Assume you are planning the confirmation of accounts

Question

Assume you are planning the confirmation of accounts receivable. There are 2000 customer accounts with a total book value of 5,643,200. Tolerable misstatement is set at $200,000, and expected misstatement is 40,000. The risk of incorrect acceptance is 30%, the ratio of expected to tolerable misstatement is 20%, and the ratio of tolerable misstatement to the population is 3.5% (round down to 3% for use in Exhibit 8.7)

a) What is the sample size?

b) What is the sampling interval?

c) What is the largest value you can use for a random start

d) Using the following list of the first 15 items in your population, a random start of 25,000, and a sample interval of $100,000, identify the items to be included in your sample.

Item		Book Value		Cumulative Amount		Sample Item
Random Start
1		3,900
2		26,000
3		5,000
4		130,000
5		2,000
6		260,000
7		100
8		25,000
9		19,000
10		10,000
11		9,000
12		2,500
13		65,000
14		110,000
15		6,992

e) What is the probability of selecting each of the following population items, assuming a $100,00 sampling interval?

Item		Book Value		Probability of Selection
1		3,900
2		26,000
4		130,000
6		360,000

f) Why might the final sample size include fewer logical unites than the computed sample size?

g) What is the statistical conclusion if no misstatements are found in the sample? Is the account balance acceptable?

Assuming sampling interval of $100,000 and the following findings:

Misstatement		Book Value		Audit Value
1		210,000		208,000
2		9,000		8910
3		15,000		14,250

h) Calculate the total estimated misstatement

i) Do these results indicate that the account balance as stated is acceptable?

j) If the results are not acceptable, what courses of action are available to the auditor?