1 Chapter 17 Audit Sampling for Tests of Details of Balances Accounts Receivable

2 Aaron Tests of Controls What do they measure The operating effectiveness of internal controls

3 The introduction … when all the confirmation replies were received or alternate procedures were completed ….. Bob called Barbara to do some statistical evaluation.

4 Kelly Mc Substantive Tests of Balances What do Substantive Tests measure calculate the dollar misstatements in account balances

5 Sampling Methods Non statistical sampling Statistical sampling monetary unit sampling variables sampling difference estimation ratio estimation Mean-per-Unit

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7 Page 413 Test of Details - sampling Objective ---- derived from management assertions Define a misstatement “ population “ sampling unit Specify tolerable misstatement ---- a dollar amount risk of incorrect acceptance β eta risk Determine sample size Select the sample Perform the procedure Project the sample results to the population

8 Test of Details – sampling inventory handout Objective all recorded inventory exist as of 12/31 physical quantities on hand agree INV records costs used to value INV are correct Define misstatement incorrect cost or quantity populationitems in parts inventory sampling unitSKU or part number Specify tolerable misstatement$200,000 risk of incorrect acceptance5% Determine sample size 387 Select the sample Perform the procedure Project the sample results to the population

9 Grace what is the audit risk model ?

10 Audit Risk Model

11 Ishrak pretend GAAS requires AAR ≤.05 Controls are effective, we assess CR as 0.03 Which audit approach will we take ?

12 Mackenzie pretend GAAS requires AAR ≤.05 Controls are effective, we assess CR as 0.03 We will take the Reduced Level of Control Risk Approach What is the Planned Detection Risk ?

13 Sami pretend GAAS requires AAR ≤.05 Controls are ineffective, we assess CR as MAX Which audit approach are we going to take ?

14 Catherine pretend GAAS requires AAR ≤.05 Controls are ineffective, we assess CR as MAX (1.00) We are taking the Primarily Substantive Approach What is the Planned Detection Risk ?

15 Melissa pretend GAAS requires AAR ≤.05 Controls are effective, not great but Somewhat effective and we assess CR as 0.25 What is the Planned Detection Risk ?

16 Anne pretend GAAS requires AAR ≤.05 Controls are effective, not great but somewhat effective and we assess CR as 0.25 Which audit approach will we take?

17 Tori is Detection Risk risk of incorrect rejectionType I or  risk risk of incorrect acceptanceType II or  risk

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19  type II  type I

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21 Test of Details - sampling Project the sample results to the population you must project sample results to the population plus appropriate consideration for sampling risk

22 projected error + allowance for sampling risk must be less than tolerable error

23 cv allowance for sampling risk Accept

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25 allowance for sampling risk Accept C V BV tolerable error $200,000 or $ error $1,110.32

26 Test of Details - sampling Project the sample results to the population you must project sample results to the population appropriate consideration for sampling risk is the projected error too close to tolerable error How close is too close?

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29 Let’s assume the sample mean was $1,094.09

30 allowance for sampling risk Accept C V BV tolerable error $200,000 or $ error $1,110.32

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32 Chris Which assertions relate to Inventory and Accounts Receivable?

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34 Valuation & allocation

35 Valuation & allocation

36 V&T what we did

37 Page Difference Estimation

38 Page MUS

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