Question

1. a. Explain what we mean by the term substantive tests of transactions. Describe steps auditors use to plan and execute a test of details.

b. Describe samples of risk and tests for audit objectives for accounts receivable.

c. Explain what is meant by the term Monetary Unit Sampling.

d. Describe the options auditors have in responding to sample results that indicate that auditee's balances are misstated.

Answer 1

1) a) Substantive testing is an audit procedure that examines the financial statements and supporting documentation to see if they contain errors or any mistakes. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate.It is is actually a process, step, or test that creates conclusive evidence regarding the completeness, existence, disclosure, rights, or valuation.

The steps auditors uses to plan and execute test of details are as follows..

A) Reperformance b) Recalculation c) inspection d) Inquiry e) External confirmationf)Observation

2) The possible sample of risk in account receivable are as follows

•Receivables classified as current when likelihood of collection is low

•Collection of receivable contingent on uncertain future events

•Payment not required until purchaser sells the product

The test for audit objective of accounts receivable are as follows

A) Verification of After-Date Cash Receipts

B) After-Date Sales Credit Note Review

C) Testing of General/Sales Ledger Accounts

3) Monetary unit sampling is a subset of a broader class of procedures referred to as probability proportional to size (PPS) sampling. Variations of MUS sampling are known as dollar unit sampling,When evaluating a MUS sample statistically, the auditor normally calculates an upper limit on misstatement equal to the projected misstatement found in the sample plus an allowance for sampling risk.The sample is selected based on each item having a chance of selection proportional to its size; therefore, stratification is unnecessary. A MUS sample size can be determined in a number of ways, including MUS tables or computer programs. These sample sizes are typically selected based on predefined factors such as the tolerable rate and deviation rate

4) Sampling risk arises from the possibility that, when a test of controls or a substantive test is restricted to a sample, the auditor's conclusions may be different from the conclusions he would reach if the test were applied in the same way to all items in the account balance or class of transactions. That is, a particular sample may contain proportionately more or less monetary mis- statements or deviations from prescribed controls than exist in the balance or class as a whole. For a sample of a specific design, sampling risk varies inversely with sample size: the smaller the sample size, the greater the sampling