Part III [20 pts] Evidential reasoning concerning audit test results

Given the overall assumed RMM is .10 which we assume applies to accounts receivable, the audit team has decided to audit the assertion of the accuracy of accounts receivable. Thus they collect negative confirmations for 1% of the accounts receivable. On average, the confirmation evidence indicated receivables were 1.5% overstated mostly because of incorrect calculations of sales discounts.

1. What is a Negative Confirmation?

2.Given that only 1% of accounts receivable were confirmed, what would be a reasonable dollar estimate of the misstatement in the total Accounts Receivable account?

3.Considering your answer to question 2 above, is your misstatement estimate greater than or less than tolerable misstatement as it applies to Accounts Receivable? [please explain and show your calculation]

4.Considering your answer to question 2 above, is your misstatement estimate greater than or less than Materiality as it applies to Accounts Receivable? [please explain and show your calculation]

5.Given your answer to question 3, what should the audit team conclude concerning the risk of material misstatement [RMM] for accounts receivable?