Detailed Answer
(a) The requirement is to identify an auditor’s most
likely response to a circumstance in which there is a tolerable
misstatement of $60,000, and the auditor has discovered
misstatement of a net overstatement of $3,500 ($3,700 – $200)
when 1/20 of the account has been included in the sample.
Because auditors must project the misstatements to the entire
population, one would expect a misstatement of approximately
$70,000 (20 times the misstatement of $3,500). Since this
exceeds the tolerable misstatement, there is little question that
the risk of material misstatement is too high and that the
misstatement in the population exceeds the tolerable
misstatement, therefore answer (a) is correct. Answer (b) is
incorrect because it seems that the sum of actual overstatement
and understatement is likely to exceed the tolerable
misstatement. Also, answer (b) makes little sense since there
probably is no such thing as “an unacceptably high risk†that the
tolerable misstatement exceeds the sum of actual overstatements
and understatements; in such a circumstance the auditor simply
accepts the population as being materially correct. Answers (c)
and (d) are incorrect because the total projected misstatement
must be calculated as indicated above. See AU-C 530 and the
Audit Sampling Guide for information on sampling.