Question

Background: You are testing the A/R balance through the confirmation process. Using Monetary Unit Sampling, determine whether the A/R balances is likely to be materially misstated.   

Key information:

Total A/R Balance: $10,000,000

# of individual customer A/R accounts: 5,600

Expected Misstatement: $400,000

Tolerable Misstatement (10% of A/R balance): $1,000,000

Risk of Incorrect Acceptance: 10%

Compute the Sample Size:

Determine the sample size by using the table in Exhibit GA.1 (pg. 872 of textbook) using the following assumptions:

• Risk of incorrect acceptance = 10%

• Ratio of expected misstatement to tolerable misstatement = 40% ($400,000 ÷ $1,000,000)
• Tolerable misstatement as a percentage of population = 10% ($1,000,000 ÷ $10,000,000)

Sample size = ________

Compute the Sampling Interval:

                              Sampling interval = __________

                                            

Analyzing the Sampled Customer A/R Balances to Compute the Upper Limit on Misstatement:

The following misstated A/R balances were detected:

                      Recorded              Audited               Tainting

      Customer              Balance            Balance                     %        

        S. Lewis               $ 40,000        $20,000                               

        R. Wood                  50,000        40,000                                 

        M. Patrick                80,000        60,000                                 

        D. Simmons          100,000        80,000                                 

Step (1): Calculate tainting percentage:

Answer 1

Sample Size = confidence factor *AR balance / Tolerable Misstated

Sample Size= 5.72* 10,000,000/10,00,000

Sample Size = 57.20

Confidence Factor

Tolerable Misstated	Confidence Level 90%
0	2.31
0.05	2.52
0.10	2.77
0.15	3.07
0.20	3.41
0.25	3.83
0.30	4.33
0.35	4.95
0.40	5.72

      Recorded              Audited               Tainting

      Customer              Balance            Balance DIFF(AB-TB) %        

        S. Lewis               $ 40,000        $20,000 200000 50% (20,000/40,000*100)

        R. Wood                  50,000        40,000 10000 20% (10000/50000*100)

        M. Patrick                80,000        60,000 20000 25% (20000/80000*100)

        D. Simmons          100,000        80,000 20000 20% (20000/100000*100)