 Hello, and welcome to the session in which we would look at audit sampling that deals with substantive testing. This topic is very important on the CPA exam. Simply put, if you are familiar with audit sampling, you should not sit for the exam unless you are pretty competent in this topic. Many students assume because they got two or three questions or four questions about the exam, they assume audit evidence is not an important topic. On the contrary, the reason they got only a few questions is because maybe they answered them correctly, but if you start to insert audit sampling incorrectly, you might see the probabilities, you might see more questions, and as a result, you might fail the exam. Simply put, this is an important topic, and you don't want to take any chances. Now, how can I help you, forhatlectures.com? If you are studying for your CPA exam, I do provide supplemental material. I don't replace your Becker, Roger, Gleim, Wiley, Surgent, or any other course. What my material does, it's a useful addition. Add me to your CPA review course, and I can add 10 to 15 points to your CPA exam score. I can add your knowledge, the confidence that's going to help you do better on the review course, which in turn, understand the review course better, which in turn will help you do better on the exam and secure that passing grade. My risk is $29, $30. If you subscribe to my website, try it out for a month. If you don't like it canceled, well, you lost $30. The potential of my website is helping you pass the exam. So I think the risk return is pretty clear. If you are studying for your CPA exam, it's a long-term investment. Take a chance. Take a $30 chance if you don't like it canceled, okay? It's not the end of the word, but the potential is you could pass the exam. And if not for anything, check out my website to find out how well is your university CPA exam score on average, what score or what's the pass rate at your university? Because it's going to tell you how well is your accounting program, which in turn will influence your score as well. I also have resources for other accounting courses. And if you have any doubts, please connect with me on LinkedIn and read my LinkedIn recommendation students that actually used my material to pass the exam. So check out, see what they say about the system. Please like this recording, share it, connect with me on Instagram and Facebook. So let's take a look at these questions and try to answer them as you are taking them on the exam day. Now these questions, I believe they are basic, basic. So simply put, if you are finding out that these questions are, if you can't answer those questions real quick and easily, then you don't understand the basic. If you don't understand the basic, you'll find issues with all the sampling. If you're going to have issues with all the sampling, you're not going to get the 75% to pass the exam. Okay, so these are basic. Make sure you understand them. Obviously on my website, I do cover each one of them in detailed plus examples and so on and so forth. Okay, let's look at the first question. While performing substantive test of details. So notice here, I already told you these sets of questions, audit sampling, substantive test of details. Remember, you could have audit sampling for test of control or test of detail. So make sure you know the difference. Okay, here I'm even differentiating though. So you could start to eliminate choices real easily. But if you don't understand the difference, then you have issues in your understanding. The auditor determined that the sample results supported the conclusion that the recorded amount balance was materially misstated. It was, in fact, not materially misstated. Such a situation illustrates the risk of what? So simply put, they took a sample, they did a substantive testing and what they concluded is the balance is materially misstated. But in fact, in reality, if we look at each one of these accounts, the account is not materially misstated. What does this situation illustrate? The risk of incorrect rejection, incorrect acceptance, assessing control risk too high, assessing control risk too low. Now, once again, most CPA exam questions, if you have basic understanding, you should go down to 50-50 immediately. The immediately is, I take out anything that to do with assessing control risk. We're not talking about control risk, C is out, D is out. Okay, because this has to do with control risk. Now you're down to two options, incorrect rejection or incorrect acceptance. Now, what happened here is this. You stated, you concluded that the amount is materially misstated. The amount, the account is not good. The account balance, whatever that balance is, account receivable inventory, it's not good. Well, in reality, the account is not materially misstated. So what did you do? You did an incorrect rejection. Okay, incorrect rejection, not incorrect acceptance. Incorrect acceptance is the opposite. Incorrect acceptance when you find out, you concluded, it's not materially misstated. Well, it was materially misstated. So you made an error and you made an error and that error is incorrect rejection. You rejected the amount while in reality, it was not materially misstated. Is that a problem? Sure, it is a problem. Is this an efficiency problem or effectiveness problem? This is an efficiency problem. It is still a problem, but it's not effectiveness. Efficiency means you're gonna have to do more work because you thought it's materially misstated. You might have to increase your sample, do other alternative procedures, just to do more work. So you're not gonna be efficient, okay? But it's not as dangerous as incorrect acceptance. This is a more dangerous error. This is when you think the account is not materially misstated, but in reality it is, okay? This is, what we are looking here is incorrect rejection. So it's efficiency, not effectiveness. B is an effectiveness problem and it's an issue because you accepted the account while it's not correct. It's materially misstated. Let's take a look at this question. A number of factors influence the sample size for a substantive test of details of an account balance. Sure, all other factors being equal, which of the following would lead to a greater larger sample? So which one will lead to a greater N? You'll have to collect more evidence. You have to collect larger sample, okay? A, greater relies on internal control. What does that mean? The assessed control risk is low. It means you can rely, you trust their internal control. Well, if that's the case, I'm not gonna do more work, I'm gonna do less work. Remember, greater N, think of it is more work. You have to do more work. Well, if I can rely on their internal control, I'm gonna do less work. A is out. Greater relies on analytical procedure. If I can rely on analytical procedures, it means there's some relationship between the accounts and that relationship is stable and I can trust it. If that's the case, I don't need to do more work. I do less work because I can rely on analytical procedures, less work. Now down to 50-50. Smaller expected frequency of misstatement. If I'm expecting smaller expected frequency, I'm expected to find less error. If that's my expectation, if that's my expectation, it means the population is good. I'll have to do less work. C is out. By process of elimination, D is the answer. And let's take a look at it. Smaller measure of tolerable misstatement. Well, smaller, I mean, you have to be careful here because notice it's a smaller, smaller, greater, greater. So it's a smaller. What does it mean smaller measure of tolerable misstatement? You're going to set what's called a tolerable misstatement. And if you don't know what tolerable misstatement is, then this is where you need to go to Farhat Lectures and learn about tolerable misstatement. It means how much can you tolerate? How much can you accept as a statement and still think the population is fairly stated? So if your tolerable misstatement is low, okay, then you don't have a lot of tolerance. It's tolerable. You don't have a lot of tolerance for misstatement. Therefore, if you don't have tolerance for misstatement because the account balance is important, what you do is you have to do more work. To do more work, you have to increase your end to increase your population. But if you can tolerate more misstatement, if you can tolerate more misstatement, then you don't have to do a lot of work. You can do less work because although you may not, you may miss some mistakes, but it's not a big deal because I can tolerate greater misstatement. But if I cannot tolerate a greater misstatement, so if my misstatement is above 1,000 is not tolerable, well, versus 10,000, well, 1,000 is a very low bar. I'm going to be crossing it very quickly. So if that's my tolerable misstatement, then I'm gonna have to do more testing because my tolerable misstatement is low. But if I can tolerate up to $10,000 in misstatement, then I have more room. I don't have to kind of look at the information in more detail. Therefore, I can have less end, yes, less end, less population. But if I have a smaller tolerable misstatement, I have to do more work because I cannot tolerate a lot of mistakes. Let's take a look at this question. Which of the following sample planning factors would influence the sample size for a substantive test of detail for a specific amount? Well, we already know from the prior question that tolerable misstatement will influence the sample size. If the tolerable misstatement is low, if this number is low, remember the sample size has to be larger. So the expected misstatement, but not the measure of tolerable misstatement. I already told you, we already know that the tolerable misstatement influence the sample size A is out. The expected amount of misstatement and the measure of tolerable misstatement. So we already know at least this part of it will influence the sample size. Would the expected amount of misstatement also influence the sample size? And the answer is yes. Generally speaking, if you expect more misstatement, if you expect more misstatement, you're gonna increase your sample size because you want to be conservative. You want to be conservative. If you expect misstatement, you wanna do more work. Just to make sure what you are doing is correct because there's more misstatement. So if this goes up, also N, generally speaking, will go up. Because the risk is what you want to do. You want to minimize the risk of rejecting the book value when the book value is not materially misstated. So you wanna do more work, more N. More work means more N. And hopefully by doing more work, you have more assurance not to reject, not to reject. And that's why when the expected misstatement is high, generally speaking, you will increase N, okay? Now, if the expected misstatement, I'm gonna put EM, if the expected misstatement is greater, if you're expecting to find greater than tolerable misstatement, what do you do then? Well, no sampling. Why would you do sampling then? If you are expecting to find misstatement of $50,000 for an account and you can only tolerate 20, well, if this is the expected and this is how much you can tolerate, well, don't sample because you're gonna reject it. So it's no use for that. Therefore, both of these will influence the sampling, but let's take a look at C and D, measure of the tolerable misstatement, but not the expected, we said both. Neither the expected nor the measure of tolerable misstatement, not at all. Now, if you go to farhat-lectures.com, obviously I will have exercises and little bit more details about this topic, but we need to know that two factors will influence the sampling size, expected misstatement, tolerable misstatement, make sure you know the relationship between each one of them to end to the sample size and how do they relate to each other? Let's take a look at this question. For monetary unit sampling, so monetary unit sampling, a sampling interval of 400 means what? So this is basically monetary unit sampling is a topic by itself, not a topic by itself, but something you need to be familiar with for the exam. And what does that mean, monetary unit sampling? Monetary is basically money, dollar amount. What you are doing is, you are treating each dollar as a unit. And what happened as a result, the larger the dollar amount in the population, the larger the probability this amount will be selected. This is what monetary unit sampling in a nutshell. Now, this is in a nutshell, I have 25 minute, 20 to 25 minute explanation about this topic, go to my website farhat-lectures.com and this is a sample of, I illustrate this through numbers, but again, it will take me maybe 10 minutes to clearly to give you a justice for this. So that's why I put this here, just to kind of remind you that on my website farhat-lectures.com, you will find this information. But let's answer this question. Let's assume a little bit of information. How much can you answer A, B, C, D? So this is A, B, C and D. Those are your options. Every 400 item in the account will be selected. First of all, as we said, monetary unit deals with dollar amount, not account. So A is out because it's 400 unit. The average size of item in the account, not the average size, monetary unit sampling, don't do the average size because look, a sampling interval, interval means you're gonna go from one interval to the other, to the other, to the other. So the average is not included. So the average is something different. What's the average? Hopefully we all know how to compute the average. But here we're saying for monetary unit sampling, a sampling interval, so the average is out. Every $400 in the account will be included. Notice here it's dollar, so this looks like a good. So every $400 in the account will be included starting from a random point. Okay, so we start from a random point and we'll start to select the 400, the 400 as the interval. I would say C is the answer. Once again, this is just a shortcut to the answer. Okay, the average misstatement and the sample size is 400. Again, since we are using intervals, just it's not average. Make sure you understand the difference between average and sampling. So again, if you want to learn more about monetary unit sampling, if your CPA review course doesn't give you justice, I have maybe 25, 20 to 25 minutes just about this topic specifically, maybe more with examples, I have maybe 40 minutes about this topic, monetary unit sampling. So check out my website plus additional exercises of course, multiple choice to reinforce the concept. And applying classical, classical variable sampling and auditor determined to do what? Again, this is another term you need to be familiar with. All what I'm giving you in this quiz is just terms. Are you familiar with those terms? So what is classical variable sampling? What is the classical variable sampling? The classical is to estimate the dollar amount of the population to determine the reasonableness of the number. So that's what you're doing. This is what classical variable sampling. Okay, so let's take a look at the answers and see which one will fit our answer. So before you look at the answer choices, if you understand the material, you should be anticipating the answer. A, estimate qualitative characteristic of interest. Well, this is like attribute sampling, internal control A is out. Determine the rate of occurrence for specified attributes. Again, test of control, this is out. Discover at least one instant of critical deviations. This is like you are looking for one particular error. It's like fraud, discovery sampling, no, C is out. Predict by process of elimination, I would select D, but let's take a look at D. Predict a monetary population value within a range of precision. As I said, estimate the dollar amount. Predict the dollar amount, predict a monetary. Estimate a dollar amount of the population within a range of precision. Now, this is gonna be within a range of precision. Nevertheless, hopefully the range of precision is within our tolerableness statement, so we can accept. But this is what classical variable sampling. Again, about classical variable sampling, I have 30 to 40 minute lectures plus illustrations. So you wanna make sure you are very comfortable with these topics, okay? Now, if your CPA review course go over it quickly and you're confident, by all means you're good. But if you need that more confidence in your knowledge, Farhat Lectures is your answer. Again, your risk is $30 to try it, see if it works for you. Most of my courses are aligned to go with your CPA review course. So it will be very easy for you to follow. Before I end, stay motivated, study hard, and stay safe until we get those vaccines. Good luck.