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Important Formulas

This document contains key formulas used in conducting a financial audit. It includes formulas for determining materiality, expected error, audit risk, sample sizes for tests of controls and details, and formulas for evaluating results including maximum projected deviation rate, error amounts, tainting, most likely error, precision, and upper error limit. The remarks column provides guidance on determining values and factors to use in the formulas.

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Ali Aadil
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34 views

Important Formulas

This document contains key formulas used in conducting a financial audit. It includes formulas for determining materiality, expected error, audit risk, sample sizes for tests of controls and details, and formulas for evaluating results including maximum projected deviation rate, error amounts, tainting, most likely error, precision, and upper error limit. The remarks column provides guidance on determining values and factors to use in the formulas.

Uploaded by

Ali Aadil
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Financial Audit Manual

Key Formulas

Formula Remarks
Planning phase
Materiality = Base Amount x Percentage Percentage is determined by Auditor as
per guidelines available in FAM.
Expected Aggregate Error = Materiality x 20% 20% taken as conservative approach as
per Working Paper Kit.
Planned Precision = Materiality – Expected Aggregate Error
AR = IR x CR x OSPR x STDR AR = Audit Risk
STDR = AR / (IR X CR X OSPR) IR = Inherent Risk
CR = Control Risk
OSPR = Other Substantive Procedure Risk
STDR = Substantive Tests of Details Risk
Sample Size for TOC = Confidence Factor / Upper Error Limit • Confidence factor is to be taken from
Table based on Confidence Level and
Number of deviations to be
permitted.
• Upper Error Limit also known as
maximum tolerable deviation rate.
You can calculate it by (Materiality x
Multiplier/Population Value).
Sample Size for Tests of Details = Population Value / Average • Basic Precision Factor and PGW
Sampling Interval Factors are taken from table based on
Average Sampling Interval = Basic precision / Basic Precision Confidence Level for test (%).
Factor • Confidence Level for test (%) is
Basic Precision = Planned Precision – PGW worked out as (1 – STDR)
PGW = Expected Aggregate Error x PGW Factor
Evaluation phase
For Test of Controls: • Confidence Factor is taken from table
Maximum Projected Deviation Rate = Confidence Factor / based on Confidence Level Used and
Sample Size number of deviations found in the
sample
For Substantive Tests of Details (Projectable Errors): • PGW Factor is taken from table based
Error (Overstatement) = Book Value – Audit Value on Confidence Level and Ranking of
Error (Understatement) = Audit Value – Book Value Error.
Tainting = Error / Book Value x 100 • Rank Tainting values, highest = 1,
Adjusted Tainting = Tainting * PGW Factor next highest = 2, and so on.
Most Likely Error = Sum of Tainting * Sampling Interval
or
Sum of Tainting / Sample Size * Population Value
Basic Precision = Sampling Interval * Basic Precision Factor
Precision Gap Widening = Sampling Interval * Adjusted Total
Tainting
Total Precision = Basic Precision + Precision Gap Widening
Upper Error Limit = MLE + Total Precision

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