 in this presentation we will take a look at substantive tests of details of account balances first a word from our sponsor well actually these are just items that we picked from the youtube shopping affiliate program but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you these are things that we actually researched purchased and use ourselves focus right scarlet solo third gen usb interface with software suite i've been using a focus right for years for my audio needs before which time i had a usb microphone which plugged directly into the computer but i think you'll find as i have found if you want to increase the quality of your microphone you will need an interface and the focus right is the go to interface as far as i'm concerned i've been using this for years now it works well it's easy to use it seems quite durably built because i only do the screen recordings i only need the one solo interface however if you have multiple microphones you need to plug in or if you have other instruments you need to plug in you can look at a similar model that has more input ports if you would like a commercial free experience consider subscribing to our website at accounting instruction dot com or accounting instruction dot think of it dot com where we have many different courses you can purchase one at a time or have a subscription model giving you access to all the courses courses which are well organized have other resources like excel files and pdf files to download and no commercials statistical concepts discuss regarding sampling for internal controls also apply here in other words in prior presentations we've taken a look at statistical sampling methods with regards to testing of controls and now we're considering the substantive testing so remember we're going to be testing the controls those are going to be the checks and balances so we can think of them as checks and balances then we're going to hopefully be able to do less substantive testing however some of the procedures that we use in order to test the controls including sampling type of methods are often often used within the substantive testing so now we're thinking about the substantive testing this is the bulk of the testing we typically think of within the audit you could think of substantive testing more as that type of testing where we're actually digging down into give me that balance sheet let's go straight through the trial balance cash counts receivable property plant equipment start digging into those items testing those actual transactions related to them this is where the bulk of the work typically will be important determination of sample size we want the desired confidence level so what's the confidence level that we want to have we need the tolerable misstatement so how much misstatement then is tolerable remember that we are looking for the material misstatements and therefore in order to do a test we need to then think about what a tolerable misstatement would be what type of misstatement would be tolerable and then we want the estimated misstatement what do we think the estimated misstatement will be population can play a large role a larger role in some of the sampling techniques used for substantive testing so we noted last time that especially when we're considering statistical sampling the population size might not be as effective or in terms of how large we're going to have our sample size here we're going to say the population can play a larger role in some of the sampling techniques used for the substantive testing as opposed to the testing of control misstatements discovered in the audit sample must be projected to the population so obviously if we find a misstatement within the sample we then project that to the population and there must be an allowance for sampling risk this is going to be our example then information about inventory account balances we have our information about the inventory book value of inventory account balance so we have a book value of inventory at the three million the three hundred thousand book value of items selected then within our selection the book value is one hundred and ten thousand and then when we go through our process the audit value of items selected comes out to be one oh six thousand uh seven hundred the difference between those two given us the total amount of overstatement observed in the audit sample is three thousand three hundred so the ratio of misstatement in the sample then is three percent because we're going to take that three thousand three hundred and divide it by the book value of the items so that's going to be the one hundred and ten thousand so again total population the three million three hundred thousand the book value of the sample the items we have 110 given our testing we have a value of one hundred six seven hundred the difference between the book value of the sample and our one hundred six seven hundred is three thousand three hundred then we're going to compare that three thousand three hundred deviation or difference to the book value of the sample not the total population that gives us a 3%, that's the ratio of misstatement in the sample. If we apply the ratio to the entire population then we get a best estimate of misstatement and inventory of 99,000. So now we're going to take of course that 30% misstatement, apply it out to the entire population that 3,300,000 at 30%, that gives us a misstatement that we would project at the 99,000 on the dollar amount. The result of the audit test depends on the tolerable misstatement associated with the inventory account. So if the tolerable misstatement is 50,000 we cannot conclude that the account is fairly stated because our best estimate of the projected misstatement is greater than the tolerable misstatement. So if we said the tolerable misstatement in our example back up to our example is 50,000 and we projected here based on this information 99 then we're in trouble here because we have 99 versus the tolerable only being the 50. If the tolerable misstatement is 50,000 we cannot decide that the account is fairly stated because our best estimate of the projected misstatement is larger than the tolerable misstatement.