AUDIT SAMPLING REVISION QUESTION SOLUTION – Chapter 13

Using the data above, calculate the following:

a) Sampling size and sampling interval

 N = BV x RF where BV = Book value, RF = Reliability factor,

TE = Tolerable error – (EE x EF) EE = Expected Error. EF = Expansion Factor

RF = 100- 10% beta sampling risk = 90% with zero error found 2.31 (Refer Table)

N = 500,000 x 2.31
20,000 – (5,000 x 1.5)

Thus, the sample size is 92.4 = 93 (It is rounded to the next number)

 Reliability factor of 2.31 is determined from the confidence table given that the auditors
confidence level is 90% because the Type 11 error or risk of risk of incorrect acceptance
is 10% and the number of error is initially 0.

b) Basic precision, upper and lower limits

Basic Precision = Tolerable error – (Expected Error x Expansion Factor)

= 20,000 – (5,000 x 1.5)
BP = 12 500

 Upper and Lower Limit

First step determine the misstatement amount and misstatement proportion. Always remember
misstatement amount to determine by Book value less audit value.

Sample Item Audit Value (A) Book Value (B) Misstatement Misstatement
Amt. C=(B-A) Proportion
(C/B)
1 100 200 100 0.5
2 20 150 130 0.87
3 3000 1500 (1500) (1)
4 1000 500 (500) (1)

Step 2 incremental effects and additions to basic bounds (Overstatement and understatement).
There are two overstatement errors determined in the table above. Thus there will be two
incremental effect of error calculations of overstatements.

Overstatement. There are two errors for overstatement (Based on 90% confidence level)
𝐼𝐸1 = 3.89 – 2.31 x $500,000 x 0 .87 = $ 7,390
93

𝐼𝐸2 = 5.33 – 3.89 x $500,000 x 0.5 = $ 1,322

93 Basic Bound = $ 8,712
 Chapter 13: Audit sampling

Understatement
𝐼𝐸1 = 3.89 – 2.31 x $500,000 x 1 = $ 8,495
93

𝐼𝐸2 = 5.33 – 3.89 x $500,000 x 1 = $ 7,742

93 Basic Precision = $ 16,237

Step 3. Maximum Overstatement/ Understatement

Maximum Overstatement = Basic Precision + additions to basic bound (Overstatement)

BP = 12 500 +$ 8,712
MO = 21,212 ok

Maximum Understatement = Basic Precision + additions to basic bound (understatement)

BP = 12,500 + $ 16,237
Maximum Understatement = $28,737

Step 4. Projected Over/Understatement

Projected Overstatement = Sum of Positive Mistatement Proportions x Book Value
Sample Size
= 1.37 x 500,000
93
= 7,366

Projected Understated statement = 2 x 500,000

93
= 10,753

Finally Step 5. The Upper and Lower limits

Upper Limit = Max Over Statement – Projected Understatement

= 21,212 – 10,753
= 10,459

Lower Limit = Maximum Understatement – Projected Overstatement

= 28,737 – 7,366
= 21,371

c) Is book value for accounts receivable materially misstated?

Conclusion: Jenna is 90% confident that the account balance is not understated by more than
$21,371 Or overstated by more than $10,459

Decision Rule:
Projected error (Upper Limit) < Tolerable error = Accept
Projected error (Upper limit) > Tolerable error = Reject
 Chapter 13: Audit sampling

Thus, based on the quantitative analysis, Jenna will reject the amount balance given that the
true monetary misstatement account balance (Projected error of $21,371 Was more than the
tolerable (error) misstatement of $20,000. Therefore, it is confirmed that the recorded amount
of the account receivables are fairly stated for materially stated.