Projected Misstatements

1) For a substantive procedure (e.g. direct confirmation of receivables balances) – say the population was $100m and you selected a sample of balances totaling $10m. If you found errors amounting to $0.3m overstatement in the sample, the projected error in the population would be $0.3 x $100m/$10m = $3m.

2) For a TOC, where we are not interested in monetary amounts, if you found 3 invoices without authorisation in a sample of 60 the error rate is 5% – this is the projection of the error in the population.

In either case the auditor will compare this with the relevant threshold (i.e. materiality for $ amount and what is called “tolerable error rate” for %). If it is not acceptable, the auditor will do more work (if smaller/fewer errors are found in the additional sample the significance of the sum of the errors becomes less).

If still not acceptable:
1) $ amounts go on the potential adjustments list for discussion with management. Management will not make adjustment for projected amount but if they adjust for actual errors, hopefully the remainder will be immaterial. (If material, “consider the implications for the audit opinion”.)
2) Conclude that the control is not operating effectively and carry out full substantive procedures (i.e. cannot place any reliance on controls so cannot reduce substantive procedures).