Question
Tony Randazzo, CPA, was engaged to audit the year-end financial statements for Tom Glavine Investment Securities LLC. The book value of accounts receivable for the
Tony Randazzo, CPA, was engaged to audit the year-end financial statements for Tom Glavine Investment Securities LLC. The book value of accounts receivable for the current year is $980,000.\ \ For the current year, Randazzo decided to use probability-proportional-to-size (PPS) sampling (sometimes referred to as monetary-unit sampling) in confirming accounts receivable because PPS sampling uses each account in the population as a separate sampling unit.\ \ Randazzo reasoned that the PPS sampling would automatically result in a stratified sample because each account would have an equal chance of being selected for confirmation. Additionally, the selection of negative (credit) and zero balance accounts would be facilitated without special considerations.\ \ Randazzo correctly notes the formula for computing sample size and her calculated sample size was 70 and the sampling interval was determined to be $14,000. However, only 64 different accounts were selected because 6 accounts were so large that the sampling interval caused each of them to be selected twice. Randazzo proceeded to send confirmation requests to 63 of the 64 customers. One selected account had a balance of only $4, so Randazzo ignored this account and substituted the largest account that had not been selected. Randazzo sent a confirmation to this newly selected account.\ \ The confirmation process revealed three differences:\ \ An account with an audited value of $5,000 had been recorded as $7,000. Randazzo projected this to be a $2,000 misstatement.\ An account with an audited value of $4,000 had been recorded at $3,800. Randazzo did not count the $200 difference because the purpose of the test was to determine overstatements.\ An account was recorded at $18,000 and the audited value was $3,000. Randazzo projected this to be a $15,000 misstatement.\ In evaluating the sample results, Randazzo determined that the accounts receivable balance was not overstated because the projected misstatement was less than the upper limit on misstatement.\ \ \ \ Required: Describe each incorrect assumption, statement, conclusion, and inappropriate application of sampling in the procedures performed by Randazzo. For each good answer you will receive 2 points. Each incorrect response will result in the loss of 1 point.
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