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Table of Contents

- What is materiality as used in auditing?
- How is overall materiality calculated?
- How is materiality level calculated?
- How is tolerable misstatement calculated?
- What does tolerable misstatement mean?
- What is high materiality?
- How do I find the deviation rate?
- What means deviation?
- What is expected misstatement?
- What is expected deviation rate in auditing?
- What is a good sample size for audit?
- What is tainting factor?
- What is precision in audit?
- What is PPS sampling in auditing?
- What is the allowance for sampling risk?
- What are the aspect of sampling risk?
- What is classical sampling?
- How do you find the upper deviation rate?
- How is CUER calculated?

Under current U.S. Generally Accepted **Auditing** Standards (GAAS), misstatements and omissions are considered **material** if they, individually or in the aggregate, could “reasonably be expected to influence the economic decisions of users made on the basis of the financial statements.”

Commonly, it will be **calculated** by applying a percentage to a chosen benchmark such as PBT or net assets. The auditor must always demonstrate judgement in selecting the **overall materiality** level. You can think of **overall materiality** as the auditor’s starting point for **materiality**.

The **materiality** threshold is defined as a percentage of that base. The most commonly used base in auditing is net income (earnings / profits). Most commonly percentages are in the range of 5 – 10 percent (for example an amount 10% material and 5-10% requires judgment).

A general range of 50 percent to 75 percent of planning materiality, based on moderate risk at the financial statement level, is commonly used to **calculate tolerable misstatement** (performance materiality) at the financial statement level.

**Tolerable misstatement**. **Tolerable misstatement is** essentially the maximum amount of known and likely error an auditor **can** accept in a financial statement classification without adjustment.

The **higher** the audit risk, the lower the **materiality** will be set. The lower the audit risk, the **higher** the **materiality** will be set.

After completing the audit procedures, the auditor summarizes the **deviations** for each control tested and evaluates the results. For **example**, if the auditor discovered two **deviations** in a sample of 50, the **deviation rate** in the sample would be 4% (2 ÷ 50).

: an act or instance of deviating: such as. a navigation : deflection of the needle of a compass caused by local magnetic influences (as in a ship) b mathematics : the difference between a value in a frequency distribution and a fixed number (such as the **mean**)

**expected misstatement** – The amount of **misstatement** that the auditor estimates is in the population. … It is the auditor’s best estimate of the total **misstatement** in the population. Back to Top. N. nonsampling risk – The risk of improperly auditing sampled items or misjudging inherent or control risk.

The **expected deviation rate** represents the **auditor’s** best estimate of the actual failure **rate** of a control in a population. The **rate** usually is based on client inquiries, changes in personnel, process observations, prior year test results, or even the results of a preliminary sample.

between 50 and 100

**Tainting factor** = (Book Value – Audit Value)* / Book Value*BV-AV=misstated amount; BV=amount stated in books, AV=actualComputing Upper misstatement limit* (page 321)*Similar to computed upper deviation rate.

**Precision** – Is the measure of how much the conclusion drawn by the **auditor** from the results of testing a particular characteristic of a sample of items difference from known population characteristics at a given level of sampling risk.

**Probability Proportional-to-Size Sampling** (**PPS**) This method is used to estimate the total monetary amount of potential misstatement in a population. **PPS** uses monetary unit **sampling** (MUS) or dollar unit **sampling** (DUS).

The **allowance for sampling risk** is the level of uncertainty associated with **sampling**. It is calculated as the difference between the tolerable deviation and the expected mean of the population.

In performing substantive tests of details the auditor is concerned with two aspects of sampling risk: The risk of incorrect acceptance is the risk that the sample supports the **conclusion** that the recorded account **balance** is not materially misstated when it is materially misstated.

**Classical** variables **sampling** is a statistical **sampling** method for estimating: the total audited value of an account or class of transactions. the total amount of monetary misstatement in an account or class of transactions.

For example, if the auditor discovered two **deviations** in a sample of 50, the **deviation rate** in the sample would be 4% (2 ÷ 50). The **upper deviation rate** is the sum of the sample **deviation rate** and an appropriate allowance for sampling risk.

**CUER** is **calculated** from statistic table, by looking number of exception founds and number of sampel, with ARACR 5%. As we can see from the above table, attributes 1, 3, dan 5 has **CUER** < TER, and attributes 2, 4, and 6 has **CUER** > TER.