INTERPRETING SAMPLE RESULTS
The following problems are based on the material in the INTERPRETING CONFIDENCE INTERVALS IN AUDIT SAMPLES folder.
Sketch the results on a 1-dimensional graph.
Place your answers below.
1. An auditor has selected and evaluated a statistical sample of accounts receivable to assess collectibility on an account-by-account basis, and then project the finding of uncollectible amounts to the population. Several accounts were found in the examination to be partly or entirely uncollectible.
The test results showed that, at 95% confidence, uncollectible receivables total between 800,000 and 4,200,000 (overstatement).
a. What should be the auditor's conclusion if the maximum tolerable misstatement is $1,800,000?
b. Propose an appropriate adjusting journal entry.
c. Suppose that, prior to this test, the client's allowance for uncollectible accounts is $1,000,000. What would you recommend?
2. You are performing an obsolescence review of a 22,000 item parts inventory. The book value of the inventory is $10,515,000. You decide to select a random sample for dollar value estimation. The maximum tolerable misstatement is $500,000 and the planned confidence level is 95% (2-sided). Pricing errors were disclosed in the sample.
What would be your conclusions/recommendation in each of the following situations?
a. Overstated by an estimated $320,000, with a lower confidence limit [LCL] of $30,000 and an upper confidence limit [UCL] of $610,000.
b. Overstated by an estimated $240,000, with LCL = $90,000 and UCL=$390,000.