# Efficient Tests of Balances Series—No. 11: Considering Risk when Calculating the Lower Limit for ISIs

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In my previous blog, I briefly discussed the impact of risk on the nature of the tests of balances procedures for accounts receivable. The assessed levels of risk of material misstatement at the assertion level also will determine the number (extent) of necessary accounts receivable confirmations from both sampling and non-sampling plans.  Risk determines tolerable misstatement at both the financial statement and assertion levels; tolerable misstatement is the basis for the lower limit of individually significant items.  Following is an example of the calculation process.

10 Steps to Calculating the Lower Limit of Individually Significant Items for Accounts Receivable

Here is an example of a calculation of the lower limit for individually significant items for accounts receivable when risk of material misstatement is  assessed as moderate at the financial statement level and at the assertion level.  As prescribed by professional standards, all percentages in this example are selected judgmentally.

1.    The higher of total revenues or total assets is sales    \$1,500,000
2.    A common materiality percentage (a sliding table
and precise percentages are not required by GAAS)                       x 1%

3.   Planning materiality at the financial statement level       \$     15,000

4.   TM percentage selected assuming risk is moderate              x 75%

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5.   Tolerable misstatement at the financial statement level  \$   11,250

6.   LL of ISIs percent selected assuming risk is moderate          x 25%

7.   Lower limit of individually significant items--financials    \$     2,800 (A)

8.   TM at the assertion level assuming risk is moderate
TM at financial statement level                                                \$   11,250
Percentage selected assuming risk is moderate                      x 80%
Tolerable misstatement for accounts receivable                \$      9,000

9.  LL of ISIs percent selected assuming risk is moderate          x 25%

10. Lower limit for individually significant items for
accounts receivable at the assertion level                        \$     2,250 (B)

Notes:
(A) The lower limit for individually significant items at the financial statement level is used for generally determining which accounts on the trial balance to consider for auditing procedures, unusual transactions from reading general ledger account activity and when proposed adjusting journal entries may be necessary.

(B) The lower limit for individually significant items at the classification level for accounts receivable may be used to guide the selection of accounts for positive confirmation in sampling and non-sampling plans and for determining which other significant accounts, notes and loans to select for applying auditing procedures.

My Basic Staff Training Series of live and on-demand webcasts focuses on “how to audit” all major financial statement classifications.  You can obtain syllabuses and register by clicking on the applicable box on the left side of my home page, www.cpafirmsupport.com.