For misstatements in which BV < SI, rank order If ULM < or = TM, conclude that population is not

projected misstatements from largest to misstated by more than TM at the specified level
smallest, multiply by corresponding incremental of sampling risk.
factor (from table 10.4) and sum to calculate IA.
If ULM > TM, conclude that the sample results do
After computing the incremental allowance, not provide enough assurance that the
auditor computes for the total upper limit on population misstatement is less than the TM
misstatements (ULM). When misstatements are and balance adjustment may be warranted.
found, the ULM is computed by adding together
Example:
the projected misstatement, the basic precision,
and the incremental allowance. If no Based on Table 10.7 calculation of ULM, the
misstatements are found in the sample, the ULM auditor compares the computed ULM to TM. ULM
consists only the basic precision. (P410,886) exceeds the amount of TM (364,000).
Auditor would not accept the population as being
Example:
materially correct.
After performing confirmation procedures, the
The auditor may do the following:
auditor found the following three
misstatements:  Adjustment of the account
Book Value Audited Value  Expansion of the test
P100 P90  Audit report modification
2,000 1,900
Adjustment of the account. Adjust the P102,008
102,000 102
in actual misstatement found in the sample
(Table 9-5). After the adjustment, the ULM was
/ reduced to P308,878 (P410,886-102,008) and
enable auditor to accept the account as being
materially correct.

APPLICATION OF THE STEPS USING CLASSICAL

VARIABLES TECHNIQUE FOR SUBSTANTIVE TESTS

Classical variables sampling plans enable

auditors to estimate a numerical quantity such
as peso amount of an account balance. This
makes these techniques particularly useful for
performing substantive tests. Classical variable
sampling method includes:

 Mean-per-unit estimation
 Ratio estimation
 Difference estimation
Step 7: Draw final conclusion
MEAN-PER-UNIT ASSUMPTION (MPU)
After calculating the upper limit on
MPU uses the mean audited value of the items in
misstatements, the auditor compares it to the
a sample to calculate an estimate of the total
tolerable misstatement, the sample results
audited value of the account. An estimate of the
support the conclusion that the population is not
total value of the population is obtained by
misstated by more than tolerable misstatement
multiplying the mean audited value of the
at a specified level of sampling risk. If the upper
sample (sample mean) to the number of items in
limit misstatement exceeds the amount of
the population. The projected misstatement may
tolerable misstatement, the sample results do
then be calculated as the difference between the
not provide the auditor with enough assurance
estimated total audited value and the client’s
that the misstatement in the population is less
book value. The general assumption for MPU is
than the tolerable misstatement.
that a sample’s mean audited value will, for a
Compare ULM to TM: certain sampling risk and allowance for
sampling risk, represent the true audited mean PLANNING
of the population.
Step 1: Determine the Test Objectives
Familiarity of the concepts of normal
Example:
distribution and standard deviation is
important. The objective of the test is to determine the
existence and gross valuation of recorded
The steps in the application of sampling in
accounts receivable of the client. The auditor
substantive tests will also be followed.
wish to test the book value of accounts
The following formulas are used in the MPU receivable by confirming a sample of the
estimation: accounts through direct correspondence with
the customers.
Determining the sample size
Step 2: Define the Population Characteristics
𝑁 𝑥 𝑈 𝑥 𝑆𝐷
𝑛=( )
𝐴 The client’s records have 100,000 accounts
recorded at a total book value of P6,250,000. The
N = population size
auditor believes that the customer will be able to
UI = incorrect rejection coefficient (Table 10.8)
confirm the total outstanding balance. Therefore,
SDE = estimated population standard deviation
the account balance is used as the sampling unit
A = planned allowance for sampling risk
instead of the individual transactions making up
Standard deviation the balance.

 Population SD Step 3: Determine the Sample Size

The population had a book value of P6,250,000
and the auditor decided on a tolerable
misstatement for the account of P364,000.
Auditor assesses control risk at the maximum
 Sample SD level and inherent risk at 100% and decides a 5%
risk of incorrect acceptance (RIA). Additionally,
based on prior audits, the auditor expects
P50,000 of misstatement in the population. 4.6%
risk of incorrect rejection is planned by the
Calculation of planned allowance for sampling auditor.
risk (A)

TM = tolerable misstatement
Ua = incorrect acceptance coefficient (Table 10.8)
Ur = incorrect rejection coefficient (Table 10.8)
Adjusted Allowance for Sampling Risk (A’)

TM = tolerable misstatement
Ua = incorrect acceptance coefficient (Table 10.8)
SDC = Sample (calculated) standard deviation
n = sample size
ILLUSTRATION OF MPU ESTIMATION
The standard deviation of P15 is calculated using = P6,100,000
the generalized audit software program used by
Acceptance interval
the auditor.
= Estimated total audited value +/-
Table 10.8 Risk Coefficients
Adjusted allowance for sampling risk
Acceptable Incorrect Incorrect
Level of Risk Acceptance Rejection = P6,100,00 +/- P200,000
Coefficient Coefficient = [P5,900,000 – P6,300,000]
1.0% 2.33 2.56 Projected misstatement
4.6 1.68 2.00
5.0 1.64 1.96 = Estimated total audited value – Book
10.0 1.28 1.64 value of population
15.0 1.04 1.44 = P6,100,000 – P6,250,000
20.0 0.84 1.28 = P150,00 overstatement
25.0 0.67 1.15
30.0 0.52 1.04 Table 10.9 Auditors’ sample of accounts
40.0 0.25 0.84 receivable
50.0 0.00 0.67

PERFORMANCE
Step 4: Select Sample Items
Example:
The client’s accounts receivable is from
residential customers and do not vary greatly in
size. The auditor decides to use a random
number table to select an unstratified random
sample.
Step 5: Perform the Audit Procedures
Example:
The auditor sends confirmation letter to the
customers selected.
EVALUATION
Step 6: Evaluate the Sample Results
Example:
Using table 10.9 (summary of confirmation of
225 accounts), the mean audited value is P61 and
the mean book value is P63. The mean book value
of the entire population is 62.50
(P6,250,000/100,000). The difference of P0.50 per
account is due to chance and is not directly used
in the MPU analysis.
The confirmation results also indicate a
standard deviation equals that used in planning
and the adjusted allowance for sampling risk
also equals the planned allowance of P200,000.
Estimated total audited value
= Mean audited value x No. of accounts
= P61 x 100,000 accounts
Step 7: Draw Final Conclusions
When the auditors’ estimate of the population’s
standard deviation is exactly the same as that
found in the sample, the planned allowance for
sampling risk may be used for evaluation
purposes. If the book value falls within the
interval, the sample results support the
conclusion that the account balance is
materially correct. If the client’s book value does
not fall within the interval, the sample results
indicate that the risk that the account balance is
materially misstated is too high.
Example:
The client’s book value of P6,250,000 falls within
the acceptance interval. The sample results
indicate that the client’s valuation of accounts
receivable is not materially misstated. The
projected misstatement of P150,000 will be
considered by the auditor when analyzing the
total amount of potential misstatement in the
financial misstatements. The auditor may
suggest that the client correct any accounts that
the test revealed to be misstated, even though