Student Forums CIA Part 2: Practice of Internal Auditing Section III: Performing the Engagement Meaning of example in “Extrapolating variables sampling results ..” section

# Meaning of example in “Extrapolating variables sampling results ..” section

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• #231335

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Denny Benjamin
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Hi Brian,

In the example, what does the sampling result mean to the auditor when auditing the \$4.5 million and 4K customers accounts receivable balance?

Mean per unit — \$4.8 million

Difference estimation — \$4.9 million

Ratio method — \$4.905 million

Are the customer accounts under valued?

What is audited value?  How does \$220,000 increase to \$240,000?

Thanks,

Denny

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• #231340

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Brian Hock
HOCK international

Hello, Denny,

The audited value is the correct value of the items they tested. They audited 200 accounts and those 200 accounts had an actual (audited) value of \$240,000. Those same accounts were recorded on the books for \$220,000. So, there was a \$20,000 difference between the recorded value (book) and the actual (audited) value. Since they tested 200 accounts, the average misstatement was \$100 (\$20,000 / 200). So, we assume that all of the accounts are understood by \$100. Since there are 4,000 accounts, we calculate that in total, they understatement is \$400,000 (\$100 per each account x 4,000 accounts).

Yes, on the books, the customer accounts have been undervalued. And this is the estimation of how much they have all been undervalued. We use the testing that we did on 200 accounts to estimate the total undervaluation of all 4,000 accounts.

Does this help?

Brian

#231354

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Denny Benjamin
Participant

Hi Brian,

It helps.

What could be the reasons for understatement of balances?  Not recording a credit sale, excessive write offs, ….

Thanks,

Denny

#231370

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Brian Hock
HOCK international

Denny,

It could be as simple as a mistake. It could be that they have misreported discounts. There could have been something about accounts being written off incorrectly. The system was not recording all of the invoices, the system was not making calculations correctly. There could be any number of reasons, but in the context of this question, it is how the misstatement is calculated that is what is important.

Brian

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