Explain why it is important to perform the above comparisons before selecting a sample?
This comparison ensures that the results of the IDEA software analysis are consistent with the results in the file. It proves the completeness and accuracy of the data file that we will sample from for the following steps.
3. STEP 3: Select a statistical sample using Monetary-Unit Sampling (MUS) in IDEA (use Appendix B, Technical Guidance Step D).
3a. Refer to PCAOB AS 2315 par 10 & 46. Define sampling risk. Explain how use of MUS helps to minimize this risk. Identify two reasons you think your manager chose to use MUS.
Sampling risk is a risk that the decision made based on the sample differs from the decision that would have been made by examining the population. A particular sample may include proportionately monetary misstatements. Sampling risk varies inversely with sample size. The smaller the sample size, the greater the sampling risk. The use of MUS can help auditors to determine appropriate sample size, which is one of the most important steps to control sampling risk.
One of the reasons our manager chose MUS is in the Wealthy Watches case, the company has a small number of large accounts receivables and a large number of small accounts receivables. MUS weighted high dollar items more heavily during sample selection, which results in a smaller overall sample size. Auditors can achieve increased efficiency without sacrificing effectiveness.
The other reason our manager chose MUS is that Wealthy Watches has a relatively large number of accounts receivables. Using MUS can help auditors apply statistical sampling more efficiently and easier and project the sample results quickly and accurately.
3b. What is the final sample size? High Values _6_ Monetary Sample _30_ Total Sample _36_
3c. How would your sample size change if you increased your tolerable misstatement to $1 million (all other requirements the same as originally stated)? Why would this occur?
If we increase the tolerable misstatement to $1 million, the monetary sample size will drop to 17, and the high value sample size will drop to 3. Increasing tolerable misstatement will give more room for errors and decrease the sampling risk, thus we can select a smaller size of samples to be tested and reduce workload.
3d. How would your sample size change if you decrease your allowable risk of incorrect acceptance to 0.05 (all other requirements the same as originally stated)? Why would this occur?
If we decrease the allowable risk of incorrect acceptance to 0.05, the monetary sample size will increase to 41, and the high value sample size will increase to 7. Decreasing the allowable risk of incorrect acceptance will require a bigger sampling size to reduce the sampling risk, thus we need to select a larger size of samples to be tested.
This is the end of Part 1. Please obtain Handouts 2&3 from your instructor to begin Part 2.
Part 2: Confirmation Testing Memo
Conclusions:
4. STEP 4: Evaluating and communicating the results: Use IDEA to project the results of your accounts receivable confirmation audit work to the population (use Appendix B, Technical Guidance Step E).
4a. What is the:
Gross most likely error for the sample of 30: $511,716.18
Gross upper error limit for the sample of 30: $882,289.74
Value of errors for the high value items: $538,876.80
Gross most likely error for all items: $1,050,592.98
Gross upper error limit for all items: $1,421,166.54
**NOTE**: Be sure to provide the MUS Projection Report from IDEA to support your above responses.
4b. Your audit manager asks you the status of your audit work and what you think the next steps should be. Please provide him an overview based on the work you performed, including anything you think he should communicate to the client, and a print out of your MUS Projection Report page. This information should be drafted in a formal memo.
The first portion of the memo should be a recap of the overall sampling process and your assessment of Wealthy Watches Inc.’s accounts receivable population. You may then wish to move on to your ultimate sampling procedure, the results of your testing/projections, and finally next steps. Your discussion of next steps should include recommendations as to what action the client may need to take and/or possible adjustments to the audit plan. Since ultimately this test was designed to support the existence of the accounts receivable balance, you should be certain to discuss whether you feel that management’s assertion is supported. Remember, per the PCAOB “if you didn’t document it, you didn’t do it” so please be complete in your write up.
Memo
To: Dr. xx Audit Manager
From: – Audit Staff
Date: March 7, 2022
Re: Wealthy Watches Inc. – Accounts Receivable Testing
Guiding Questions for your Memo –
How did you ensure completeness of the population?
What were your concerns about the population prior to testing?
How does your sampling method help to address any of those concerns (i.e., statistical sampling, MUS)?
Did you have any concerns related to the work performed by the RPA software?
What are the results of your testing after projecting the errors identified?
What does this mean for your conclusions on the existence of the population?
What are your recommendations for next steps and outstanding concerns that you might want the engagement team to follow up on?
Screenshot of IDEA Cell Evaluation Summary:
