Question: You decide to use statistical sampling to test the reasonableness of the recorded book value of the Key West Company's accounts receivable. Because the company's internal control procedures over accounts receivable have been evaluated by you as excellent and you believe few misstatements will be found, you decide to use probability proportional- to-size sampling. The company has 4,000 customer accounts with a total book value of $3,000,000. You decide $150,000 is the maximum tolerable misstatement and anticipate that there may be $30,000 of misstatement in the population. You wish to limit the risk of incorrect acceptance to 10%. It is your intention to seek positive confirmation of accounts included in your sample and to apply alternative procedures to accounts for which no reply is received.
Required:
a. Compute the sample size.
b. Compute the sampling interval.
c. Assume the following misstatements were found in the sample:
SAMPLE ITEM BOOK VALUE AUDIT VALUE
1 $800 $0
2 1,500 1,350
3 13,000 0
4 15,000 14,250
Calculate
1. Projected misstatement.
2. Allowance for sampling risk.
3. Upper misstatement limit.
d. State your conclusion based on the results in (c).