 In this presentation, we will discuss the monetary unit sampling or M.U.S. process, the steps that we will go through to apply the monetary unit sampling. We're going to have the planning part. We're going to have the performance and the evaluation. This is where we're going to break the steps up into, into these chunks, into these categories, the planning. 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 we're 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. Bayer Dynamic? Not sure if I said that right, but this is the DT770 Pro 250 OHM Studio Reference Closed Back Headphones. I wear headphones basically every day for a large part of the day. They are important to me. Therefore, I've gone through many different kinds of headphones. I've had these for some time and they've worked quite well. They fit over my ears, but I'm still able to put my glasses on under the headphones. The headphones not pinching too tight on the glasses to give me a headache, which is nice. The quality of the patting is good, and it has lasted for some time. I've had these for some time now, and they haven't gotten all torn up on me or anything like that. I also like that I have a cord when I'm doing my recordings as opposed to a USB centered headphone, because that frees up a USB port, and I find the USB headphones to be less reliable. They come with an audio jack that looks like this, which is useful for me because that plugs into my audio interface. However, if you want to use the headphones for some other purpose, I believe it's fairly easy to get a converter to other types of audio jacks. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.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. Performance and evaluation. The planning is going to have two components to it because we're going to have a long description of what is in the planning. So there's the planning part one. Decide on test objective. And as we go through these, we will first review them and then we'll go through them in some more detail shortly. Define the population characteristics, population characteristics, including define the population, define the sampling unit, define a misstatement. Then still in the planning area, decide on the sample size using. So we're going to decide on the sample side and use these to do so. Desired confidence level or risk of incorrect acceptance, tolerable misstatement, expected population misstatement and population size. Once we have the planning set up, we'll go into the actual performance. We'll actually be doing the process here. Now that the plan is set up, we're going to select the sample items. So we're going to select the items that will be sampled. Then we'll perform the auditing procedures on them. We're going to perform, say the tests or the auditing procedures to the sample. Then we're going to have the evaluation. Once we have performed the monetary unit sampling, which will be a conclude, calculate the projected misstatement and the upper limit on the statement. And then we're going to come to that final conclusion. So we're going to go through some of these steps now in more detail. So now we're going to keep in the planning phase. We're considering the decide on test objectives. So we're in the planning, decide on test objectives starting off in the process. Sampling can be used for substantive testing too. Remember that we're in the substantive testing as opposed to the testing of controls to test reasonableness of assertions about a financial statement amount. So we're considered, we're often considering the amount like accuracy or existence accuracy or existence of an amount typically. Now this is the most common use of the sampling for substantive testing. However, we can also develop an estimate of an amount as well using this method, define the population characteristics. So within defining the characteristics, we need to define the population. So recall that the population is the monetary value of an account balance. So typically we're talking about we're considering the population size. Oftentimes when we're thinking about sampling size, when we're thinking about sampling size for dollar amounts, now we're saying the population is the monetary value of an account balance. So if we're thinking about accounts receivable, the population size basically is the monetary balance, the amount of the accounts receivable on the balance sheet. For example, obviously the accounts we're thinking of are accounts receivable and inventory. So if we think about something like inventory, we can say, hey, they have units as well that we can test to see if the units are there. But we are considering here the monetary value, the amount on the balance sheet in a monetary terms. Then we have to define the sampling unit. An individual dollar represents the sampling unit. So the sampling unit will be dollars. Define a misstatement. Difference between the monetary amounts in the business records and the amounts supported by the audit evidence. So we're going to go through the test, we're going to get the audit evidence, we're going to come up with an amount, we're going to compare that to the amount reported on the business records. Then we have to decide on the sample size using, we have the desired confidence level or risk of incorrect acceptance, the tolerable misstatement, the expected population misstatement, and the population size. Now we've seen this factor table in prior presentations when we applied statistical sampling to tests of control. We have the similar table with the relationships of these items. In other words, the factors, the change in the factor, and the effect on the sample size. The difference in this table is going to be the item in red. Note down here that we are considering the sample size as a relation to the population. So population size does have a more of an effect on the sample, what's going to happen with the sample as opposed to the control testing. So keep that in mind. The rest are going to be the same here. We have the expected population deviation rate change in the factor. If we lower it, the effect on the sample size is a decrease. If we increase it, we have an increase. That's going to be like this, the same type of thing is happening, the lower the decrease, increase, increase. Then we have the tolerable deviation rate. This is inverse relationship. If the change in the factor is lower, we have an effect on the sample size increase. If it's higher effect on the sample size decrease, and then the desired confidence level, it's going to have the same relation, lower, decrease, higher, increase. Then the population, if we want the change in the factor goes lower, then again we have the same, it would be decrease, higher would be an increase. Next we're going to go to the performance. We have the select sample items and perform the auditing procedures. We're concentrating here on the select sample items. The auditor will select and a sample by using a systematic selection approach called probability proportional to size selection. So we're going to use probability proportional to size selection. The sampling interval is determined by dividing the book value of the population by the sample size. So we'll take the book value, what's on the books of the population divided by the sample size. Each individual dollar in the population has an equal chance of being selected and the items or logical units larger than the interval will always be selected. So the unit's larger than a specific interval. After we have the selected sample items, we will of course perform the auditing procedures. Auditor does the plan auditing procedures on the logical units containing the selected dollar sampling units. Next we have the evaluation. So once we've gone through the performance, we have the evaluation, calculate the projected misstatement and the upper limit on misstatement. The misstatements detected in the sample need to be projected to the population. So we're going to project what happened in the sample, of course, to the population in total. Then we're going to come to conclusion. So we're going to make a conclusion based on this process. Often the decision is whether the balance is materially misstated or not. So remember, we're typically considering something like the balance at a counts receivable or the balance in something like inventory on a dollar basis. And the question is, is it materially misstated or not? So that's going to be in essence typically our conclusion that we're getting to tolerable misstatement is compared to the upper misstatement limit. So we're going to say, what's the tolerable misstatement? What's the upper misstatement limit? If the upper misstatement limit is less than or equal to the tolerable misstatement, we decide that the balance is not materially misstatement misstated. And that's of course, the conclusion we're hoping for. However, what if we have a case where that's not the case? And we say that it is materially misstated given our sample. In a situation where the misstatement limit is greater than the tolerable misstatement limit, the auditor will conclude that the balance is materially misstated. That's a problem. It's materially misstated. What do we do from that point forward? Well, we can increase the sample size and doing that, we would basically be thinking, well, maybe it's not materially misstated. Maybe our sample is misrepresenting. Possibly we can increase the sample size and do more testing and see if indeed it is materially misstated or if there's something wrong given the sample population that we have. We can perform other substantive procedures. We might say, okay, let's do other types of procedures to test whether or not this balance is correct or not correct or how incorrect or what we believe the balance should be. So we might do other procedures, request the entity adjust the balance. If we come to the conclusion that the balance is misstated and we've tried to test it, we've said, okay, we've looked and we said it was misstated. We've, the sampling said it was misstated. We increased the sample to double check it. We've done other types of substantive testing and we still come to the conclusion that there's some type of misstatement. We're going to request then that the entity make an adjustment to the balance so that the balance will be properly stated so that we can report that the balance is properly restated on the financial statement in the opinion of the audit report. However, if management refuses to adjust the balance, the alder will consider issuing a qualified or adverse opinion. So it's possible we say, hey, look, our audit says that your inventory and or your accounts receivable are overstated and that's and we believe that's the case. We think that this adjustment needs to be put in place. It's possible that the management that says, well, I don't believe that or I'm not going to do that for whatever reason. If that's the case, then we would have to issue possibly a qualified opinion basically saying, well, the financial statements look correct, except for this one deviation or an adverse opinion. If it was severe enough for us to think that the financial statements were not materially stated correctly, then an adverse opinion. And if that were the case, if we were going to give a qualified or definitely an adverse opinion and the client wasn't making the adjustment that we think is clearly needs to be made, it might be the case that we'd have to stop the engagement at that point as well.