Question

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. As of 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 tests 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 (Do not round intermediate calculations. Round your answer to the nearest dollar amount.):

Stratum				Book Value of Stratum				Book Value of Sample				Audit Value of Sample				Amount of 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

Using ratio projection, what is the total projected misstatement?

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. As of 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 tests 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 (Do not round intermediate calculations. Round your answer to the nearest dollar amount.):

Stratum				Book Value of Stratum				Book Value of Sample				Audit Value of Sample				Amount of 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

Using ratio projection, what is the total projected misstatement?

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. As of 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 tests 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 (Do not round intermediate calculations. Round your answer to the nearest dollar amount.):

Stratum				Book Value of Stratum				Book Value of Sample				Audit Value of Sample				Amount of 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

Using ratio projection, what is the total projected misstatement?

Sample Size

b. Gren confirmed the accounts receivable accounts selected and noted the following results (Do not round intermediate calculations. Round your answer to the nearest dollar amount.):

Stratum				Book Value of Stratum				Book Value of Sample				Audit Value of Sample				Amount of 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

Using ratio projection, what is the total projected misstatement?

Projected misstatement:

Answer 1

Answer:

a.

Remove the 10 accounts greater than $50,000 (total value $750,000) from the sampling population because they will be the subject of 100% testing. Sample size is calculated as follows:

b.

The projected misstatement for the accounts receivable account is:

Strata	Amount of Misstatement	Ratio of Misstatements in Stratum Tested	Projected Misstatement
>$50,000	$ 3,500	NA 100% of Strata Tested	$ 3,500
>$5,000	15,250	(15,250 ¸ 910,000) × 3,000,000	50,275
<$5,000	1,550	(1,550 ¸ 70,000) × 1,750,000	38,750
Total projected misstatement	$ 92,525

Since the projected misstatement, $92,525, is significantly greater than the expected misstatement, $55,000, Gren should conclude that there is an unacceptably high risk that the true misstatement exceeds the tolerable misstatement (i.e., must consider the original allowance for sampling risk of $100,000 ($155,000 – 55,000)).