In estimation sampling for variables, what must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation?
The acceptable level of risk.
Variables sampling is used in tests of details because it may be used to (1) estimate the amount of a variable, such as an account balance, and (2) quantify the risk that the estimate may not approximate the true value. For substantive tests of details, the sample size depends on the auditor’s desired assurance (1.0 – the risk of incorrect acceptance) that tolerable misstatement is not less than actual misstatement in the population. The desired assurance may be based on, among other things, the following: (1) the assessed risk of material misstatement, (2) the assurance provided by other substantive procedures related to the same assertion, (3) tolerable misstatement, and (4) expected misstatement for the population. Accordingly, as the acceptable risk of incorrect acceptance decreases, the desired assurance increases, and the auditor decreases the tolerable misstatement.