Decision Sciences Journal
Volume 29, Number 4
Fall 1998
Setting Tolerable Misstatements When Auditing Aggregated
Accounts
Orie Barron
Department of Accounting, Smeal College of Business, Pennsylvania
State University, University Park, PA 16802-1912, oeb1@psu.edu
S. Michael Groomer
Department of Accounting and Information Systems, Kelley School
of Business, Indiana University, Bloomington, IN 47405-1701,
groomer@indiana.edu
Morgan Swink
Marketing and Supply Chain Management, The Eli Broad College
of Business, Michigan State University, East Lansing, MI 48824-1122,
email: swinkm@pilot.msu.edu
ABSTRACT. Generally accepted auditing standards require
auditors to plan audits of clients’ account balances. If
accounts are to be sampled, then part of this planning must include
setting the tolerable misstatement for each account or class
of transactions to be sampled. Although classical sampling approaches
provide certain advantages, they have not been widely used because
they are viewed as complex and difficult to implement. We present
a remedy to these difficulties in an efficient, easily implemented
optimal solution method for the problem of setting tolerable
misstatements given constraints on tolerable misstatements for
individual account balances as well as the overall audit. Further,
our method suggests when the materialities of certain accounts
or the materiality of the overall audit are irrelevant to the
problem. Several example auditing problems demonstrate both our
solution approach and the settings in which our approach provides
a more effective or more efficient sampling plan than that provided
by monetary unit sampling.
Subject Areas: Audit, Auditor Judgment, and Mathematical
Programming/Optimization. |