Final answer:
Monetary-unit sampling is not particularly effective at detecting misstatements that are individually immaterial but collectively material, as it targets individual transaction values and may overlook numerous small errors that together are significant.
Therefore, option 1 ) is correct
Step-by-step explanation:
Monetary-unit sampling (MUS) is a statistical sampling method used in auditing that focuses on the value of transactions or balances, usually applied to test the accuracy of a company's financial records. This method is primarily effective at detecting misstatements that are both individually and collectively material, because if a large misstatement is captured in the sample, it has a higher chance of being detected due to its significant impact on the monetary unit being tested.
However, monetary-unit sampling is not particularly effective at detecting misstatements that are individually immaterial but collectively material. This is because MUS focuses on individual values of items rather than the cumulative effect of many immaterial items that could collectively become material. Furthermore, the design of MUS which often involves higher value items having a higher chance of being selected, means that a population of many small misstatements might go undetected if none or few are selected in the sample. It is important for auditors to understand the limitations of this method and to combine it with other procedures when necessary to detect different types of misstatements.
Errors related to the process of sampling itself are known as sampling errors, and might include instances where the sample is not large enough to gain a representative view of the population. Meanwhile, issues like a defective counting device can result in a type of error known as a nonsampling error. To maintain accuracy, true independence among sampling units is vital, otherwise, statistical power to detect differences or effects is biased and may increase the risk of Type II errors.