Question

The following information relates to a nonstatistical sample used for a price test of inventory:

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1. What is the best estimate of the total misstatement?
2. Are these results acceptable, assuming tolerable misstatement is $25,000? Explain.
3. Assume that the results are not acceptable. What possible courses of action can the auditor take?

Answer 1

a) Ansy Lower Stratum projected misstatment:($600/4185000)x$1500000= $4864.86 plus top stratun misstatement 1,000.00 Total projected misstatement $ 5864.86 b) Ans: The project misstatement ($5,865) is significantly less than dorable misstatement ($25,000). No Fwether work needs to be performed. =) Ans: If the results would to not have been acceptable, the auditor could * Increase the sample size. * Analyze the misstatement and it common cause of misstatement is discoverd in alternate audit strategy to determine the total misstatement that is likely in the population & Have the client correct the known misstatement * The auditor could change the audit objective from testing the fairness of the account balance to estimating what the account balance should be. Statistical Approach Test account Balance and Assertions * Dollar-based sampling approach where the population is the number of dollars in account balance examined X Larger dollar items are likely to be selected x effective in testing overstatements * Appropriate where few misstatements are expected and Individual book values are available strengths weakness a Easier to apply than other & Not designed to test for Statistical sampling approach the understatement of a population automatically selects a sample (4) Evaluation of the sample in proportion to an items dollar require special Consideration and in highly efficent Sample / selection of zero or negative - balances. Probability Prportional to size sampling (PPS) * sample size fixed interval * PPS Samples are usually selected using * Sampling approch * The sampling interval w is calenlated as *