An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population 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.
Answer:A
(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 cir cumstance the auditor simply accepts the population as be ing 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.