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AR Sampling

AR Sampling. 1. Which procedures - confirmations 2. Sample size auditor judgment considering risk and materiality 3. Which accounts 4. When - often “off year - end” 5. Evaluation of results. Evaluation of Results. 1. Identify errors

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AR Sampling

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  1. AR Sampling • 1. Which procedures- confirmations • 2. Sample size • auditor judgment considering risk • and materiality • 3. Which accounts • 4. When - often “off year - end” • 5. Evaluation of results

  2. Evaluation of Results • 1. Identify errors • separate errors from timing differences (see prob. 16-31 and 17-30) • 2. Project errors to population • including consideration of sampling risk • Evaluate acceptability • Discussion of Bill DeBurger case

  3. Sample Size • Key factors • Population size (in $) • Tolerable misstatement • Assurance from test • - combined IR and CR • - assurance from other tests

  4. AICPA formula • 1. Select all amounts > tolerable misstatement • 2. Remaining amounts based on this formula: • Population amt.(1)X Assurance = Sample • Tolerable mstmt. Factor Size • (1) Population amount = • Book value - (all items > tol. misstatement)

  5. Assurance Factor • Assessment of Risk That Other Tests Fail • IR X CR To Detect Misstatement • Slightly • Max < Max Mod. Low • Maximum 3.0 2.7 2.3 2.0 • Slightly < max 2.7 2.4 2.0 1.6 • Moderate 2.3 2.1 1.6 1.2 • Low 2.0 1.6 1.2 1.0

  6. Sample Size Example • Book value 1,975,000 • Tolerable misstatement 50,000 • Assurance factor (some error 2.3 • expected, moderate assurance) • Total of accounts in excess of 875,000 • tolerable misstatement (3 accts) • Sample size • 1,100,000 x 2.3 = 51 51 • 50,000 • (1,1000,000 =1,975,000 - 875,000) • Total sample size (51 + 3) 54

  7. Effect of changes in variables on sample size • Change in Effect on • variable sample size Comment • Population Increase Larger population • increase generally requires • more evidence • Tol. mstmt. Decrease More materiality; • increase less evidence • Assurance Increase More assurance; • increase more evidence

  8. 17-25(c) • Accounts receivable contains a few unusually large balances. The auditor should: • 1. Eliminate any large balances from • the sample. • 2. Continue to draw samples until no large • balances appear in the sample. • 3. Stratify the population so the large • balances are reviewed separately. • 4. Increase the sample size to lessen the • impact of the large balances.

  9. Error Projection Example • Sample Errors + Pop. Book Untstd . % Book. Proj. • Strat. Value Amts. Error Value Error • 1 88,955 (2,740) (.0308) 88,955 (2,740) • 2 43,955 971 .0221 71,235 1,572 • 3 13,105 2,158 .164747,105 7,757 • Tot. 146,055 389 207,295 6,589

  10. Options if projected error exceeds tolerable misstatement • a. Adjust the account balance • b. Increase the sample size • c. Perform expanded tests in specific areas (isolate the error) • d. Request the client to correct the • population • e. Do not issue an unqualified opinion

  11. Error Adjustment • A/R Book value 2,000,000 • A/R tested 400,000 • Overstatement errors - actual 30,000 • Projected error 150,000 • Tolerable misstatement 100,000

  12. After Adjustmentfor Known Errors • A/R Book value 2,000,000 • A/R tested 400,000 • Unadjusted errors 0 • Adjusted projected error120,000 • Tolerable misstatement 100,000 • Options: 1) Additional adjustment 20,000+ • 2) More testing to reduce projection

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