Definition
When planning a sample, the auditor estimates how much misstatement is likely to be in the population. For tests of controls, the corresponding input is the expected rate of deviation. AU-C 530 lists the expected misstatement among the factors that affect sample size. The estimate comes from last year's results, the risk assessment, and knowledge of the client's accounting and controls.
Why it matters in an audit or review
The higher the expected misstatement, the larger the sample needed for the same assurance, since less room remains between the expected and tolerable amounts. If the auditor sets it at zero and the sample finds errors, the planned sample is probably too small, and the evaluation must account for this.
Example
Tolerable misstatement is $120,000 (illustrative). Last year the same receivables population had $25,000 of identified errors, and conditions are similar. The auditor sets expected misstatement at $25,000, and the sample size comes out larger than it would have been at zero. The difference between $120,000 and $25,000 is what the sample must be able to distinguish.
Common mistakes
- Setting it at zero every year to keep the sample small.
- Setting it above tolerable misstatement, which makes the sample design meaningless.
FAQ
Must it be based on last year's errors?
Not only. Last year is a starting point, adjusted for changes in people, systems and risk.
Sources
- AICPA, AU-C Section 530, Audit Sampling (factors influencing sample size; expected misstatement and expected rate of deviation)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error