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Testing the balances and Testing of Control and Substantive Tests. This where Auditing meets Statistics
Testing the balances and Testing of Control and Substantive Tests. This where Auditing meets Statistics
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Whether the exception rate in the population is sufficiently low.
To reduce assessed control risk and thereby reduce tests of details of balances.
For larger public companies to conclude that the control is operating effectively
for purposes of auditing internal control over financial reporting.
ARIA is the amount of risk an auditor is willing to take of accepting a balance as correct when the true misstatement in the balance exceeds tolerable misstatement.
The planned sample size increases as the amount of misstatements expected in the population approaches tolerable misstatement.
The auditor will determine why that type of misstatement occurred and then determine the implications on other auditor areas.
The auditor’s preliminary judgment about materiality should be the amount used as tolerable misstatement in all applications of MUS.
The problem with PPS selection is that population items with a zero recorded balance have no chance of being selected with a PPS sample.
Thus, the dollar value of the misstatement is not likely to exceed $36,000.
The change from 100% to 10% significantly affects the misstatement bounds.
In the absence of convincing information to the contrary, most auditors believe that it is desirable to assume a 100% amount for both overstatements and understatements unless there are misstatements in the sample results.
When there were no misstatements in the sample, an assumption was required as to the average percent of misstatement for the population items misstated.
A point estimate of misstatements is made for both overstatement and understatement amounts.
Each bound is reduced by the opposite point estimate.
The preliminary judgment about materiality is normally the basis for the tolerable misstatement amount used.
There may be a separate assumption for the upper and lower bounds. The auditor’s judgment should be based on knowledge of the client and past experience.
ARIA is auditor judgment.
The population value is taken from the client records.
When misstatements are expected, the total dollar amount of expected population misstatements is estimated and then expressed as a percent of the population recorded value.
The use of variable methods shares many similarities with non-statistical sampling. All 14 steps must be performed for variable methods.
Ratio estimation is similar to difference estimation except that auditor calculates the ratio between the misstatements and their recorded value and projects this to the population to estimate the total population misstatement.
Ratio estimation can result in sample sizes even smaller than difference estimation if the size of the misstatements in the population is proportionate to the recorded value of the population items.
Mean per unit estimation requires the auditor to focus on the audited value rather than the misstatement amount of each item in the sample.
The point estimate of the audited value equals the average audited value of items in the sample times the population size.
ARIR is the statistical risk that the auditor has concluded that a population is materially misstated when it is not. This causes the auditor to perform more audit work than should be necessary.
Audit sampling applies in the confirmation of accounts receivable because of the large number of accounts.
The misstatement condition is a client misstatement determined by the confirmation of each account.
The population size is determined by count as it was for attribute sampling.
The sampling unit is an account on the list of customer accounts.
The amount of misstatement the auditor is willing to accept is a materiality question.
ARIR is the risk of rejecting accounts receivable as incorrect if it is not actually misstated by a material amount.
To determine the initial sample size, auditors need an advance estimate of the variation in the misstatements in the population as measured by the population standard deviation.
For confirmations, a misstatement is the difference between the confirmation response and the client’s balance after the reconciliation of all timing differences and customer errors.
The population standard deviation is a statistical measure of the variability in the values of the individual items in the population.
The precision interval is calculated by a statistical formula. The results are a dollar measure of the inability to predict the true population misstatement because the test is based on a sample rather than on the entire population.
Auditors calculate the confidence limits which define the confidence interval by combining the point estimate of the total misstatements and the computed precision interval at the desired confidence level.