Audit Risk (AR) = Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR) AD =
DR = DR =
DR = 25%
b. Calculate (and show the calculation) of the sample selection interval.
Interval (I) = Tolerable Misstatement - (Expected Misstatement x Error expansion factor) Relibility factor
I =
I =
I = $ 114,209
Sample size = Population book value Sample interval
Sample size = 9,325,000
Sample size = 85
c. Assume the rounds the sampling interval downto the next nearest $5,000. Calculate the approximate largest sample size the auditor would expect.
110,000 (Sampling interval downto nearest 5,000) ��× �� �� × ��/(�� ×��) (5%)/(1% × 20%) (�� − ( �� × )) ��� /�� (215,000 − ( 45,000 ×1.25 ))/1.39
d. (a) Calculate the most likely error and the upper error limit for accounts receivable.
Book Value Audited Value Misstatement
32,500 15,000 17,500 55,000 20,000 35,000 125,000 65,000 60,000 105,000 85,000 20,000 500 400 100 Upper misstatement limit calculation:
UML Tainting Sampling
Factor (%) Interval Conclusion
Basic precision 1.39 110,000
Most likely misstatement:
Top stratum 60,000 Lower stratum: 1st largest 64% 2nd largest 54% 3rd largest 20% 4th largest 19% 157% 110,000 172,700 Total most likely misstatement
Incremental allowance for sampling error:
1st largest 0.31 x 0.64 20%
2nd largest 0.23 x 0.54 12%
3rd largest 0.18 x 0.20 4%
4th largest 0.17 x 0.19 3%
39% 110,000 Upper misstatement limit (UML)
d. (b) Discuss audit implication, that is, whether the audit work supports book value or whether additional audit work should be recommended, and if so, the nature of the audit work.
Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR)
Tolerable Misstatement - (Expected Misstatement x Error expansion factor) Relibility factor
9,325,000
to the next nearest $5,000. Calculate the approximate
Tainting (%) 54% 64% 48% 19% 20% Dollar Conclusion 152,900 232,700 385,600 42,999 428,599
Formula:
Audit Risk (AR) = Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR) AD =
DR =
Interval (I) =
Relibility factor I =
Sample size = Population book value Sample interval
Answer:
Risk (%)
Case AR IR CR DR Sampling Interval
1 5 100 50 10 49,784 2 10 100 50 20 76,398 3 5 100 25 20 76,398 4 5 50 20 50 192,857 5 5 50 10 100 -
b. What is the effect on sample size (increase or decrease) of:
Situation Effect
Increasing the audit risk Become smaller Increasing the detection risk Become smaller Increasing the tolerable misstatement Become smaller Increasing the ecpected misstatement Become larger
Tolerable Misstatement - (Expected Misstatement x Error expansion factor) ��× �� �� × ��/(�� ×��) (�� − ( �� × )) ��� /��
Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR) Relibility factor Sample Size 113 74 74 29 - Tolerable Misstatement - (Expected Misstatement x Error expansion
Audit Risk (AR) = Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR) AD =
DR = DR =
DR = 20%
b. Calculate (and show the calculation) of the sample selection interval.
Interval (I) = Tolerable Misstatement - (Expected Misstatement x Error expansion factor) Relibility factor
I =
I =
I = $ 91,925
Sample size = Population book value Sample interval
Sample size = 8,425,000
Sample size = 105
c. Assume the rounds the sampling interval downto the next nearest $5,000. Calculate the approximate largest sample size the auditor would expect.
80,000 (Sampling interval downto nearest 10,000) ��× �� �� × ��/(�� ×��) (5%)/(100% × 25%) (�� − ( �� × )) ��� /�� (200,000 − ( 40,000 ×1.30 ))/1.61
d. (a) Calculate the most likely error and the upper error limit for accounts receivable.
Book Value Audited Value Misstatement
25,000 15,000 10,000 40,000 20,000 20,000 325,000 250,000 75,000 105,000 100,000 5,000 122 - 122 Upper misstatement limit calculation:
UML Tainting Sampling
Factor (%) Interval Conclusion
Basic precision 1.61 80,000
Most likely misstatement:
Top stratum 75,000 Lower stratum: 1st largest 100% 2nd largest 50% 3rd largest 40% 4th largest 5% 195% 80,000 156,000 Total most likely misstatement
Incremental allowance for sampling error:
1st largest 0.39 x 1 39%
2nd largest 0.28 x 0.50 14%
3rd largest 0.24 x 0.40 10%
4th largest 0.21 x 0.05 1%
64% 80,000 Upper misstatement limit (UML)
d. (b) Discuss audit implication, that is, whether the audit work supports book value or whether additional audit work should be recommended, and if so, the nature of the audit work.
Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR)
Tolerable Misstatement - (Expected Misstatement x Error expansion factor) Relibility factor
8,425,000
to the next nearest $5,000. Calculate the approximate
d. (a) Calculate the most likely error and the upper error limit for accounts receivable. Tainting (%) 40% 50% 23% 5% 100% Dollar Conclusion 128,800 231,000 359,800 50,920 410,720
d. (b) Discuss audit implication, that is, whether the audit work supports book value or whether additional audit work should be recommended, and if so, the nature of the audit work.
