Question

Edwards has decided to use monetary-unit sampling in the audit of an entity’s accounts receivable balance. Few, if any, misstatements of account balance overstatements are expected. (8 points)

a. Calculate the sample size and the sampling interval Edwards should use for the following information:

Tolerable misstatement = $15,000

Expected misstatement = $6,000

Desired confidence level = 95%

Recorded amount of accounts receivable balance $300,000

b. Calculate the upper misstatement limit (UML) assuming that the following three misstatements were discovered in testing based on the MUS sample computed in part (a).

Misstatement #	Book Value	Audit Value
1	$400	$320
2	$500	$0
3	$3,000	$2,500

c. Document the auditor’s conclusion about the fairness of the accounts receivable balance based on your testing.

Answer 1

a. Answer:

Calculate the sample size and the sampling interval

Tolerable misstatement = $15,000

Expected misstatement = $6,000

Recorded amount of accounts receavable balance = $300,000

Therefore,

Tolerable misstatement in percentage = (Tolerable misstatement/Recorded amount of accounts receivable) * 100

= ($15,000/$300,000) * 100 = 5%

Expected misstatement in percentage = (Expected misstatement/Recorded amount of accounts receivable) * 100

= ($6,000/$300,000) * 100 = 2%

Desired confidence level = 95%

Statistical sample size for attribute sampling - 95% desired confidence level, the sample size for tolerable misstatemen of 5% and expected misstatement of 2% is = 181

Sample interval = Recorded aamount of acounts receivable/Sample size

= $300,000/181

= $1,657

b. Answer:

The upper misstatement limit for the three misstatements identified is calculated by first computing the tainting factors as follows:

Tainiting factors for Misstatement no. 1 = ($400 - $320)/$400 = 0.20

Tainiting factors for Misstatement no. 2 = ($500 - $0)/$500 = 1

Tainiting factors for Misstatement no. 3 = Not applicable since book value ($3,000) exceeds sampling interval ($1,657).

Misstatement Number	Tainting Factors	Sampling Interval	Projected Misstatement (2*3)	95% upper limit increment	Upper Misstatement Limit (2*3*5)
Basic Precision	1	1657	N.A.	3	4971
1	0.2	1657	331	1.7 (4.7 -3.0)	563
2	1	1657	1657	1.5 (6.2 - 4.7)	2486
Add misstatements detected in logical units greater than the sampling interval: Error 3	N.A.	1657	N.A.	N.A.	75000
				Upper misstatement limit	83020

c. Answer:

Since the UML ($83,020) is more than the TM ($15,000), Edwards cannot accept the accounts receivable balance as being fairly stated.