Monetary Unit Sampling (MUS) for doing the test of control, is that possible? Oftentimes, you hear (or read, including in this blog) that substantive testing is the kind of test where MUS can do it. But you also know that MUS is (based on) attribute sampling, which is usually used in the test of control. So it might cross your mind to use MUS for the control test. Is this idea workable? Let’s find out.
Test of Control
Test of control is several audit procedures (test) to evaluate whether the entity’s internal control is effective or not. The result of the test of control will be used to set several things in the substantive test, such as control risk, sample size, tolerable misstatement, etc. So, performing the test of control properly is crucial for your audit.
Doing a test of control (or control test) is relatively complex and out of the scope of this post. For example, you must understand the entity’s internal control, review control documents, etc. In the sampling section, you need to determine the population, the sample size, overreliance, and tolerable rate of deviation, to name a few.
Speaking of sampling, which kind of sampling do we need for the task? It’s attribute sampling.
Attribute Sampling
Attribute sampling is a statistical method to test whether a certain attribute is present in a population. You can find a more formal definition of attribute sampling here.
How do you do attribute sampling? It’s simple. You just need to count the number of individuals (or sampling units, as you may say) with the attribute in interest.
For example, you must test whether all purchase orders are properly authorized. From 10,000 purchase orders, say you need to test 60 ones. After evaluating the samples, you found that 5 of 60 weren’t authorized properly. In the test of control’s realm, you’ll calculate the deviation (5/60 = 8.33%) and compare it with the tolerable rate of deviation. If the deviation is greater than the tolerable rate of deviation, you can:
- Perform further tests of other controls that could result in supporting the planned level of control reliance; or
- Increase the assessed level of control risk (and, as a result, adjust your sample size, tolerable misstatement, etc.)
From the anecdote, you know that in attribute sampling, the “only” task needed is to count individual(s) with the attribute. The attribute in the case is “whether purchase orders authorized or not.”
Monetary Unit Sampling for Test of Control
From the Monetary Unit Sampling’s perspective, the plot is thicker because it is based on attribute sampling (as the AICPA says). So people may wonder if it can handle the control test, too.
Unfortunately, after digging into several sources, I found no indication that MUS could be employed in the test of control. Here are the reasons why I personally think that MUS isn’t the best fit for the task.
- The nature of the test of control is different from that of MUS. For example, the sampling unit in the control test may be a document, an entry, or a line item, while MUS use $1 as a sampling unit. The test of control uses the tolerable rate of deviation (a percentage from the counting process, as we elaborated before), while MUS expresses its results based on monetary value.
- The MUS mechanism tends to select a higher account balance or class of transaction. At the same time, control tests often require a more evenly distributed sample that includes all types of transactions regardless of size.
- The authoritative guide, like the AICPA Audit Guide: Audit Sampling, doesn’t provide a hint about using MUS for a test of control.
When I searched the Internet for the topic, I found one source that pointed out that “MUS is based on attribute sampling techniques and is often used in tests of controls and appropriate when each sample can be placed into one of two classifications—‘exception’ or ‘no exception’”. However, I found no elaboration on this statement.
Anyway, if you found any sources or have firsthand experience(s), let me know in the comment, and we can elaborate more about it.
The “Best Way” to Perform the Test of Control
Okay, the idea of using MUS for a test of control isn’t the best (instead, this is the best time to employ MUS). Thus, what are the appropriate way(s) to do the test of control?
AICPA offers both statistical and non-statistical methods. For the statistics way you can pick between:
For the non-statistical method, here are the options:
- Haphazard Sampling; or
- Block Sampling
Conclusion
Unfortunately, Monetary Unit Sampling isn’t the best fit for performing the test of control. Just because MUS is based on attribute sampling and the test of control uses attribute sampling doesn’t mean both can work well together. Using appropriate methods for the right task is a part of our challenge in the audit engagement. Thus, we’ll always need to know well about the “tools” we use.
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