（1998）Setting Tolerable Misstatements When Auditing Aggregated Accounts.pdfVIP

Decision Sciences Volume 29 Number 4 Fall 1998 Printed in the U.S.A. Setting Tolerable Misstatements When Auditing Aggregated Accounts* Orie Barron Department of Accounting, Smeal College of Business, Pennsylvania State University, UniversityPark, PA 16802-1912, oebl @psu.edu S. Michael Groomer Department of Accounting and Information Systems, Kelley School of Business, Indiana University,Bloomington, IN 47405-1 701,groomer8indiana.edu Morgan Swink Marketing and Supply Chain Management, TheEli 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 ascomplex 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 over- all 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. INTRODUCTION When conducting an audit in accordance with generally accepted auditing stan- dards, the auditor is required