Principles of Auditing: Attribute vs Variables - Professor Helen Liburd
Professor Helen Liburd
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0:12 Attribute Vs. Variable
Summary:
Introduction to the principles and concepts of the audit as an attestation service offered by the accounting profession. Primary emphasis is placed on Generally Accepted Auditing Standards, the role of the CPA/auditor in evidence collection, analytical review procedures and reporting, the CPA/auditor's ethical and legal responsibilities, the role of the Securities and Exchange Commission as well as other constituencies. Audit testing, including statistical sampling, internal control issues, and audit programs are discussed. --
Description:
Variables sampling is used to estimate the amount (or value) of a population. Substantive procedures are used to estimate the account balance or misstatement, and compare account balance or misstatement to recorded amount or tolerable misstatement. The types of variables sampling approaches include monetary unit sampling (MUS) and classical variables sampling.
The sampling approach must be documented and involves (1) planning the sample, which includes stating the objectives of the audit test (determining whether account balances are fairly stated under GAAP), defining the characteristic of interest (instance in which audited value of component differs from recorded value), defining the population (highlights the significant of completeness; includes MUS sampling, dollars comprising account balances, classical variables sampling, individual components or transactions comprising account balance) and (2) selecting the sample and performing the audit procedures, which includes determining the initial sample size (sampling risk, risk of incorrect acceptance, expected misstatement, tolerable misstatement, population size, recorded account balance), selecting the sample, and measuring the sample items (performing appropriate substantive procedures, calculate actual misstatement, audited value, and recorded value). Lastly, the auditor must evaluate the results. The problem with actual misstatement is that it may result from a nonrepresentative sample. The auditor needs to adjust actual misstatement to control for the risk of incorrect acceptance. The auditor must calculate an upper limit (roof) on misstatements.
Monetary unit sampling (MUS) involves defining the sampling unit as individual dollar (or Euro, Yen, Yuan, etc) in an account balance. The auditor will select individual dollars for examination, and then verify the entire logical unit containing the selected dollar (for example, accounts receivable would involve the customer account, while inventory would involve which specific inventory item).
The advantages of using MUS is that it results in smaller sample sizes, includes transactions or components reflecting larger dollar amounts, is effective for overstatement errors, and is generally simpler to use than classical variables sampling. The disadvantages are that it provides a conservative (higher) estimate of misstatement. It is not effective for understatement or omission errors. Expanding an MUS sample is difficult if the initial conclusion is to reject the account balance. It requires special consideration for accounts with zero or negative balances.
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