The auditors wish to test the valuation of accounts receivable in the audit of Desert Enterprises of Bullhead City. 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 probability-proportional-to-size sampling.

Required:

a. For planning the sample, calculate:

(1) Required sample size. $500,000

(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. Explain how the auditors would consider the results calculated in b.

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d. Now work the Problem using ACL. Note the following differences

ACL	TEXT
Monetary	PPS sampling
Confidence	Risk of incorrect acceptance
Materiality	Tolerable misstatement
Expected Total Errors	Expected misstatement
Interval	Sampling interval

NOTE: If you do this correctly, ACL will give you a slightly different sampling interval than you obtained manually. When evaluating results use the interval you calculated manually. (In practice, if you were using ACL, you would certainly use its interval; we ask you here to use the manual interval simply so you can compare your results more easily.) Although you need not calculate it, make certain you know how to calculate the incremental allowance.

More Bullhead City

e. Now assume that the average book value of the 66 correct items in the sample was $450. Calculate the projected misstatement and the estimated total audited value using:

1. Difference method

2. Ratio method

3. Mean-per-unit method.

Hint: If the average book value of the 66 correct items in the sample is $450, what is their average audited value?