In this mini-case you will complete the test of details on accounts receivable for the 2016 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 Level95%, 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. 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. 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 IDEA. One approach you can use to obtain the sampling interval is to calculate the sample size in IDEA using the inputs provided above. Please refer to Chapter 9 for a description of how to calculate a sample size and evaluate errors using IDEA. Please be careful as you enter your results from IDEA to the work paper as the items may not be listed in the same order 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? EARTHWEAR CLOTHIERS Evaluation of A/R Confirmations December 31, 2016 Results of A/R Confirmations Complete the worksheet below by reviewing the accounts receivable confirmation file contained in the Instructions. If you determine that the difference noted by the customer is a misstatement, record the amount of difference in the "Amount of Misstatement" column. (Round all answers to 2 decimal places except for Projected misstatement and A/R balance per customer, which should be rounded to the nearest whole number. Leave no cell blank - Be sure to enter "0" wherever required.) Customer ID Customer Name A/R Balance per clients' records A/R Balance per Customer Difference per Customer Reason(s) for Difference (i.e., timing difference, transposition error, cut-off error, mistake, etc.) Amount of Misstatement 652-54310 Red Star Health Group $ 12,365 $ $ $ 210-38725 Museum of Flight $ 14,235 $ $ $ 254-62418 Summit Hills Country Club $ 24,362 $ $ $ 179-26343 Central States Hotels $ 18,642 $ $ $ 64 additional items $ 880,560 $ 880,650 $ 0 $ 0 Total Dollar Amount of Items in Sample $ 950,164 Net misstatement $ Total Dollar Amount of Items in Sampling Population $ 7,722,000 ________________________________________ Nonstatistical Evaluation of Errors Amount of Misstatement Ratio of Misstatements in Sample Projected Misstatement Evaluation of Test Results $ % $ ________________________________________ Statistical Evaluation of Errors using IDEA Monetary Unit Sampling Item Error Most Likely Error Upper Error Limit Evaluation of Test Results Basic Precision Totals Star Health Group 3520 Lone Star DR Dallas TX 75212-6301 Dear Customers: Please examine the accompanying statement carefully and either confirm its correctness or report any differences to our auditors: Willis & Adams P.O. Box 4080 Boise, Idaho 79443-4080 who are auditing our financial statements. Your prompt attention to this request will be appreciated. An envelope is enclosed for your reply. Please do not send your payments to the auditors. Sincerely, Carol McKay Controller, EarthWear Clothiers The balance receivable from us for $12,365 as of December 31, 2016, is correct except as noted below: CUSTOMER NAME Date By Print Name: Position: Carol McKay David Allen Our accounting records show a balance of $12,356. 1/21/2017 David Allen Accounts Payable Clerk Upon review of our documents and in consultation with the customer, we have determined the customers records were correct. The correct balance is $12,356 as indicated by the customer on the confirmation request. Museum of Flight 308 Air St. Dayton OH 45404-1808 Dear Customers: Please examine the accompanying statement carefully and either confirm its correctness or report any differences to our auditors: Willis & Adams P.O. Box 4080 Boise, Idaho 79443-4080 who are auditing our financial statements. Your prompt attention to this request will be appreciated. An envelope is enclosed for your reply. Please do not send your payments to the auditors. Sincerely, Carol McKay Controller, EarthWear Clothiers Carol McKay The balance receivable from us for $14,235 as of December 31, 2016, is correct except as noted below: CUSTOMER NAME 1/17/2017 Alexis Oliver Date By Alexis Oliver Print Name: Gift Shop Store Manager Position: The customers order was shipped FOB shipping point on December 31, 2016. The freight company confirmed their order was delivered January 2, 2017. The balance shown on the confirmation request of $14,235 is correct. Summit Hills Country Club 236 Dudley Road Crestview Hills, KY 41017 Dear Customers: Please examine the accompanying statement carefully and either confirm its correctness or report any differences to our auditors: Willis & Adams P.O. Box 4080 Boise, Idaho 79443-4080 who are auditing our financial statements. Your prompt attention to this request will be appreciated. An envelope is enclosed for your reply. Please do not send your payments to the auditors. Sincerely, Carol McKay Controller, EarthWear Clothiers CONFIRMATION: CONFIRMATION: The balance receivable from us for $24,362 as of December 31, 2016, is correct except as noted below: A payment for invoice 12-6156389 was sent on December 30, 2016. Balance due per our records was $21,520 The payment was received from the customer on January 2, 2017. All balances were outstanding as of the end of 2016. Central States Hotels Best Western Development Director 4346 MAIN ST KANSAS CITY MO 64111 1810 Dear Customers: Please examine the accompanying statement carefully and either confirm its correctness or report any differences to our auditors: Willis & Adams P.O. Box 4080 Boise, Idaho 79443-4080 who are auditing our financial statements. Your prompt attention to this request will be appreciated. An envelope is enclosed for your reply. Please do not send your payments to the auditors. Carol McKay The balance receivable from us for $18,642 as of December 31, 2016, is correct except as noted below: Balance does not include Credit Memo 12-1006 issued on December 29, 2007 for $3,000. Balance should be $15,642. The customer service representative agreed to issue a $3,000 credit memo to the group when they called on December 29, 2016. The customer service representative inadvertently listed Western States Hotels which delayed processing of the credit memo until January 4, 2017. The credit memo was correctly attributed to Central States Hotels, but not until the next accounting period. The balance the customer listed of $15,642 is correct.