Generalize from the sample to population 13. Analyze misstatements 14. Decide acceptability of population

4. Details of Balances Stratified sampling can be used to emphasize certain population items subdivides population Sampling unit can be: customer account balance individual invoice ARIA = acceptable risk of incorrect acceptance

5. Details of Balances nonstatistical sampling Generalizing to population point estimate is simple percentage of error times dollars in population evaluate difference between point estimate and tolerable misstatement

6. Details of Balances Actions when a population is rejected 1. wait until other areas of audit complete 2. perform tests on problem areas 3. increase sample size 4. adjust account balance 5. request client correct errors in population 6. refuse to give unqualified report

7. Statistical SamplingBalances Monetary Unit Sampling same as: dollar unit sampling cumulative monetary amount sampling sampling with probability proportional to size Use the 14 steps approach Sampling unit is individual dollar Population size is “all dollars”

8. Statistical SamplingBalances Use the 14 steps approach(continued) Preliminary judgment of materiality is used rather than tolerable misstatement Sample selection is done using probability proportional to size sample selection See Table 17-4

9. Statistical SamplingBalances Use the 14 steps approach(continued) Generalization is done with Monetary Unit sampling Attributes sampling tables (p. 470) convert results to dollars results called misstatement bounds

10. Statistical Sampling Assumption 1- 100% misstatement upper 1,200,000 x 3% x 100% = $36,000 lower 1,200,000 x 3% x 100% = $36,000 Assumption 2 - 10% misstatement upper 1,200,000 x 3% x 10% = $3,600 lower 1,200,000 x 3% x 10% = $3,600 Assumption 3 - 20% over 200% under upper 1,200,000 x 3% x 20% = $7,200 lower 1,200,000 x 3% x 200% = $72,000

11. Statistical SamplingBalances When misstatements are found MUS 1. overstatement and understatement are dealt with separately 2. a different misstatement assumption is made for each misstatement, including zero misstatements 3. layers of the computed upper exception rate See Table 17-6

12. Statistical SamplingBalances When misstatements are found MUS (cont.) 4. Misstatement assumptions must be associate with each layer See Table 17-7 Acceptability: MUS Lower misstatement bound and upper misstatement bound must fall between tolerable misstatement acceptable Fig 17-3

13. Statistical SamplingBalances Sample Size :MUS Formula on page 538 Use of MUS increases likelihood of selecting high dollar items reduces cost, fewer items to test relatively easy to use statistical conclusion

14. Variables Sampling uses concept of frequency distribution formulas to determine confidence intervals Three kinds of variables sampling 1. Difference estimation used when there is recorded value and audited value for each item in sample (point estimate plus plus precision interval)

15. Variables Sampling Three kinds of variables sampling (cont.) 2. Ratio estimation - point estimate determined differently - sample dollars misstated multiplied by total recorded population book value 3. Mean-per-Unit Estimation - concern for audited value rather than misstatement- precision interval determined by audited value of sample rather than misstatements

16. Sampling Risks ARIR = Acceptable risk of incorrect rejection (was correct) ARIA =Acceptable risk of incorrect acceptance (was in error)