An Auditor Established a $60,000 Tolerable Misstatement for an Account

question 22

Multiple Choice

An auditor established a $60,000 tolerable misstatement for an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population of 1,000 items that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that

• A) There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.
• B) There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements.
• C) The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement.
• D) The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.
• Net overstatement is $3,500. Using difference projection, the mean misstatement per sampling unit is $70 ($3,500/50) and the projected misstatement is $70,000 ($70 x 1,000). The projected misstatement is larger than the tolerable (even before considering sampling risk).

---

Definitions:

Ethnocentric Staffing Model

A staffing approach used by multinational companies that primarily uses parent country nationals to staff higher-level foreign positions.

International Business

The carrying out of trade and investment activities by firms across national borders, encompassing the management of international operations.

Host-Country Nationals

Individuals who are citizens of the country in which a foreign subsidiary is located and are employed by the subsidiary.

Transnational Strategy

A global business approach used by companies to develop and distribute products or services across multiple countries while maintaining a high level of local responsiveness.