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Uhhhh do you guys use a sampling form? Can you extrapolate the error somewhere?
Search for Unrecorded liabilities is a cutoff procedure. Therefore there’s no “immateriality” with respect to that assertion. It is a finding worth discussing with your incharge, with the potential result being pulling more samples.
Immaterial! Move along
Ask your senior
Y’all use sampling forms when doing the search ?
Some firms/teams say that you can quantify the total possible population by adding up all of your disbursements for an average AP cycle (ie 60 days) and then making a sample from that population which would allow you to extrapolate but that's always seemed like a stretch to me. Our firm typically scopes as a percentage of performance materiality or firm derived 'significant item' formula based on performance and RMM and tests everything meeting scope.
Consider lowering your search threshold and select additional items.
Finally someone who knows how to test a search properly
Why would you ever use a sampling form to test for completeness? How can you sample from a population that you are testing for understatement? “Let’s see what’s not here, by picking randomly from what’s here.” 🤔
Non stat is a no-no in performing the search. Go with risk based target approach. Yours truly, a 22 year assurance partner.
Materiality should not be considered for passing in that test. You are searching for what isn’t included, which is an unknown factor. If you find something above your original scope then that could be an indication that there are more items that they have excluded. If your scope is already set at a relatively low level, you could justify not selecting additional items but if your scope is high, you should lower scope to select more items to - hopefully determine this as an isolated instance. You can’t extrapolate either with an unknown population of everything that might not be included. Justify no additional testing though by saying your scope is low instead of referring to the error as immaterial.
Your scope is your factor of materiality. Like I said, if your scope is low and you only find one item then it can be sufficiently assessed as passable. If you originally assessed that account as low risk and set a high scope, one error, regardless of material nature, may indicate that there are more items unrecorded. The cumulative effect of several items unrecorded may be material. This area has a risk of understatement not overstatement. In overstatement it’s easy to say immaterial, pass. In understatement , you are searching for what is not in there- not if what is already in there is materially correct. Of course I do agree with a lot of people here saying you need to talk to your managers because there are other combinations of procedures that can provide more comfort with completeness. My recommendation is just flat out SURL testing alone.
OP- better to post a methodology question in the EY bowl. Posting to a broader group gets you varied answers from different firms as everyone has their own methodology.
It’s inappropriate to conclude that the error is immaterial at the sample level, as that sample selection is supposed to be representative of the population and you’re trying to test the population for misstatements.
You need to extrapolate the error to the remaining untested population and then determine if the extrapolated error is immaterial.
Peer and PCAOB reviewers love when you find a mistake and then just post immaterial based on the one error. Address if there is the possibility whether the error could represent a material
Issue if more errors were found. Several firms have been written up for just stating immaterial.
The search should be at a % or TE. This would be similar to Key Item testing in which you would not extrapolate. You should however ask the client what happened and understand the error. If it’s not representative of a larger error (Control failure, entire vendor that didn’t get accrued for, etc) then immaterial and move on
Document it and say that “as it is immaterial, we passed further procedures”
You cant really tell if you need to extrapolate it based on the info of the exact procedure you are doing. Was the error due to subsequent disbursements that were not recorded as AP? coz if it is, then aren't the items you are testing for search supposedly above a certain threshold and would most likely be above SAD? In this case, you dont need to extrapolate.
Yes it was a subsequent payment. The item was above SAD but only portion of it is a true mistake. The mistake is not above SAD.
How did this turn into a discussion on how to test unrecorded liabilities? Op was confused to begin with and now with all the different testing approach opinions no one is ever asking for advice here again.
Disagree. Best way to get different points of view from people at various firms. I find it very helpful
I just got through with 3 months of SURL testing and it was so tedious asking the client for proper support. Can’t wait to pass it off to the first year next year
He is not around. thanks for the answer!
I think you extrapolate the errors in sampling form only. That’s from my experience so far
What do you mean a sampling form? I was about to extrapolate but was not sure I’m suppose to
Good to hear some competing methodologies. I wrote up DHG's (seems to align with PWC) in another thread.