McGraw-Hill/Irwin

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Module G Variables Sampling

Learning Objectives
1.
2. 3. 4. 5.

6.

Define variables sampling and understand when variables sampling is used in the audit. Understand the basic process underlying monetary unit sampling (MUS) and when to use it. Identify the factors affecting the size of an MUS sample and calculate the sample size for an MUS application. Evaluate the sample results for an MUS sample by calculating the projected misstatement, incremental allowance for sampling risk, and basic allowance for sampling risk. Understand the basic process underlying classical variables sampling and the use of classical variables sampling in an audit. Understand the use of nonstatistical sampling for variables sampling.

Mod G-2

Variables Sampling
Used to estimate the amount (or value) of a population Substantive procedures
Types of variables sampling approaches
Monetary unit sampling (MUS) Classical variables sampling

Mod G-3

Monetary Unit Sampling (MUS)

Defines the sampling unit as individual dollar (or Euro, Yen, Yuan, etc.) in an account balance Auditor will select individual dollars for examination Auditor will verify entire logical unit containing the selected dollar

Mod G-4

When to use MUS

ADVANTAGES OF MUS

DISADVANTAGES OF MUS

Mod G-5

Major Steps in Variables Sampling: Planning

1. Determine the objective of sampling

2. Define characteristic of interest

3. Define the population

Mod G-6

Major Steps in Variables Sampling: Performing

4. Determine sample size

5. Select sample items

6. Measure sample items

Mod G-7

Using AICPA MUS Tables

Ratio of Expected to Tolerable Misstatement
Tolerable Misstatement as a Percentage of Population

Find appropriate Risk of Incorrect Acceptance Find Appropriate Ratio of Expected to Tolerable Misstatement Read across to Tolerable Misstatement as a Percentage of Population column

Mod G-8

Major Steps in Variables Sampling: Evaluating

7. Evaluate sample results

Upper Limit on Misstatements

Mod G-9

Upper Limit on Misstatements

If Upper Limit on Misstatements is $50,000 and risk of incorrect acceptance is 5%
There is a 5% probability that the true misstatement exceeds $50,000 There is a 95% probability that the true misstatement is less than or equal to $50,000
95% $0 $50,000 5%

Mod G-10

Projected Misstatement
Assumes the entire sampling interval contains the same percentage of misstatement as the item examined by the auditor Do not calculate if balance > sampling interval
Tainting % = Amount of Misstatement Recorded Balance of Item

Projected = Sampling Interval x Tainting % Misstatement

Mod G-11

Basic Allowance for Sampling Risk

Incremental Allowance for Sampling Risk

Mod G-12

Evaluate Results
If upper limit on misstatements < tolerable misstatement
If upper limit on misstatements > tolerable misstatement

Mod G-13

MUS Sampling vs. Classical Variables Sampling

MUS is more appropriate when:

Classical variables sampling is more appropriate when:

Mod G-14

Mean per Unit Sampling (Sample Size)

Sample size N x [R(IR) + R(IA)] x SD 2 TE - EE Differences from MUS sampling

Mod G-15

Evaluating Results
Precision = N X R(IA) X (SD n )
Project sample average to population estimate Add/subtract precision to get precision interval Determine difference between account balance and furthest bound of precision interval If greater than tolerable misstatementreject balance

Determine cause of all misstatements

Mod G-16

Other Approaches
Stratified sampling
Difference estimation Ratio estimation

Mod G-17

Nonstatistical Sampling
Does not measure the auditors exposure to sampling risk Permitted under generally accepted auditing standards Differences Does not consider sampling risk in determining sample size or evaluating sample results May use a nonprobabilistic selection technique

Mod G-18

BASIC PROCEDURE
Select sample Does not explicitly consider sampling risk in determining sample size May use block or haphazard selection methods

Measure sample items (same as statistical sampling)

Mod G-19

Evaluate Sample Results

Difference estimation
Ratio estimation Use judgment to allow for sampling risk Normally reject if projected misstatement exceeds expected misstatement
Mod G-20

Documentation
Objective and assertions evaluated Sampling technique used and definition of a misstatement Method and parameters used to determine sample size Sample size Selection method Description of audit procedures Determination of upper limit on misstatement, precision, or projected misstatement Conclusioneffect on audit opinion

Mod G-21