Chapter_17_Solutions - 1 Chapter 17 Audit Sampling for Tests of Details of Balances Review Questions 17-1 The most important difference between(a

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Unformatted text preview: 1 Chapter 17 Audit Sampling for Tests of Details of Balances Review Questions 17-1 The most important difference between (a) tests of controls and substantive tests of transactions and (b) tests of details of balances is in what the auditor wants to measure. In tests of controls and substantive tests of transactions, the primary concern is testing the effectiveness of internal controls and the rate of monetary misstatements. When an auditor performs tests of controls and substantive tests of transactions, the purpose is to determine if the exception rate in the population is sufficiently low to justify reducing assessed control risk to reduce substantive tests. When statistical sampling is used for tests of controls and substantive tests of transactions, attributes sampling is ideal because it measures the frequency of occurrence (exception rate). In tests of details of balances, the concern is determining whether the monetary amount of an account balance is materially misstated. Attributes sampling, therefore, is seldom useful for tests of details of balances. 17-2 Stratified sampling is a method of sampling in which all the elements in the total population are divided into two or more subpopulations. Each subpopulation is then independently sampled, tested and the results projected to the population. After the results of the individual parts have been computed, they are combined into one overall population measurement. Stratified sampling is important in auditing in situations where the misstatements are likely to be either large or small. In order for an auditor to obtain a stratified sample of 30 items from each of three strata in the confirmation of accounts receivable, he or she must first divide the population into three mutually exclusive strata. A random sample of 30 items is then selected independently for each stratum. 17-3 The point estimate is an estimate of the total amount of misstatement in the population as projected from the known misstatements found in the sample. The projection is based on either the average misstatement in the sample times the population size, or the net percent of misstatement in the sample times the population book value. The true value of misstatements in the population is the net sum of all misstatements in the population and can only be determined by a 100% audit. 17-4 The statement illustrates how the misuse of statistical estimation can impair the use of an otherwise valuable audit tool. The auditor's mistake is that he or she treats the point estimate as if it is the true population value, instead of but one possible value in a statistical distribution. Rather than judge whether the point estimate is material, the auditor should construct a statistical confidence interval around the point estimate, and consider whether the interval indicates a material misstatement. Among other factors, the interval will reflect appropriate levels of risk and sample size....
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This note was uploaded on 08/27/2011 for the course AC555 AC555 taught by Professor Tarbet during the Spring '10 term at Keller Graduate School of Management.

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Chapter_17_Solutions - 1 Chapter 17 Audit Sampling for Tests of Details of Balances Review Questions 17-1 The most important difference between(a

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