Question

Substantive Test

Assume that you are now performing substantive tests on receivables and you want to perform account receivable confirmations. The client’s recorded book value is $2,300,000 made up of 2,650 customers. You have established a tolerable misstatement of $75,000 for accounts receivable. You have selected 200 accounts worth a total of $235,000 to confirm and after sending out the confirmations, four are returned showing the following overstatements.

	Book Value	Audit value
Sonic Trading	12,800	10,350
Bazaar Enterprises	8,300	6,500
Millers Co	18,800	14,150
Mendez Bros.	4,925	3,200

2a. What is your sample misstatement? (Please show work for credit)

2b. What is your projected misstatement using the ratio estimation method? (Please show work for credit)

2.c What do you conclude about the fairness of the accounts receivable account, what is your conclusion about the accounts receivable balance based on ratio estimation, what is your conclusion about the accounts receivable balance based on ratio estimation?

A. The account is likely to be materially misstated

B. The account is likely to be fairly stated

2d. Using the difference estimation method, calculate your projected misstatement. What is your projected misstatement using the difference method?

2e. What do you conclude about the fairness of the accounts receivable account, what is your conclusion about the accounts receivable balance based on the difference method?

A. The account is likely to be misstated

B. The account is fairly stated

Answer 1

			Book Value	Audit Value
		Sonic Trading	12800	10350
		Bazzar Enterprises	8300	6500
		Millers Co	18800	14150
		Mendez Bros	4925	3200
		Total	44825	34200
	2a	Sample Misstatement	10625	(44825-34200)
	2b	Ratio Estimation
		Selected Book Value	$235,000
		Selected Audit Value	$224,375	(235000-44825+34200)
		Ratio of Selected Audit Value to selected Book Value:
		Ratio=224375/235000	0.95478723
		Projected audit Value	$2,196,011	(0.95478723*2300000)
		Recorded Book Value	$2,300,000
		Projected Misstatement	$103,989	(2300000-2196011)
		Tolerable misstatement	$75,000
	2c	CONCLUSION
		A. The account is likely to be materially misstated
	2d	Difference Estimation
		Sample Difference	$10,625
		Number of Samples	200
		Difference per sample	$53.13	(10625/200)
		Population size	2650
		Projected Misstatement	$140,781	(2650*53.13)
		Tolerable misstatement	$75,000
	2e	CONCLUSION
		A. The account is likely to be misstated