Problem
Based on statistical sampling, the estimated misstatement in accounts receivable is as follows:
EyeMax Corp Sample difference $8,662
Number of accounts tested 40
Average difference per account $216.55
Number of accounts in population 1,545
Point Estimate of Misstatement in Population $334,570
90% confidence range/interval with sampling error $15,570- $653,570.
Task
1. What is your best estimate of the overall misstatement in EyeMax's accounts?
2. Explain the basis for your estimate and show your work.
3. Would you be willing to issue an unqualified ("clean") opinion without EyeMax making any adjustments to the accounts?
4. Explain why or why not. Assuming you would require an adjustment, what is the minimum amount of adjustment necessary for you to issue an unqualified opinion?
5. How would you explain/justify the amount of this adjustment to the client? Ignore your answer to the previous question. Assume the client agrees to an adjustment of $400,000.
6. What amount of the adjustment would you allocate to each of the four accounts? Explain why.
Hints:
(a) Analyze/review the materiality guidance in the case.
(b) Analyze/review the nature of the misstatements in the four accounts.
7. Propose a journal entry to record your adjustment.