An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:
Answer: There is an unacceptable high risk that actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstm
I do not agree the way how they calculate the projected misstatement. Here how they did:
Selection of every twentieth item results in a sample that 5% (1/20 =0.05) of the population. Net overstatement = $3,500 ($3,700 – $200). Projected misstatement is $70,000 (=$3,500/0.05)
Understatement and overstatement are both misstatement, right? How come understatement can cancel out overstatement ? Because I think they both misstatements, so when I solve this I would add them up ($3,700 + $200 = $3,900). If the understatement is $3000 (bigger misstatements), then the projected misstatement will only be $14,000 (=700/0.05) and can state that the account is fairly present (b/c $14,000 < $60,000). That just does not make sense for me. I know they just test the fairness of TOTAL Account Balance. But for me, you can not use one misstatement to offset the other misstatement and consider that the account is fairly stated
Any thought?
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