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Chap.S 8 & 9-Audit Sampling: An Application To Tests of Controls & Substantive Testings
Chap.S 8 & 9-Audit Sampling: An Application To Tests of Controls & Substantive Testings
AUDIT RISK
SAMPLING RISK Samples taken may not be representative of the population tested. Overcome: to increase number or sample size. NON-SAMPLING RISK Error in conclusion not due to sample size but to nature of evidence that is persuasive rather than conclusive. i.e. inappropriate audit procedures,
misinterpret evidence, or failure in recognizing the error.
AUDIT PROCEDURES
Items most likely to contain misstatements Items containing selected population characteristics Large dollar coverage
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The auditor is normally attempting to determine the operating effectiveness of a control procedure in terms of deviations from the prescribed internal control policy.
Attributes Sampling
Example: Audit test on how often a credit check is not performed on customer orders before shipment - sampling unit = customer order forms how often an invoice is not sent after shipment is made - sampling unit = invoice or shipping documents? Common use of attribute sampling test 10 of controls
Focus on monetary value rather than rate of occurrences. To test overstatement (high value items).
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Stopping the test before completion. Egs. List of invoices from creditors to see if the accounts are paid.
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Com bine d Assessment of Control Risk and Inherent Risk Maximum Slightly belo w maximum Mo derate Low
Risk that Other Su bstantive Proce dures will Fail to Detect Material Misstatements Maximum Slightly belo w maximum 2.7 2.4 2.1 1.6 Moderate Substantial
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Jones has made the following decisions: Based the results of the tests of controls, a low assessment is made for inherent & control risk. Tolerable misstatement allocated to accounts receivable is $40,000. The expected amount of misstatement is $15,000. There is moderate risk that other auditing procedures will fail to detect material misstatements. All customer account balances greater than $25,000 are to be audited.
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Com bine d Assessment of Control Risk and Inherent Risk Maximum Slightly belo w maximum Mo derate Low
Risk that Other Su bstantive Proce dures will Fail to Detect Material Misstatements Maximum Slightly belo w maximum 2.7 2.4 2.1 1.6 Moderate Substantial
Results
Strata > $25,000 > $3,000 < $3,000 Book Value of Strata $ 550,000 850,500 2,317,400 Book Value of Sam ple $ 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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Ratio estimation - % of $ misstatement in sample population (Amount of misstatement relate to size of item)
Difference estimation The $ misstatement in sample items population (Misstatements to be relatively constant for all items)
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Projected Misstatement
Strata > $25,000 > $3,000 < $3,000 Amount of Misstatement $ 500 2,000 250 Percentage of Strata Sampled 100% 425,000 850,500 = .50 92,000 2,317,400 = .073 Projected Misstatement $ 500 4,000 6,250 10,750
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CONCLUSION
If projected misstatements > tolerable misstatement, conclusion: there is unacceptably high risk that the account is misstated. If projected misstatements is considerably < tolerable misstatement; compare the projected misstatements to the expected misstatements. If projected misstatement is < expected misstatement, conclusion: there is acceptably low sampling risk that projected misstatement exceeds tolerable misstatements. If projected misstatement significantly > expected misstatements, conclusion: there is unacceptably high risk that true misstatement exceeds tolerable 25 misstatements.