ABREMA: audit sampling and testing: example: audit testing plan: substantive testing

Audit testing procedures

Example: Audit testing plan: substantive testing

Consider the substantive testing of retail inventory. Assume that:

the audit objective is to gather evidence as to the accuracy of valuation of the inventory items.
the tolerable level of exceptions is $200,000, based on the value of planning materiality for this account balance previously determined during the audit planning stage.
an exception, which in substantive testing is a misstatement, is defined as any item where the recorded value of the unit cost is different to the unit selling price as at balance date less 50%.

the population is made up as follows:

Unit cost	Total recorded cost ($) (Number of products)
Unit cost	> 2 mnths	2 months	1 month	Total
$10,000 +	300,000 (6)	600,000 (12)	1,700,000 (72)	2,600,000 (90)
$5,000-$9,999	200,000 (12)	300,000 (25)	1,000,000 (65)	1,500,000 (102)
$1,000-$4,999	150,000 (95)	250,000 (120)	700,000 (350)	1,100,000 (565)
under $1,000	200,000 (320)	300,000 (450)	800,000 (1200)	1,300,000 (1970)
Total	850,000 (433)	1,450,000 (607)	4,200,000 (1687)	6,500,000 (2727)

Further assume the auditor has estimated that the different risks of material misstatement [RMM] applying to different strata in the population are as follows:

RMM	Description	Value ($)	No. of products	Avge unit value ($)
High	Value > $10,000 per unit and age > one month	900,000	18	50,000
Moderate	Value > $10,000 per unit and age = one month	1,700,000	72	23,611
Low to moderate	Value < $10,000 and age > 2 months	550,000	427	1,288
Low	all others	3,350,000	2,210	1,515
	Total	6,500,000	2,727

The auditor may then decide to select all 18 products rated "high" as key items and to stratify the remaining population into three strata. Based on the guide to sample size, the auditor may decide to select, for products rated "moderate", one product in ten, or 7 products; for products rated "moderate to low", 20 products; and for products rated "low", 10 products. Thus the total number of products selected for examination total 55 (18 key items and 37 by random selection). This testing plan may be summarized as follows:

Stratum	RMM	No. of products selected	Avge unit value ($)	Total est'd value of products selected ($)
Key items	High	18	50,000	900,000
Stratum 1	Moderate	7	23,611	165,277
Stratum 2	Low to moderate	20	1,288	25,760
Stratum 3	Low	10	1,515	15,150
Total to be selected		55		$1,106,187

The auditor then performs the relevant substantive procedures on the 55 items selected.

Audit testing procedures, index page