Unformatted text preview: AR Sampling AR
1. Which procedures  confirmations confirmations 1. Which
2. Sample size 2. Sample auditor judgment considering risk and materiality 3. Which accounts 3. Which 4. When  often “off year  end” 4. When 5. Evaluation of results 5. Evaluation Evaluation of Results Evaluation
1. Identify errors – separate errors from timing separate differences (see prob. 1631 and 1730) 1730) 2. Project errors to population – including consideration of including sampling risk sampling 1. Evaluate acceptability
– Discussion of Bill DeBurger case Sample Size Sample
Key factors • Population size (in $) Population • Tolerable misstatement • Assurance from test  combined IR and CR  assurance from other tests AICPA formula AICPA
1. Select all amounts > tolerable misstatement 2. Remaining amounts based on this formula:
(1) Population amt. (1) X Assurance Tolerable mstmt. Factor = Sample Size (1) Population amount = Book value  (Σ all items > tol. misstatement) Book Assurance Factor Assurance
Assessment of IR X CR Risk That Other Tests Fail To Detect Misstatement Slightly Max < Max Mod. Low Max 3.0 2.7 2.3 2.0 3.0 2.7 2.4 2.0 1.6 2.7 2.3 2.1 1.6 1.2 2.3 2.0 1.6 1.2 1.0 2.0 Maximum Maximum Slightly < max Slightly Moderate Moderate Low Low Sample Size Example Sample
Book value Tolerable misstatement Assurance factor (some error expected, moderate assurance) Total of accounts in excess of Total tolerable misstatement (3 accts) Sample size 1,100,000 x 2.3 = 51 50,000 50,000 (1,1000,000 =1,975,000  875,000) Total sample size (51 + 3) 1,975,000 50,000 2.3 875,000 51 54 Effect of changes in variables on sample size sample
Change in Change variable variable Population Population increase increase Tol. mstmt. Tol. increase increase Assurance Assurance increase increase Effect on sample size Comment Increase Larger population Increase generally requires more evidence more Decrease More materiality; Decrease less evidence Increase More assurance; Increase more evidence 1725(c) 1725(c) Accounts receivable contains a few unusually Accounts large balances. The auditor should: large 1. Eliminate any large balances from the sample. the 2. Continue to draw samples until no large balances appear in the sample. balances 3. Stratify the population so the large 3. balances are reviewed separately. balances 4. Increase the sample size to lessen the 4. impact of the large balances. impact Error Projection Example Error
Sample Errors + Pop. Book Untstd . % Book. Proj. Book. Strat. Value Amts. Error Value Error 1 88,955 (2,740) (.0308) 88,955 (2,740) 2 3 43,955 13,105 971 2,158 389 .0221 .1647 71,235 47,105 207,295 1,572 7,757 6,589 Tot. 146,055 Tot. Options if projected error exceeds tolerable misstatement tolerable
a. Adjust the account balance a. Adjust b. Increase the sample size b. sample c. Perform expanded tests in specific c. areas (isolate the error) areas d. Request the client to correct the d. population population e. Do not issue an unqualified opinion Error Adjustment Error
A/R Book value A/R A/R tested A/R Overstatement errors  actual Overstatement Projected error Projected Tolerable misstatement Tolerable 2,000,000 400,000 30,000 150,000 100,000 After Adjustment After for Known Errors
A/R Book value A/R tested Unadjusted errors Unadjusted Adjusted projected error Adjusted Tolerable misstatement 2,000,000 400,000 0 120,000 120,000 100,000 Options: 1) Additional adjustment 20,000+ 2) More testing to reduce projection 2) ...
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 Spring '11
 SMITH

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