Response to the following problem:
You are planning to use nonstatistical sampling to evaluate the results of accounts receivable confirmation for the Meridian Company. You have already performed tests of controls for sales, sales returns and allowances, and cash receipts, and they are considered excellent. Because of the quality of the controls, you decide to use an acceptable risk of incorrect acceptance of 10%. There are 3,000 accounts receivable with a gross value of $6,900,000. The accounts are similar in size and will be treated as a single stratum. An overstatement or understatement of more than $150,000 is considered material.
Required:
a. Calculate the required sample size. Assume your firm uses the following nonstatistical formula to determine sample size:
Sample size= Population Recorded Amount × Confidence Factor/Tolerable Misstatement
A confidence factor of 2 is used for a 10% ARIA
b. Assume that instead of good results, poor results were obtained for tests of controls and substantive tests of transactions for sales, sales returns and allowances, and cash receipts. How will this affect your required sample size? How will you use this information in your sample size determination?
c. Regardless of your answer to part a., assume you decide to select a sample of 100 accounts for testing. Indicate how you will select the accounts for testing using systematic selection.
d. Assume a total book value of $230,000 for the 100 accounts selected for testing. You uncover three overstatements totaling $1,500 in the sample. Evaluate whether the population is fairly stated.