Chapter 9

Audit Sampling: An
Application to
Substantive Tests of
Account Balances

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
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 Substantive Tests of Details of LO# 1

Account Balances
The statistical concepts we discussed in the last
chapter apply to this chapter as well. Three important
determinants of sample size are
1. Desired confidence level.
2. Tolerable misstatement.
3. Estimated misstatement.
Population plays a bigger role in some of the sampling
techniques used for substantive testing.
Misstatements discovered in the audit sample must be
projected to the population, and there must be an
allowance for sampling risk.
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 LO# 2

Monetary-Unit Sampling (MUS)

MUS uses attribute-sampling theory to express a
conclusion in dollar amounts rather than as a rate of
occurrence. It is commonly used by auditors to test
accounts such as accounts receivable, loans receivable,
investment securities, and inventory.

MUS uses attribute-sampling theory (used primarily to

test controls) to estimate the percentage of monetary
units in a population that might be misstated and then
multiplies this percentage by an estimate of how much
the dollars are misstated.

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 LO# 2

Monetary-Unit Sampling (MUS)

Advantages Disadvantages
1. When the auditor expects no 1. The selection of zero or
misstatement, MUS usually negative balances generally
results in a smaller sample size requires special design
than classical variables consideration.
sampling.
2. The general approach to MUS
2. The calculation of the sample assumes that the audited
size and evaluation of the amount of the sample item is
sample results are not based not in error by more than
on the variation between items 100%.
in the population.
3. When more than one or two
3. When applied using the misstatements are detected,
probability-proportional-to-size the sample results calculations
procedure, MUS automatically may overstate the allowance
results in a stratified sample. for sampling risk.
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 LO# 2

Steps in MUS Sampling

Steps in MUS Sampling Application
Planning
1. Determine the test objectives.
2. Define the population characteristics.
• Define the population.
• Define the sample unit.
• Define a misstatement.
3. Determine the sample size, using the following inputs:
• The desired confidence level or risk of incorrect acceptance.
• The tolerable misstatement.
• The expected population misstatement.
• Population size.
Performance
4. Select sample items.
5. Perform the auditing procedures.
• Understand and analyze any misstatements observed.
Evaluation
6. Calculate the projected misstatement and the upper limit on misstatement.
7. Draw final conclusions.
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 LO# 3

Steps in MUS Sampling

If the upper misstatement limit is greater than the
tolerable misstatement, the auditor concludes that the
account balance is materially misstated.

When faced with this situation, the auditor may:

1. Increase the sample size.
2. Perform other substantive procedures.
3. Request the client adjust the accounts receivable balance.
4. If the client refuses to adjust the account balance, the
auditor would consider issuing a qualified or an adverse
opinion.
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 LO# 3

Risk When Evaluating Account

Balances
True State of Financial Statement Account
Auditor's Decision Based
on Sample Evidence Not Materially Misstated Materially Misstated
Supports the fairness of Risk of incorrect
Correct decision
the account balance acceptance (Type II)
Does not support the
fairness of the account Risk of incorrect Correct Decision
balance rejection (Type I)

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 LO# 4

Nonstatistical Sampling for Tests

of Account Balances
The sampling unit for nonstatistical sampling is normally a
customer account, an individual transaction, or a line item
on a transaction. When using nonstatistical sampling, the
following items must be considered:
o Identifying individually significant items.
o Determining the sample size.
o Selecting sample items.
o Calculating the sample results.

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 LO# 4

Why Did Statistical Sampling

Fall Out Of Favor?
1.Firms found that some auditors were
over relying on statistical sampling
techniques to the exclusion of good
judgment.
2.There appears to be poor
linkage between the applied audit
setting and traditional statistical
sampling applications.

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 LO# 5

Classical Variable Sampling

Classical variables sampling uses normal distribution
theory to evaluate the characteristics of a population
based on sample data. Auditors most commonly use
classical variables sampling to estimate the size of
misstatement.

Sampling distributions are formed by plotting the

projected misstatements yielded by an infinite
number of audit samples of the same size taken
from the same underlying population.

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 LO# 5

Classical Variables Sampling

A sampling
distribution is useful
because it allows us
to estimate the
probability of
observing any single
sample result.

In classical variables
sampling, the sample
mean is the best
estimate of the
population mean.

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 LO# 5

Classical Variables Sampling

Advantages Disadvantages
1. When the auditor expects a 1. Does not work well when little or no
relatively large number of misstatement is expected in the
differences between book and population.
audited values, this method will
2. To determine sample size, the
normally result in smaller
auditor must estimate the standard
sample size than MUS.
deviation of the audit differences.
2. The techniques are effective for
3. If few misstatements are detected
both overstatements and
in the sample data, the true
understatements.
variance tends to be
3. The selection of zero balances underestimated, and the resulting
generally does not require projection of the misstatements and
special sample design the related confidence limits are not
considerations. likely to be reliable.

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 LO# 6

Applying Classical Variables

Sampling
Defining the Sampling Unit
The sampling unit can be a customer account,
an individual transaction, or a line item. In
auditing accounts receivable, the auditor can
define the sampling unit to be a customer’s
account balance or an individual sales invoice
included in the account balance.

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 LO# 6

Applying Classical Variables

Sampling
Determining the Sample Size
2
Sample Population size (in sampling units) × CC × SD
=
Size Tolerable misstatement – Estimated misstatement

where
CC = Confidence coefficient
SD = Estimated standard deviation.

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 LO# 6

Applying Classical Variables

Sampling
Mean
Project the error misstatement Total audit difference
and the SD: =
per sampling Sample size
item
Projected
population = Population size × Mean misstatement
misstatement
(in sampling units) per sampling item

Total audit Sample Mean difference

– ×
SD = differences squared Size per sampling item2

Sample size – 1

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 LO# 6

Applying Classical Variables

Sampling
Confidence Population SD
bound
= size × CC ×
Sample size

Confidence Projected Confidence

interval
=
misstatement ± bound

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 LO# 6

Applying Classical Variables

Sampling
Projected Upper
Lower
misstatement limit
limit $30,803
($1,653) $14,575

($50,000) $0 $50,000

Tolerable Misstatement

If both limits are within the bounds of tolerable

misstatement, the evidence supports the conclusion that
the account is not materially misstated.

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 End of Chapter 9

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
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