Why Tolerable misstatement has inverse relationship and expected misstatement has direct relationship with sampling ?? please give example.
Hello Kedar Sorry for Late Reply was busy with some urgent work.
Tolerable Limit is monetary limit which is use to compare / evaluate projected misstatement, if PM is higher then population is considered materially misstated and vice a versa. This limit is based on materiality level for financial statement.
If tolerable misstatement is lowered, that means this particular area is considered more sensitive / risky, hence we should be very careful and hence we increase sample size so there is inverse relationship.
Now Expected Misstatement is computed based on historical data, which indicates chances that misstatement will be present in particular area, higher expected misstatement we should be more careful hence increase sample size so there is direct relationship.
Tolerable Misstatement is comparison limit.
Expected Misstatement is historical misstatement limit.