In the auditing realm, understanding sampling techniques is crucial. One method, Monetary Unit Sampling (MUS), offers advantages and challenges. By treating each monetary unit as a separate sampling entity, MUS has gained popularity for specific audit situations while being less suitable for others. This article explores the scenarios where MUS is most effective and those where an alternative approach might be better. Whether you’re an experienced auditor or just getting started, this guide aims to clarify the perfect time (and the opposite) to use Monetary Unit Sampling.
Understanding Monetary Unit Sampling
It’s story time
This time, let’s use an analogy to understand Monetary Unit Sampling. Say you buy a giant bowl filled with marbles at a carnival. The seller (the auditee) said that the total weight of the marbles (the population), the bowl was excluded, is 1,000 lbs (the account balances). You are both a happy customer and a skeptical auditor. So, you want to examine the total weight of the marbles.
Each marble (transaction) has weight (dollar amount) printed on a label (recorded amount) and the actual weight (a figure pointed by scales). You need to examine the actual weight (actual amount) for all marbles to prove the seller’s claim about the 1,000 lbs weight.
Of course, you don’t have time to weigh every single marble. So you close your eyes and grab a couple of marbles (take a sample). Using the approach, the larger the marble, the higher the chance your hand will pick it.
Then, you examine the weight of each marble you’ve selected. Sometimes, the scales display the same number as the marble’s label, while other marbles may have different numbers.
You summarise the values and get the total discrepancies between the labels and actual numbers for all sample marbles. (Pro tip: you should use Ms. Excel for the task to save time, wink).
The total discrepancies for the sample must be extrapolated to get the population (all marbles in the bowl) weight discrepancy. After extrapolating the sample misstatement, you found the total overstatement is 100 lbs, meaning the actual weight of all marbles is only 900 lbs.
Before taking samples, you set up your predefined acceptable marble weight variance (tolerable misstatement) to 70 lbs. When comparing the number (70) with the overstatement you’ve found (100), you found the misstatement is unacceptable. Then, you give the seller two options: give a refund or add more marbles. Yes, the last sentence has nothing to do with audit; it serves as an “epic” ending for your marble adventure story.
More formal definitions
For this purpose, we’ll cite multiple sentences (and give a summary) from The Audit Process Seventh Edition book by Iain Gray, Stuart Manson, and Louise Crawford.
Monetary Unit Sampling (MUS) is the most popular statistical sampling method used to estimate the amount by which an account balance is in error (p. 438).
The fundamental concepts behind MUS are.
- The population is divided into $1 units (or any other monetary unit).
- If there’s an error detected in the transaction or balance associated with the $1, the transaction or a balance is considered to be “tainted” based on the error’s percentage concerning its value. For example, if a transaction is recorded as $100, but the actual value is $80, it’s considered tainted by 20 percent.
For the summaries, we can say that Monetary Unit Sampling is used when the population can be specified in monetary amounts, and the cumulative total can be calculated. The population is divided into $1 units, and specific $1 units are selected as a sample for audit examination. MUS is suitable when the auditor (you) wants to estimate the monetary error in an account balance and compare it to the tolerable error to determine the acceptability of the balance.
Below, we elaborate more about several times when the method can be applied and when it’s not the best option to choose.
When to Use Monetary Unit Sampling
When the population can be specified in terms of a $1 monetary amount1
Because the method uses a monetary unit, it can only apply when the population is in monetary unit terms. For example, you can audit the account balances and transactions using MUS. On the other hand, for another audit objective, for example, if the primary focus isn’t on monetary amounts but on counts, existence, or occurrence, such as inventory counts, the monetary unit sampling isn’t the right fit.
Clear materiality thresholds2
The Monetary Unit Sampling method asks for tolerable materiality and expected materiality for its phases, from deciding a sample size to getting a conclusion for the population. So, you need to set clear materiality thresholds for using the method.
Substantive tests of details
Monetary Unit Sampling has a straightforward statistical nature, similar to attribute sampling, but offers results expressed in monetary terms.3 The characteristic is perfect for substantive tests of details because, at the end of the process, you’ll get the results in monetary terms and make it easier to communicate to other parties.
Standardization and consistency
The method provides how-tos for each sampling step. Which is easier to follow by the auditor, even the novice one. Thus, if the auditor expects standardization, it’s the best fit. Standardization reduces the need for arbitrary decisions (a.k.a, professional judgment), which can enhance the auditor’s self-confidence. Another benefit of standardization is the consistency of the result.
Statistical analysis required
Statistical sampling offers benefits such as justified sample size, quantified evaluation, and provides a mathematical base for the auditor’s conclusion.45 Those benefits attract the auditor to use the statistical method. And one of the statistical methods I found the easiest is Monetary Unit Sampling.
Limited time or resources
When using Monetary Unit Sampling, you can use a smaller sample size whilst maintaining reliable results. Thus, you can use MUS when you have limited time or resources on your hand.
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When to Not Use Monetary Unit Sampling
In summary, if you are in the opposite condition described in the “When to use MUS” section, you probably shouldn’t use the method. But here are some other conditions when it’s wiser not to use the Monetary Unit Sampling method.
When the auditor is testing for understatement of an account balance6
The reason is that as the recorded transaction decreases, its likelihood of being chosen for the transaction’s examination. For example, if a transaction is recorded as $0 rather than $100 (as the actual amount), there’s no possibility of the item getting picked for sampling. If you expect understatement in the population, consider using another form of audit testing.
The high volume of Expected Error
From the sample size perspective, you always see the Expected Error as a numerator. So, the greater your expected error, the greater the sample size you need to examine, which is usually the least favorable option.
Alternative Sampling Methods to Consider
When Monetary Unit sampling isn’t the right fit for the audit situation, don’t worry; there are other sampling methods to consider. Here is the list.
- Random sampling
- Haphazard sampling
- Stratified sampling
- Block sampling
- Systematic sampling
- Cluster sampling
- Attribute sampling
- Discovery sampling
- Stop-or-go sampling
- non-statistical sampling
Conclusion
While Monetary Unit Sampling (MUS) is most commonly associated with financial statement audits, its application is not strictly limited to them. The fundamental principle of MUS is to focus on individual monetary units and give higher-value items a greater probability of selection. So, it can be applied in other audit or review contexts where there’s a need to assess the monetary impact of errors in a given dataset.
However, it’s crucial to ensure that the underlying assumptions and characteristics of MUS are suitable for the specific audit or review context in which it’s being applied. Always consider the objectives of the audit or review and the nature of the data being examined when determining the appropriateness of MUS or any other sampling technique.
References
- Gray, L., Stuart Manson, and Louise Crawford. “The Audit Process: Principles, Practice and Cases.” (2019, p.439). ↩︎
- Ibid. ↩︎
- Arens, Alvin A. “Auditing: the art and science of assurance engagements”. Beles Paradise College, (2022, p.392). ↩︎
- Gray, L., Stuart Manson, and Louise Crawford. “The Audit Process: Principles, Practice and Cases.” (2019, p.430). ↩︎
- Gray, L., Stuart Manson, and Louise Crawford. “The Audit Process: Principles, Practice and Cases.” (2019, p.838). ↩︎
- Gray, L., Stuart Manson, and Louise Crawford. “The Audit Process: Principles, Practice and Cases.” (2019, p.439). ↩︎
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