Audit Sampling for Tests of Details of Balances - Ch. 17
Terms
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- Acceptable Risk of Incorrect Acceptance
- The risk that the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance is equal to or greater than tolerable misstatement.
- Misstatement Bounds
- An estimate of the largest likely overstatements and understatements in a population at a given ARIA, using monetary unit sampling.
- Monetary Unit Sampling (MUS)
- A statistical sampling method that provides upper and lower misstatement bounds expressed in monetary amounts; also referred to as dollar unit sampling (DUS), cumulative monetary amount sampling, and sampling with probability proportional to size (PPS).
- Point Estimate
- A method of projecting from the sample to the population to estimate the population misstatement, commonly by assuming that misstatements in the unaudited population are proportional to the misstatements found in the sample.
- Probability Proportional to Size Sample Selection (PPS)
- Sample selection of individual dollars in a population by the use of random or systematic sample selection.
- Statistical Inferences
- Statistical conclusions that the auditor draws from sample results based on knowledge of sampling distributions.
- Stratified Sampling
- A method of sampling in which all the elements in the total population are divided into two or more subpopulations that are independently tested and statistically measured.
- What is the sampling unit in MUS?
- The individual dollar in an account balance. This puts greater emphasis on physical units with larger recorded balances. Due to this there is no need to use stratified sampling with MUS, because it occurs automatically.
- What is the population size in MUS?
- The recorded dollar population.
- What term is used to identify the process of determining the tolerable misstatement for MUS process?
- Preliminary judgment of materiality.
- What is a primary problem in using the PPS method of sampling?
- Populations with a zero balance or a small balance have either no or a very small chance of being selected although there may be misstatements in these accounts. Also, the inability to include negative (credit) balances in accounts.
- What steps must the auditor do to generalize from the sample results to the population?
- (1) Project misstatements from the sample results to the population, (2) Determine the related sampling error.
- What are four important aspects to generalizing from the sample to the population?
- (1) Attributes sampling tables are used to calculate the results, replacing ARACR with ARIA. (2) The attribute results must be converted to dollars. Estimating the rate of population dollars that contain a misstatement is way of estimating the total dollar misstatement. (3) The auditor must make an assumption about the percentage of misstatement for each population item that is misstated. (4) Determine the upper misstatement bound. This last step is an extremely important part of MUS.
- What is the appropriate percent of misstatement assumption?
- Ultimately it is the auditor's decision, in the absence of convincing information most auditor's set it at 100% unless there are misstatements in the sample results.
- What steps do you follow if misstatements are found in your sample?
- (1) Overstatement and understatement amounts are dealt with separately and then combined, first calculate the bounds then reduce the bounds by the point estimate. (2) A different misstatement assumption is made for each misstatement, including the zero misstatements. (3) The auditor must deal with layers of the CUER from the attributes sampling table. (4) Misstatement assumptions must be associated with each layer.
- How are the adjustments of bounds for offsetting amounts made?
- (1) A point estimate of misstatements is made for both over and under misstatements. (2) Each bound is reduced by the opposite point estimate.
- How is the point estimate for understatments calculated?
- Take the misstatement assumption for each understatement and add those together. Take that number and divide it by your sample size. Multiply that answer by the recorded amount of accounts receivable. This renders the understatement point estimate. Reverse this process for the overstatement point estimate.
- What is the decision rule for MUS?
- If both the lower misstatement bound (LMB) and upper misstatement bound (UMB) fall between the understatement and overstatement tolerable misstatement amounts, accept the conclusion that the book value is not misstated by a material amount.
- How is the tolerable misstatement (preliminary judgment about materiality) adjusted?
- If misstatements in non-MUS tests are expected, tolerable misstatement would be materiality less those amounts.
- Why is MUS appealing to auditors?
- (1) Automatically increases the likelihood of selecting high dollar items from the population being audited. (2) Reduces the cots of doing the audit testing because several sample items are tested at once. (3) Because of its ease of application. (4) MUS provides a statistical conclusion rather than a nonstatistical one.
- What are the primary disadvantages to MUS?
- (1)The total misstatement bounds resulting when misstatements are found may be too high to be useful to the auditor. (2) It may become cumbersome to select PPS samples from large populations without computer assistance.
- When is MUS commonly used?
- (1) When zero or few misstatements are expected, a dollar result is desired, and the population data are maintained on computer files.