Question

how MUS applies to auditing of sales and collections?

Answer 1

Solution:-

Auditors use monetary unit sampling, also called probability-proportional-to-size or dollar-unit sampling, to determine the accuracy of financial accounts. With monetary unit sampling, each dollar in a transaction is a separate sampling unit. A transaction for $40, for example, contains 40 sampling units. Auditors usually use monetary unit sampling to sample and test accounts receivable.

Here’s an example of how monetary unit sampling works The audit client’s accounts receivable book value is $300,000, and the sample size is set at 96 records.

1.Figure the sampling interval by dividing book value by sample size

(300,000/96) = 3125

2.Arrange the client’s accounts receivable in an ordered list using some sort of ordering sequence.

For example, you can arrange them alphabetically by customer name or numerically by customer number.

3.Pick a random number between 1 and 3,125.

For this method to work correctly, the random number has to be less than the sampling interval and greater than the smallest sampling unit. Auditors usually use a random-number-generator computer program to pick the random number. The sampling unit and sampling interval limits are programmed into the software before the task is run. In this case, say the software selects the random number 556.

First, pick the records to test: Take the alphabetically ordered list shown in the Customer Name column, which lists every customer balance by dollar amount, and count each dollar until getting to $556. The random number generator gives the number 556 in Step 3 in the previous slide. The cumulative dollar amount for ABC Electric is under $556.

That shows that the first sampling item is Best Friend Cat Care, which at a cumulative total of $1,220 is the first customer in the list with a cumulative balance over $556. Best Friend Cat Care becomes the first customer in the sample.

Secondly, select the next invoice to sample: Add the sampling interval of $3,125 to the random number of $556. This equals $3,681, which is the next sampled item dollar amount. Brandy’s Grill at $2,730 cumulatively is under $3,681, thus Brandy’s is skipped. Buddy’s Gas Station has the 3,681st dollar.

To pick the next sampling item: Add the sampling interval of $3,125 to the prior sampling item of $3,681, which equals $6,806, and so on until the last name in the customer list is reached. This will give the total sample size of 96.

When sampling, misstatements are being looked for. If a selected customers invoice should have been entered for $986, for example, and it was entered as $896, there is a misstatement. If the total misstatements exceed the tolerable level, there may be a material misstatement.

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