Problem 1:
As auditor for the Harder Company, you decide to use PPS sampling in determining the fairness of accounts receivable. In executing the plan, you discover the following misstatements:
Book Audit
Value Value
$1,500 $1,000
2,400 1,200
8,200 7,500
6,000 5,400
9,000 8,000
The book value of the accounts receivable is $720,000, the RF factor at a 5% risk of incorrect acceptance is 3.0, and sample size is 90. The incremental change in reliability factors for the first four misstatements are 1.75, 1.55, 1.46, and 1.40.
REQUIRED:
1. Calculate basic precision and the total projected misstatement.
2. Determine the incremental allowance for sampling risk and the upper misstatement limit.
3. State the quantitative conclusion that can be drawn from the sample assuming tolerable misstatement is $30,000.
Problem 2:
Assume the following data for Morris Company whose auditor employs nonstatistical sampling to substantive testing:
DOLLAR VALUE BOOK VALUE OF
STRATUM OF RECEIVABLES POPULATION N n
1 Greater than $60,000 $ 700,000 10 10
2 $6,000 — $60,000 1,200,000 60 8
3 Less than $6,000 1,100,000 330 12
Total $ 3,000,000 400 30
BOOK VALUE AUDITED VALUE
STRATUM OF SAMPLE OF SAMPLE
1 $700,000 $697,000
2 360,000 357,000
3 72,000 69,000
Total $1,132,000 $ 1,123,000
REQUIRED:
1. Calculate the estimated audit value for each of the strata using the ratio method.
2. Calculate the estimated audit value for each of the strata using the difference method.