You are using PPS to audit accounts receivable, which has a recorded book value of $1,000,000. You expect few misstatements to be uncovered during substantive tests. You estimate $20,000. The materiality allocated to receivables is $60,000. Assume that you are willing to accept a risk of incorrect acceptance of 5 percent. The following misstatements are uncovered during your tests of receivables. Error No. 1 2 3 4 Recorded Amount $ 15,000 $ 8,000 $ 9,000 $ 6,000 Audited Amount $ 5,000 $ 6,000 $ -0- $ 3,000 Assume that accounts receivable comprise 20 percent of total current assets and 4 percent of total assets. Over the recent past, receivables turnover and days in receivables have been reasonably constant. Use the following tables to answer the questions. Reliability Factors for Misstatement of Overstatement Number of Overstatement Misstatements 09 1 2 3 1% 4.61 6.64 8.41 10.05 5% 3.00 4.75 6.30 7.76 10% 2.31 3.89 5.33 6.69 Risk of Incorrect Acceptance 15% 20% 25% 1.90 1.61 1.39 3.38 3.00 2.70 4.72 4.28 3.93 6.02 5.52 5.11 30% 1.21 2.44 3.62 4.77 37% 1.00 2.14 3.25 4.34 50% 0.70 1.68 2.68 3.68 Expansion Factors for Expected Misstatements 20% Risk of Incorrect Acceptance 10% 15% 25% 1.5 1.4 1.3 1.25 1% 1.9 50% 5% 1.6 30% 1.2 37% 1.15 Factor 1.0 a. What is the sample size? (6 points) b. Assuming auditors examine 100 customer's accounts (ignore your answer in part a), what is the amount of sample interval? What is the amount of computed basic precision? (6 points) c. Also assuming auditors examine 100 customer's accounts (ignore your answer in part a). Using PPS method, is the account balance fairly stated? Show your computation (6 points) You are using PPS to audit accounts receivable, which has a recorded book value of $1,000,000. You expect few misstatements to be uncovered during substantive tests. You estimate $20,000. The materiality allocated to receivables is $60,000. Assume that you are willing to accept a risk of incorrect acceptance of 5 percent. The following misstatements are uncovered during your tests of receivables. Error No. 1 2 3 4 Recorded Amount $ 15,000 $ 8,000 $ 9,000 $ 6,000 Audited Amount $ 5,000 $ 6,000 $ -0- $ 3,000 Assume that accounts receivable comprise 20 percent of total current assets and 4 percent of total assets. Over the recent past, receivables turnover and days in receivables have been reasonably constant. Use the following tables to answer the questions. Reliability Factors for Misstatement of Overstatement Number of Overstatement Misstatements 09 1 2 3 1% 4.61 6.64 8.41 10.05 5% 3.00 4.75 6.30 7.76 10% 2.31 3.89 5.33 6.69 Risk of Incorrect Acceptance 15% 20% 25% 1.90 1.61 1.39 3.38 3.00 2.70 4.72 4.28 3.93 6.02 5.52 5.11 30% 1.21 2.44 3.62 4.77 37% 1.00 2.14 3.25 4.34 50% 0.70 1.68 2.68 3.68 Expansion Factors for Expected Misstatements 20% Risk of Incorrect Acceptance 10% 15% 25% 1.5 1.4 1.3 1.25 1% 1.9 50% 5% 1.6 30% 1.2 37% 1.15 Factor 1.0 a. What is the sample size? (6 points) b. Assuming auditors examine 100 customer's accounts (ignore your answer in part a), what is the amount of sample interval? What is the amount of computed basic precision? (6 points) c. Also assuming auditors examine 100 customer's accounts (ignore your answer in part a). Using PPS method, is the account balance fairly stated? Show your computation (6 points)
