An auditor established a 6 %tolerable misstatement for a $million account balanc

Question

An auditor established a 6 %tolerable misstatement for a $million account balance and selects a sample of every 20th item from the assets population items that represented the asset account balance and discovered $3,700 of overstatements and $200 of understatements. Show why that under the difference method sampling, we derive an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement exceeds the tolerable misstatement.

Explanation / Answer

Amount of Tolerable Misstatement = $1000000x6%

=$60000

Assume that there are 100 items

Amount of tolerable misstatement per item is $60000/100 = $600

Every 20th item has been taken as sample

So, out of 100 items , total items taken as sample are five.

For 5 items,amount of tolerable misstatement is $600 X 5 = $3000

Actual amount of misstatements discovered are $3700 which is higher than Tolerable misstatements that amounts to $3000.

That is why we derived high risk at unacceptable level under Difference method sampling.

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