11.3 Evaluating Sample Results and Projecting Misstatements
6 min read•august 13, 2024
Evaluating sample results and projecting misstatements are crucial steps in audit sampling. Auditors review sample outcomes, calculate error rates, and assess to determine if results fall within acceptable ranges. This process helps identify potential material misstatements in financial statements.
Projecting sample results to the entire population allows auditors to estimate total errors or deviations. By comparing projected misstatements to materiality thresholds, auditors can assess the overall impact on financial statements and determine if additional procedures are necessary to support their audit opinion.
Audit Sampling Results
Reviewing Sample Results
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Auditors review the sample results to identify any misstatements or deviations from the expected outcomes
The sample error rate is calculated by dividing the number of errors found by the total number of items sampled
For example, if 5 errors are found in a sample of 100 items, the sample error rate would be 5%
Auditors compare the sample error rate to the tolerable error rate to determine if the sample results are within the acceptable range
If the sample error rate exceeds the tolerable error rate, it may indicate a higher risk of material misstatement
Evaluating Sample Precision
The precision of the sample is evaluated to assess the reliability of the sample results
Precision is influenced by factors such as sample size, variability of the population, and the desired
A larger sample size generally leads to higher precision and more reliable results
Greater variability in the population may require a larger sample size to achieve the desired precision
Auditors consider the nature and cause of any misstatements or deviations identified in the sample to determine if they are indicative of a larger issue or control deficiency
For example, if multiple errors are found related to a specific control, it may suggest a control deficiency that requires further investigation
Misstatements and Deviations
Identifying Misstatements and Deviations
Misstatements are errors or omissions in the financial statements, while deviations are instances where the client's procedures or controls were not followed
Examples of misstatements include incorrect amounts, misclassifications, or omitted disclosures
Examples of deviations include lack of proper authorization, missing documentation, or non-compliance with established policies
Auditors thoroughly investigate any misstatements or deviations to understand their nature, cause, and potential impact on the financial statements
The investigation may involve inquiries with management, examination of supporting documentation, or performing additional audit procedures
Assessing the Impact of Misstatements and Deviations
Auditors assess whether the misstatements or deviations are isolated incidents or if they represent a systemic issue that could affect other transactions or account balances
Isolated incidents may have a limited impact on the financial statements
Systemic issues may indicate a more pervasive problem that requires further investigation and potential adjustments to the audit approach
The results of the investigation are documented in the audit workpapers, including the nature of the misstatement or deviation, the auditor's assessment of the cause, and any follow-up actions taken
Documentation ensures a clear understanding of the issue and provides support for the auditor's conclusions
Population Projections
Projecting Sample Results to the Population
Auditors use techniques to extrapolate the sample results to the entire population
The projection method depends on the sampling approach used, such as attribute sampling or variable sampling
Attribute sampling is used to estimate the proportion of items in a population that possess a certain characteristic (e.g., the percentage of transactions that are properly authorized)
Variable sampling is used to estimate a numerical value for the population (e.g., the total dollar amount of inventory)
For attribute sampling, the sample error rate is projected to the population to estimate the total number of errors or deviations in the population
For example, if a 5% error rate is found in a sample of 100 items, and the population contains 1,000 items, the projected number of errors in the population would be 50 (5% × 1,000)
For variable sampling, the sample mean or total is projected to the population to estimate the population mean or total
For example, if the sample mean of inventory values is 100peritem,andthereare1,000itemsinthepopulation,theprojectedtotalinventoryvaluewouldbe100,000 ($100 × 1,000)
Adjusting for Precision and Known Misstatements
The projection incorporates the precision of the sample to determine the range of possible values for the population at the desired confidence level
Precision represents the amount by which the sample results may differ from the true population value
A higher confidence level requires a larger sample size to achieve the desired precision
Auditors consider any known or likely misstatements that were not included in the sample projection and adjust the projection accordingly
Known misstatements are errors or omissions that were identified outside of the sample (e.g., through other audit procedures)
Likely misstatements are errors or omissions that are expected to exist based on the sample results but were not specifically identified in the sample
Financial Statement Impact
Comparing Projected Misstatements to Materiality
Auditors compare the amount to the materiality threshold established during the planning phase of the audit
Materiality represents the maximum amount of misstatement that would not influence the economic decisions of financial statement users
If the projected misstatement exceeds the materiality threshold, it indicates that the financial statements may be materially misstated
Material misstatements require adjustments to the financial statements or additional disclosures to ensure fair presentation
Evaluating the Nature and Pervasiveness of Misstatements
Auditors consider the nature and pervasiveness of the misstatements to assess their impact on the relevant assertion (e.g., existence, completeness, accuracy) and the affected account balances or disclosures
The nature of the misstatement refers to the type of error or omission (e.g., overstatement, understatement, misclassification)
The pervasiveness of the misstatement refers to the extent to which it affects multiple transactions, account balances, or disclosures
The evaluation includes both quantitative and qualitative factors, such as the size of the misstatement relative to the account balance, the impact on key ratios or performance indicators, and any related party transactions or management bias
Quantitative factors focus on the numerical significance of the misstatement
Qualitative factors consider the underlying reasons for the misstatement and its potential implications
Auditors communicate significant misstatements to management and those charged with governance and request that management correct the misstatements in the financial statements
Additional Audit Procedures
Determining the Need for Additional Procedures
If the sample results indicate a higher than expected error rate or if projected misstatements exceed the materiality threshold, auditors may need to perform additional audit procedures
Additional procedures may include expanding the sample size to obtain more precise results, performing substantive tests on specific transactions or account balances, or testing the operating effectiveness of relevant controls
Expanding the sample size helps to reduce the uncertainty associated with the sample results
Substantive tests provide direct evidence about the accuracy and completeness of specific transactions or balances
Testing the operating effectiveness of controls helps to determine if the controls are functioning as intended and can be relied upon
Auditors consider the nature and cause of the misstatements or deviations identified to determine the most appropriate additional procedures to address the increased risk
For example, if misstatements are related to a specific type of transaction, targeted may be appropriate
Evaluating the Results of Additional Procedures
The decision to perform additional procedures is based on the auditor's professional judgment and the assessed level of audit risk
Professional judgment involves the application of relevant knowledge, experience, and objectivity in making decisions
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
If additional procedures are performed, the results are evaluated in conjunction with the original sample results to reach an overall conclusion on the population
The combined evidence from the original sample and the additional procedures provides a more comprehensive basis for the auditor's opinion
The auditor's conclusion takes into account the entirety of the audit evidence obtained, including the sample results, any misstatements or deviations identified, and the results of additional procedures performed