Audit Sampling Case Study- Air BNB Co.

You are the experienced assistant auditor for the audit of Technology Inc. (the Company), whose audit is subject to the standards of the AICPA. Your engagement team has identified risks of material misstatement related to the existence, valuation and allocation, and rights and obligations assertions of accounts receivable, specifically the risks of material misstatement that the client has recorded in sales and accounts receivable for sales and shipments that are not valid or are recorded at the incorrect amount. The total balance of accounts receivables is $1,118,517 rounded to $1,119,000. Your field senior has assigned you to test the accounts receivable balance by sampling and confirming balances with individual customers, which is a common audit test to address these risks of material misstatement.

As part of your risk assessment procedures, you obtained an understanding of the Companys accounting policy, processes, and controls regarding the accounts receivable balance by performing procedures (including inquiries of management and process owners) and walkthroughs of the processes related to accounts receivable. As a result of these procedures, you understand that the accounts receivables balance is relatively homogeneous and consists of a high volume of low-dollar value transactions. You decide to use data analytics to obtain fact-based evidence and to corroborate your understanding of the accounts receivables balance. On the basis of your analysis, you identified one statistical outlier of $300K, while the remaining balance aggregated to $800K, which is made up of approximately 80 homogeneous transactions. Upon further inquiries about the $300K transaction above, you determined that it is a related-party transaction.

On the basis of your analysis of the accounts receivable balance, you define the customer balance as the sampling unit. You determine that any balances greater than performance materiality (Tolerable misstaement) of $258K should be selected for testing and therefore select the $300K related-party transaction as a judgemental selection. You then determine that you would use PPS statistical sampling to test the remaining population. The other relevant factors are as follows: Performance materiality (Tolerable Misstatement) is $258 thousand. Clearly trivial threshold (De Minimis Materiality) is $12,906. The population size, excluding the $300 thousand selected balance, is $819 thousand (no other items are above performance materiality). The Inherent level of risk is determined to be Higher/High. You are relying on the operating effectiveness of internal controls and therefore Control Risk is determined to be Low. Combined Risk of Inherent and Control Risk (AKA Risk of Material Misstatement RMM) is determined to be Moderate. You determined that the "risk that other substantive procedures will fail to detect a material misstatement" is moderate. The client provided the accounts receivable population to you in electronic format. Through the use of data analytics, you noted that the population had similar, positive value characters.

TEST THE SAMPLE & EVALUATE THE RESULTS: Assume You send a total of 44 confirmations: 43 confirmations as determined by the Non-stat calculation above and 1 that was judgmentally selected because it was greater than performance materiality. A selection of the confirmation results for the Company is shown below. Assume the remaining 40 items samples were returned and the book value was the same as the value per the confirmation (aka audit value).

	Confirmation	Sample Type	Customer Name	Recorded	Amount	Evaluation
	Number			Balance	Confirmed by	of
					Customer	Results
Strata 1	1	Representative sample selected haphazardly by non-statistical sampling.	Snapchat Corporation	$15,000	Confirmation reply not received from customer, but alternative procedures performed successfully.	Answer below.
	2	Representative sample selected haphazardly by non-statistical sampling.	Facebook	$66,000	$64,000
	3	Representative sample selected haphazardly by non-statistical sampling.	Tesla	$20,000	$19,800
Strata 2	4	Judgementally Selected	Specimen Inc. (a related party)	$300,000	$250,000