#2 PPS sampling: The auditors wish to test the valuation of accounts receivable in the audit of Dannon Company. The client has $500,000 of total recorded receivables, composed of 850 accounts. The auditors have determined the following:

Tolerable misstatement $25,000

Risk of incorrect acceptance 5%

Expected misstatement $2,000

The auditors have decided to use PPS sampling (monetary unit sampling).

a. For planning the sample,

calculate:

(1) Required sample size.

(2) Sampling interval.

b. Assume that the auditors have tested the sample and discovered three misstatements:

Book Value Audited Value

$ 50 $ 47

800 760

8,500 8,100

Calculate:

(1) Projected misstatement.

(2) Basic precision.

(3) Incremental allowance.

(4) Upper limit on misstatement.

c. Comment on the quantitative and qualitative implications of b).