11.3 Evaluating Sample Results and Projecting Misstatements

Evaluating sample results and projecting misstatements are crucial steps in audit sampling. Auditors review sample outcomes, calculate error rates, and assess precision 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 confidence level
  • 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 statistical sampling 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 $100 per item, and there are 1,000 items in the population, the projected total inventory value would be$100,000 ($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 projected misstatement 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 substantive testing 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