Exercise Chapter 8

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