Purchase Solution

Sampling to test the reasonableness of the recorded book value

Not what you're looking for?

Ask Custom 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).

Purchase this Solution

Solution Summary

Statistical sampling to test the reasonableness of the recorded book values are examined.

Solution Preview

Running Head: AUDIT QUESTION

Statistical Sampling

Ans.1
(a).
Calculation of Sample Size:
Sample size =
Total no. of Customers Account = 4000
Total Book Value (BV) = $3000000
Tolerable Misstatement (TM) = $150000
Anticipate Misstatement (AM) = $30000
Reliability Factor for the 10% risk of incorrect acceptance (RF) = 2.31 (Exhibit-1)
Expansion Factor for AM at 10% risk of incorrect acceptance (EF) = 1.5 (Exhibit-2)
Sample Size = = 66
So, the sample size for the statistical sampling will be 66.
(b).
Calculation of Sampling Interval:
Sampling interval =
Book Value of account receivables = $3000000
Sampling Interval = = $45455
So, the sampling interval for statistical sampling will be $45455.
(c).
(1).
Calculation of Projected misstatement:
Project misstatement = (Tainting percentage × Sampling interval)
Tainting Percentage = (Book value - Audit value) ÷ Book value
(Boynton & Johnson, 2009).
Sampling Interval = 45455
Calculation of projected misstatement for each sample is as follow-
Sample Book Value Audit Value Misstatement Taint (%) Sampling ...

Solution provided by:
Education
  • B.Com, University of Ajmer
  • M.Com, University of Ajmer
Recent Feedback
  • "Great work!!!! Thank you"
  • "Excellent!"
  • "Really help!!!thank you."
  • "Thanks for answering my question!!"
  • "thank you. great guidance."
Purchase this Solution


Free BrainMass Quizzes
Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Introduction to Finance

This quiz test introductory finance topics.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.