Audit II - Chapter 8

Tools in Gathering Audit Evidence

Exercise 8-39
a. Calculate the detection risk (DR).
Audit Risk (AR) =

Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR)

AD =
/( )
DR =
(5%)/(1%
DR =20%)
DR =

25%

b. Calculate (and show the calculation) of the sample selection interval.

Interval (I) =

Tolerable Misstatement - (Expected Misstatement x Error expansion f

Relibility factor
I=

( (
))/

I=

(215,000 ( 45,000
1.25 ))/1.39

I=

114,209

c. Assume the rounds the sampling interval downto the next nearest $5,000. Calculate the approxima
largest sample size the auditor would expect.
Sample size =

Sample size =
Sample size =

Population book value

Sample interval
9,325,000
110,000 (Sampling interval downto nearest 5,000)
85

Audit II - Chapter 8
Tools in Gathering Audit Evidence

d. (a) Calculate the most likely error and the upper error limit for accounts receivable.
Book Value

Audited Value

32,500
55,000
125,000
105,000
500
Upper misstatement limit calculation:
UML
Factor
Basic precision
1.39
Most likely misstatement:
Top stratum
Lower stratum:
1st largest
2nd largest
3rd largest
4th largest

Misstatement

15,000
20,000
65,000
85,000
400

Tainting
(%)

Sampling
Interval
110,000

Conclusion

60,000
64%
54%
20%
19%
157%

Total most likely misstatement

Incremental allowance for sampling error:
1st largest
0.31 x 0.64
2nd largest
0.23 x 0.54
3rd largest
0.18 x 0.20
4th largest
0.17 x 0.19

17,500
35,000
60,000
20,000
100

110,000

172,700

20%
12%
4%
3%
39%

110,000

Upper misstatement limit (UML)

d. (b) Discuss audit implication, that is, whether the audit work supports book value or whether additi
audit work should be recommended, and if so, the nature of the audit work.

tion Risk (DR)

ment x Error expansion factor)

r

Calculate the approximate

nto nearest 5,000)

Audit II - Chapter 8
Tools in Gathering Audit Evidence

Audit II - Chapter 8
Tools in Gathering Audit Evidence

Tainting (%)
54%
64%
48%
19%
20%

Dollar
Conclusion
152,900

232,700
385,600

42,999
428,599

value or whether additional

Audit II - Chapter 8
Tools in Gathering Audit Evidence
Exercise 8-41
a. Complete the following table using the audit risk model:
Formula:
Audit Risk (AR) =

Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR)

AD =
/( )
DR =

Interval (I) =

Tolerable Misstatement - (Expected Misstatement x Error expansio

factor)
Relibility factor
I=

( (
))/

Population book value

Sample interval

Sample size =

Answer:
Case
1
2
3
4
5

AR

IR
5
10
5
5
5

Risk (%)
CR

100
100
100
50
50

DR
50
50
25
20
10

Sampling Interval
10
20
20
50
100

49,784
76,398
76,398
192,857
-

b. What is the effect on sample size (increase or decrease) of:

Situation
Increasing
Increasing
Increasing
Increasing

the
the
the
the

audit risk
detection risk
tolerable misstatement
ecpected misstatement

Effect
Become smaller
Become smaller
Become smaller
Become larger

Audit II - Chapter 8
Tools in Gathering Audit Evidence

ection Risk (DR)

statement x Error expansion

or

Sample Size
113
74
74
29
-

Audit II - Chapter 8
Tools in Gathering Audit Evidence
Exercise 8-42
a. Calculate the detection risk (DR).
Audit Risk (AR) =

Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR)

AD =
/( )
DR =
(5%)/(100%
DR =25%)
DR =

20%

b. Calculate (and show the calculation) of the sample selection interval.

Interval (I) =

Tolerable Misstatement - (Expected Misstatement x Error expansion f

Relibility factor
I=

( (
))/

I=

(200,000 ( 40,000
1.30 ))/1.61

I=

91,925

c. Assume the rounds the sampling interval downto the next nearest $5,000. Calculate the approxima
largest sample size the auditor would expect.
Sample size =

Sample size =
Sample size =

Population book value

Sample interval
8,425,000
80,000 (Sampling interval downto nearest 10,000)
105

Audit II - Chapter 8
Tools in Gathering Audit Evidence

d. (a) Calculate the most likely error and the upper error limit for accounts receivable.
Book Value

Audited Value

25,000
40,000
325,000
105,000
122
Upper misstatement limit calculation:
UML
Factor
Basic precision
1.61
Most likely misstatement:
Top stratum
Lower stratum:
1st largest
2nd largest
3rd largest
4th largest

Misstatement

15,000
20,000
250,000
100,000
-

Tainting
(%)

Sampling
Interval
80,000

Conclusion

75,000
100%
50%
40%
5%
195%

Total most likely misstatement

Incremental allowance for sampling error:
1st largest
0.39 x 1
2nd largest
0.28 x 0.50
3rd largest
0.24 x 0.40
4th largest
0.21 x 0.05

10,000
20,000
75,000
5,000
122

80,000

156,000

39%
14%
10%
1%
64%

80,000

Upper misstatement limit (UML)

d. (b) Discuss audit implication, that is, whether the audit work supports book value or whether additi
audit work should be recommended, and if so, the nature of the audit work.

ection Risk (DR)

tement x Error expansion factor)

tor

0. Calculate the approximate

nto nearest 10,000)

Audit II - Chapter 8
Tools in Gathering Audit Evidence

Audit II - Chapter 8
Tools in Gathering Audit Evidence

eceivable.
Tainting (%)
40%
50%
23%
5%
100%

Dollar
Conclusion
128,800

231,000
359,800

50,920
410,720

ok value or whether additional