Question

When using monetary-unit sampling, the upper misstatement limit was $11,200 and the risk of incorrect acceptance was 5%. This means that

A. Tolerable misstatement is $11,200.

B. There is a 95% chance that the actual misstatement in the account is $11,200 or more.

C. There is a 95% chance that the actual misstatement in the account is $11,200.

D. There is a 95% chance that the actual misstatement in the account is $11,200 or less.

Answer 1

Monetary unit sampling is a statistical sampling method used to determine if the account balances or monetary amounts in a population contain any misstatements. In this method, each individual amount in the population is considered a sampling unit. This method is generally used in auditing for substantive tests of account balances (eg. accounts receivables, investments, fixed assets, inventory).

This method is used by auditors to derive a conclusion in relation to the amount of misstatement in the financial statements. For example the auditor may state that "Based on the sample results, I am _% confident that the amount of misstatement would not exceed $ _" (materiality limit)

In the given question it is stated that the upper misstatement limit was $11,200 and the risk of incorrect accepatance was 5%. This means that there is 5% chance that the amount of misstatement will exceed $11,200 and 95% chance that the amount of misstatement wiil be equal to or less than $11,200.

Thus the answer to the question is option D. i.e. there is a 95% chance that the actual misstatement in the account is $11,200 or less.