http://lectures.mhhe.com/connect/0077632656/Chapter%2010/9e_AR_Confirmations.pdf

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EarthWear Hands-on Mini-case Chapter 10 - Accounts Receivable Tests of Details The McGraw-Hill Companies, Inc., 2014 In this mini-case you will complete the test of details on accounts receivable for the 2014 audit of EarthWear Clothiers, Inc. The principal test of detail involves sending "confirmations" or letters to customers so that they can confirm that they owe EarthWear the reported balance. All six customer accounts receivable balances exceeding $100,000 were targeted for testing. These six balances, aggregated total of $921,000, were confirmed without exceptions. The remaining accounts are of similar size and total $7,722,000 and will be tested via audit sampling. Inputs for the sample size determination were, Desired Confidence Level--95%, Tolerable Misstatement--$600,000, and Expected Misstatement--$154,440. Based on these inputs, 68 accounts receivable balances were selected for confirmation requests. The first 64 accounts receivable confirmations have already been reviewed by other staff members and no errors have been found. The remaining four confirmations require your review as they were returned with notes from customers indicating a potential misstatement. Please note that legitimate timing differences do not result in misstatements. INSTRUCTIONS: 1 Review the four confirmation responses in the PDF file downloaded from the mini-case website (a link is also provided below). Enter the information into Work Paper 10-1. For each confirmation response, please determine whether the difference noted by the customer represents a misstatement or a timing difference. After reviewing all four confirmations, please complete both the nonstatistical and the statistical evaluation options outlined on Work Paper 10-1 unless your instructor tells you otherwise. Chapter 9 of the text provides guidance on both nonstatistical and statistical evaluation. You will need to obtain the Sampling Interval before evaluating the results statistically using ACL. One approach you can use to obtain the sampling interval is to calculate the sample size in ACL using the inputs provided above. Please refer to Chapter 9 for a description of how to calculate a sample size and evaluate errors using ACL. Please be careful as you enter your results from ACL to the work paper as the items may not be listed in the same order. Fields you are to complete on work papers are colored yellow. The color will disappear when the field is completed. You should download the PDF files required to complete this case from the EarthWear Mini-Cases section of the Student Online Learning Center. http://www.mhhe.com/messier9e 2 After completing both the nonstatistical and statistical evaluation methods, please briefly discuss how the results compare to each other in the space provided on Work Paper 10-1. Are the monetary amounts and overall conclusions similar? 3 When you are finished evaluating the sample results, enter your initials in the yellow box in the upper right-hand corner of Work Paper 10-1 (box indicates "Initial Here"). 4 Please print a hard copy of Work Paper 10-1 to submit unless your instructor requests an electronic submission. The work paper is formatted to fit on one page. EARTHWEAR CLOTHIERS Evaluation of A/R Confirmations December 31, 2014 10-1 Initial Here 12/20/2015 Results of A/R Confirmations Complete the worksheet below by reviewing the accounts receivable confirmation file contained in the Instructions. Complete the cells below in yellow. If you determine that the difference noted by the customer is a misstatement, record the amount of difference in the "Amount of Misstatement" column. Customer ID Customer Name 652-54310 Red Star Health Group 210-38725 Museum of Flight 254-62418 Summit Hills Country Club 179-26343 Central States Hotels 64 additional items Total Dollar Amount of Items in Sample Nonstatistical Evaluation of Errors Amount of Ratio of Misstatements Misstatement in Sample $0 Enter Ratio or Formula* A/R Balance per A/R Balance clients' records per Customer $12,365 $14,235 $24,362 $18,642 $880,560 $950,164 Difference per Customer Enter Amount Enter Amount Enter Amount Enter Amount $880,560 Amount of Misstatement Indicate reason(s) for difference here. Indicate reason(s) for difference here. Indicate reason(s) for difference here. Indicate reason(s) for difference here. $0 Projected Misstatement Enter Amount or Formula** Reason(s) for Difference (i.e., timing difference, transposition error, cut-off error, mistake, etc.) Enter value of any misstatement here. Enter value of any misstatement here. Enter value of any misstatement here. Enter value of any misstatement here. $0 Net misstatement $0 Total Dollar Amount of Items in Sampling Population $7,722,000 Evaluation of Test Results Enter Evaluation Here * The ratio of misstatements is simply the computation of the percentage error in dollars tested in the sample. You can find this formula and an illustration of the computation in Chapter 9 (Nonstatistical Sampling section). ** Projected misstatement is the application of the misstatement ratio to the population subject to audit sampling. You can find this formula and an illustration of the computation in Chapter 9 (Nonstatistical Sampling section) Statistical Evaluation of Errors using ACL Monetary Unit Sampling*** Item Error Most Likely Error Basic Precision 1 2 3 4 Totals 0.00 Upper Error Limit Input ACL Result Evaluation of Test Results Enter Evaluation Here 0.00 *** To evaluate the results with ACL, you will need to obtain the Sampling Interval. One method you can use is to calculate the Sample Size in ACL using the inputs in the instructions. Evaluation Method Comparison In this space please briefly discuss how the results compare to each other. Are the monetary amounts and overall conclusions similar