Page 136 - CA Final PARAM Digital Book.

reduce the variability of items within each stratum and therefore allow sample size to be
reduced without increasing sampling risk.

2. When performing tests of details, the population is often stratified by monetary value. This
allows greater audit effort to be directed to the larger value items, as these items may contain
the greatest potential misstatement in terms of overstatement. Similarly, a population may be
stratified according to a particular characteristic that indicates a higher risk of misstatement,
for example, when testing the allowance for doubtful accounts in the valuation of accounts
receivable, balances may be stratified by age.

3. The results of audit procedures applied to a sample of items within a stratum can only be
projected to the items that make up that stratum. To draw a conclusion on the entire
population, the auditor will need to consider the risk of material misstatement in relation to
whatever other strata make up the entire population. For example, 20% of the items in a
population may make up 90% of the value of an account balance. The auditor may decide to
examine a sample of these items. The auditor evaluates the results of this sample and reaches
a conclusion on the 90% of value separately from the remaining 10% (on which a further sample
or other means of gathering audit evidence will be used, or which may be considered
immaterial).

4. If a class of transactions or account balance has been divided into strata, the misstatement is
projected for each stratum separately. Projected misstatements for each stratum are then
combined when considering the possible effect of misstatements on the total class of
transactions or account balance.

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