[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for AUD.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[TheblackCPAseeker]

I need help this is question:

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?

A.There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement

B.There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements.

C.The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement

D.The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.

I know the answer but please explain, thanks

FAR - 80 (05/2015)

AUD - 68 (08/2015, Retake (07/03/16)

REG - 77 (11/2015)

BEC - Sometime in 2016

We are destined for this.

[JT]

The errors in the sample netted to 3500 (3700-200).

The sample was 1/20 of the population. So 20 X 3500 = (70k) estimated errors for the population.

70k estimated errors from the sample, compared to tolerable rate of 60k for the population is not it acceptable.

On a related note, the best thing for the auditor to do at this point is to continue sampling and hopefully instead of sampling only 1/20 of the population, the auditor would sample 1/10.

In that case, the auditor would instead multiple the errors (3500+what ever additional errors that come to light) by 10. If there were no additional errors in the additional items sampled, then you would multiple 3500 X 10= 35k and this is less than the tolerable rate of 60k which is great!!

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[GiniC]

@JT and @TheBlackCPASeeker –

I question whether it's “the best” course of action to increase sample size. Your 5% sample size was presumably selected based on multiple criteria, including control risk (which would be expected to detect/correct and or prevent errors). Perhaps I'm reading bias into the suggestion that really isn't there – but it sounds like the auditor is hoping to get a “better” result by sampling more, rather than maintaining professional skepticism.

In my review class this morning the instructor mentioned “5% tables” and “10% tables”, which I've never heard of. Is this perhaps part of the reason for increasing sample size, and something my Audit class skipped for lack of time?

GiniC

[JT]

I think your on point to what you were taught.

The original question asked “what would the auditor conclude?” Which I think the answer is A.

But if the question said “what can the auditor do to alleviate this error?” I think the answer would be to sample more. ***i could be very wrong here***

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[TheblackCPAseeker]

@JT you are right the answer is A. I just read the question again and I feel dumb I read twentieth(20) as twelfth (12). I didn't understand why the sample size was 1/20 but now I get it lol.

Thanks for answering the question. This concludes my studies I have my exam tomorrow morning, I will report back tomorrow about my exam experience. Good luck and thanks for all the help.

FAR - 80 (05/2015)

AUD - 68 (08/2015, Retake (07/03/16)

REG - 77 (11/2015)

BEC - Sometime in 2016

We are destined for this.

[JT]

Definitely!

Good luck!

Hopefully we both pass on our retakes!

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[Forem004]

@ GiniC, I was shortening that to the what, how and who details that I said in my question. 🙂 I was just thinking ahead to next week that both of my thoughts sounded strange. For example, use me as the related party: 1) The Executive Director's wife loaned…. or 2) Tiffany Holifield loaned… Does that make sense? I have never had this situation. It's always been a company or stockholder the I could reference.

Good luck theblackcpaseeker!!

I just answered a multiple choice question correctly, but am curious as to the further procedures needed. Auditors realized they failed to audit the opening balance of inventory after a report had been issued. They're next step is to attempt to perform alternative procedures to support their opinion. I do not have any clients with material amounts of inventory, so I have not dealt with this situation. What alternative procedures could be done to support your opinion?

[JT]

***no audit ‘real world' experience here

My 2 cents… Can't you confirm ending inv balances, and verify purchases and cogs were correct and then work your way backwards to opening inv balance?

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[Forem004]

are you being serious JT???

[JT]

Yeah. I guess that's a completely wrong answer then. Sorry if you were offended.

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[Forem004]

Is that a personal rule or a forum rule? Because relating to the questions to work has substantially helped me pass. Therefore, talking about “real world” experiences helps me to understand the concepts.

[JT]

Oh I think I might've misunderstood your question.

I looked up auc 330.31-32

“When the auditor has not received replies to positive confirmation re- quests, he or she should apply alternative procedures to the nonresponses to obtain the evidence necessary to reduce audit risk to an acceptably low level. However, the omission of alternative procedures may be acceptable (a) when the auditor has not identified unusual qualitative factors or systematic charac- teristics related to the nonresponses, such as that all nonresponses pertain to year-end transactions, and (b) when testing for overstatement of amounts, the nonresponses in the aggregate, when projected as 100 percent misstatements to the population and added to the sum of all other unadjusted differences, would not affect the auditor's decision about whether the financial statements are materially misstated.

The nature of alternative procedures varies according to the account and assertion in question. In the examination of accounts receivable, for ex- ample, alternative procedures may include examination of subsequent cash receipts (including matching such receipts with the actual items being paid), shipping documents, or other client documentation to provide evidence for the existence assertion. In the examination of accounts payable, for example, alter- native procedures may include examination of subsequent cash disbursements, correspondence from third parties, or other records to provide evidence for the completeness assertion.”

From what I read in the past and from this mentioned above, I assume you can look at “other relevant items” or try to bring the materiality level of the unconfirmed item (in your case beg. inventory) to an immaterial level.

The example above discusses a/r not being confirmed and by looking at cash payments and matching shipping docs.

I guess my example of looking at ending inventory and cogs/purchases should be an ‘ok' procedure. The curve ball is if you were to do alternate procedures on something else completely and bring the materiality level of opening inv down/make it negligible.

Hopefully my response is what you were looking for.

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[Forem004]

Well I read the forum rules and it does not say anywhere that I cannot talk about “real world” experience. So, please ignore my conversations with other ninjas on walking myself through my work experience to my study questions.

[GiniC]

@foremo004 – I think @JT was saying that HE has no real-world experience to offer for your question, not that you can't discuss real-world auditing situations to help us all study

[JT]

I think that might be some of the miscommunication.

Yes, I meant I don't have any real world auditing experience to offer.

REG-80-1X
BEC-80-1X
FAR-73-1X
FAR-75-2X
AUD-September 2016

[Author]

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