An auditor established a $60,000 tolerable misstatement for a $million account b

Question

An auditor established a $60,000 tolerable misstatement for a $million account balance and selects a sample of every 20th item from the population of 1,000 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

Total tolerable misstatement = $60,000

Tolerable misstatement per item = $60,000/1,000 = $60

Total items audited = 1,000/20 = 50

Tolerable misstatement for 50 items = 50 x $60 = $3,000

Since the actual misstatement is higher than the tolerable misstatement limit, it is an unacceptable position and indicates a high risk under difference method sampling.

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