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Chapter 18 - Answer PDF
Chapter 18 - Answer PDF
AUDITSAMPLINGFORSUBSTANTIVETESTS
Questions
1.
2.
The two methods of projecting the known misstatement to the population are the
average difference method and the ratio method. Refer to Chapter 19 for
formula expressions of each.
3.
The important thing is to audit all the sample units. You cannot simply discard
one that is hard to audit in favor of adding to the sample a customer whose
balance is easy to audit. This action might bias the sample. If considering the
entire balance to be misstated will not alter your evaluation conclusion, then you
do not need to work on it any more. Your evaluation conclusion might be to
accept the book value, as long as the account counted in error is not big enough
to change the conclusion. Your evaluation conclusion might already be to reject
the book value, and considering another account to be misstated just reinforces
the decision.
If considering the entire balance to be misstated would change an acceptance
evaluation to a rejection evaluation, you need to do something about it. Since
the example seems to describe a dead end, you may need to select more
accounts (expand the sample) and perform the procedures on them (excluding
confirmation) and reevaluate the results.
4.
Two main reasons for stratifying a population when sampling for variables
(peso) measurement:
a.
Some units may be individually significant (e.g., large) and taking sampling
risk with respect to them is not a good idea.
5.
The tolerable misstatement (judged for the audit of a particular account balance)
must be less than the monetary misstatement considered material to the overall
financial statements. Also, the aggregation of multiple tolerable misstatement
amounts for several different balances under audit must be equal to or less than
the amount of monetary misstatement considered material to the overall
statements.
6.
7.
Sample Size
Relation
Inverse
Smaller
Larger
Inverse
Smaller
Larger
Inverse
Larger
Smaller
Direct
Larger
Smaller
Direct
Larger
Smaller
Direct
Figure the total amount of actual misstatement found in the sample. This
amount is called the known misstatement.
9.
18-3
10. Account balances also can be audited, at least in part, at an interim date. When
account balance audit work is done before the companys year-end date, auditors
must extend the interim-date audit conclusion to the balance-sheet date. The
process of extending the audit conclusion amounts to nothing more (and nothing
less) than performing substantive-purpose audit procedures on the transactions
in the remaining period and on the year-end balance to produce sufficient
competent evidence for a decision about the year-end balance.
Additional considerations include:
a.
b.
c.
If the companys internal control over transactions that produce the balance
under audit are not particularly strong, you should time the substantive
detail work at year-end instead of at interim.
If control risk is high, then the substantive work on the remaining period
will need to be extensive.
If rapidly changing business conditions might predispose managers to
misstate the accounts (try to slip one by the auditors), the work should be
timed at year-end. In most cases, careful scanning of transactions and
analytical review comparisons should be performed on transactions that
occur after the interim date.
b
a
c&d
b
5.
6.
7.
8.
c
b
b
d
9.
10.
11.
12.
Supporting Computations:
Audited Value 47,520
3. c. Book Value
48,000
d.
P480
120
1,200 x P4
P4
=
P4,800
d
a
a
c
13.
14.
15.
16.
a
a
c
d
17.
18.
19.
20.
d
b
c
d
7.
18-5
3.5%
2.
a.
b.
Attention to, and quantification of, alpha and beta risk assist the auditor in
applying an audit risk approach to substantive testing. During the audit
planning stage, the auditor identifies areas of high audit risk and sets
detection (beta) risk low for these areas. The result is that more substantive
testing is devoted to the high risk areas relative to the lower risk areas. This
approach enhances both audit efficiency and audit effectiveness.
c.
Because it is closely related to the basis for the auditors opinion, alpha risk
is usually set equal to overall audit risk. Beta risk is set on the basis of the
auditors evaluation of inherent risk and control risk. The greater these risk
factors, as determined by the auditor during the audit planning stages, the
lower the beta risk set by the auditor. The lower the acceptable beta risk,
the larger the sample sizes for substantive testing purposes. Alpha and beta
risk, therefore, provide the necessary link between audit risk analysis and
substantive audit testing.
a.
(1) Mean-per-unit estimates the total value of a population by (1) using the
sample mean as an estimate of the true population mean, and (2)
extending this estimated population mean by the number of items in the
population. The computations are as follows:
(1) Estimated population mean =
P582,000 / 200 lots = P2,910 per lot
(2) Estimated total value =
P2,910 per lot x 2,000 lots = P5,820,000
18-7
of total value is not affected by the mean value of items in the sample.
However, sampling error may still be present if the sample lots are not
representative of the population with respect to the ratio of audited values
to book values.
3.
The auditors would project the misstatement found in the sample to the
population using either the ratio or difference approach. The ratio approach
would result in a projected misstatement of P65,500. This may be computed by
first calculating the ratio of the audited to book value as 1.0131 [P23,100 /
P22,800 (since there is a net understatement of P300, the audited value is
P23,100)] and estimating the audited value of the population as:
1.0131 x P5,000,000 = P5,065,500 (rounded)
The projected misstatement is thus P65,500 under the ratio method.
The difference approach results in an average difference of P1.50 (P300 net
difference divided by 200 items). Multiplying by the 100,000 invoices indicates
a projected misstatement of P62,400 (P1.50 x 41,600).
4.
The audit risk (ultimate risk) of material misstatement in the financial statements
(AR) is the product of:
(1) Inherent risk (IR), the risk of material misstatement in an assertion,
assuming there were no related internal controls.
(2) Control risks (CR), the risk of material misstatement occurring in an
assertion, and not being prevented or detected on a timely basis by the
internal control structure.
(3) Detection risk (DR), the risk that the auditors procedures will lead them to
conclude an assertion is not materially misstated, when in fact such
misstatement does exist.
In equation form, this relationship is expressed as follows:
AR = IR x CR x DR
This equation may be restated to solve for the allowable detection risk as
follows:
DR = AR / (CR x IR)
Using the risk levels set forth in the problem, the allowable risk of reliance upon
substantive tests is computed as illustrated below:
DR = .02 / (.2 x .5) = .20
5.
a.
Sample size =
Tolerable misstatement
(Expected misstatement x Expansion factor)
P500,000 x 3
Sample size =
69
Note: The reliability factor is from the zero misstatements row of the
PPS sampling table given in the case.
(2) The sampling interval is calculated simply by dividing the book value
of receivables by the sample size, as follows:
Sampling interval = Recorded receivables / Sample size
= P500,000 / 69 = P7,246
b.
Audite
d
Value
P 47
760
8,100
Misstatemen
t
P 3
40
400
=
Taintin
g%
6%
5%
NA
Samplin
g
Interval
P7,246
7,246
NA
Projected
Misstatemen
t
P 435
362
400
P1,197
3.0
P7,246
P21,738
Projected
Incremental
.75
.55
18-9
Allowance
P435
362
P326
199
P525
NOTES:
Projected misstatement
(a) Tainting percentages are calculated as the difference between book
and audited value divided by book value (e.g., (P50 P47) / P50 =
6%).
(b) No tainting percentage is calculated for items in excess of the
sample interval and the actual misstatement is extended to
projected misstatement (as for the third error).
Basic precision is always the reliability factor for zero misstatements
multiplied times the sampling interval.
Incremental allowance
(a) Reliability factors are read from the PPS sampling table given in
the case, starting at zero misstatements.
(b) Increment 1 is the difference in the two adjacent reliability
factors minus 1 (e.g., 4.75 3.00 1.00 = .75).
(c) Misstatements in excess of the sampling interval are not
considered in the incremental allowance. This is because the
nature of the process requires that all items in excess of the
sampling interval be included in the sample therefore no
allowance for items not in the sample is necessary.
6.
c.
The results obtained in part b would indicate that the auditors may accept
the population as not containing a tolerable misstatement at the 5 percent
level of risk of incorrect acceptance. The auditors would also consider the
results obtained in conjunction with other audit tests.
a.
b.
c.
P300,000
/ 60
P5,000
Projected misstatement =
Book
Valu
e
P 400
500
3,000
Audite
d
Value
P 320
0
2,500
Misstatemen
t
P 80
500
NA
Taintin
g%
20%
100%
NA
Samplin
g
Interval
P1,000
1,000
NA
Projected
Misstatemen
t
P 200
1,000
500
P1,700