Assume that the auditor is auditing accounts receivable for a long-time client. The auditor has assessed the risk of incorrect acceptance at 10%. The client's book value in accounts receivable is $8,425,000. Tolerable misstatement is $200,000, and expected mis- statement is $40,000. Therefore, the ratio of expected to tolerable misstatement is 20%. The ratio of tolerable misstatement to the population book value is 2.4%.
a. Calculate the sample size and sampling interval.
b. Analyze each difference detected during the audit to determine if it is a misstatement.
c. Calculate the total estimated misstatement assuming the mis- statements detailed in the following table were found in the sample. Identify the top-stratum items, the lower-stratum items, and tainting percentages, where applicable. What conclusion do you reach based upon your calculation?
d. Discuss the audit implications, that is, whether the audit work supports book value or whether additional auditing procedures should be recommended, and, if so, describe the nature of the recommended auditing procedures.
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Book Value
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Audited Value
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Nature of Difference
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1. $25,000
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$15,000
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$10,000 was billed to Jason Company, but it should have been billed to Johnson Company. Subsequent follow-up work confirmed that it should be billed to Johnson, and Johnson acknowledged the $10,000 debt.
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2. $40,000
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$20,000
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Merchandise was returned before year end, but credit was not recorded until the next period.
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3. $325,000
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$250,000
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Major dispute on cost overrun charges. Subsequent review supports customer position.
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4. $105,000
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$100,000
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Another dispute on cost overrun. Again customer position is correct.
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5. $122
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$0
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A credit memo was supposed to have been issued for defective merchandise, but was not.
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