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:

Question

Quizplus · Accepted Answer

Choice "A" is correct. Selection of every twentieth item results in a sample that is 5% (1/20 = .05) of the population. The sample results indicate a net overstatement of $3,500 (= $3,700 $200), which is then projected to the total population as $70,000 (= $3,500 / .05). (Alternatively, 3,500 × 20 = 70,000). Since the projected misstatement of $70,000 exceeds the tolerable misstatement of $60,000, there is an unacceptably high risk that the actual misstatement in the population will exceed the tolerable misstatement. Choice "B" is incorrect. Tolerable misstatement is compared to the projected misstatement, not to the actual error in the sample. Choices "C" and "D" are incorrect. The asset account is not fairly stated because the projected misstatement exceeds the tolerable misstatement.

An Auditor Established a $60,000 Tolerable Misstatement for an Asset