The accounting firm of Johnson and Johnson has decided to design a nonstatistical sample to examine the accounts receivable balance of Francisco Fragrances, Inc., at October 31, there were 1,500 accounts receivable accounts with a balance of 5.5 million. The accounts receivable population can be segregated into the following strata:
Number and size of accounts Book Value of Stratum
10 accounts > $ 50,000 $750,000
440 accounts > $5,000 3,000,000
1,050 accounts < $ 5, 000 1,750,000
- Jonathan L. Gren, senior-in-charge of the audit, has made the following decisions.
- Based on the results of the test of controls and risk assessment procedures, a low assessment is made for the risk of material misstatement.
- The desired confidence level is moderate.
- The tolerable misstatement allocated to accounts receivable is $ 155,000, and the expected misstatement is $55,000
- All the balances greater than $50,000 will be audited.
Required:
a. Using the nonstatistical sampling formula included in the textbook, compute the suggested sample size for this test.
b. Gren confirmed the accounts receivable accounts selected and noted the following results
Statum Book Value Book Value Audit Value Amount of Straum of Sample of Sample Overstatement
>50,000 750,000 750,000 746,500 3,500
>5,000 3,000,000 910,000 894,750 15,250
<5,000 1,750,000 70,000 68,450 1,550