You are auditing the revenue of XYZ Co. for the year ending 12/31/2020. Total sales for the year are 6,789,222 and are comprised of 2,486 transactions. Planning materiality for the audit has been set at 250,000. Any sales transactions over $500k are deemed significant, and after reviewing the detail listing of sales transaction, you noted that there are 2 large transactions for $600,000 each and the rest of population is made up of many smaller (transactions). The max tolerable misstatement is equal to planning materiality, no misstatements are expected in the testing based on control testing performed and results of the prior year audit, and the desired level of assurance you want to obtain from the test is high (as revenue is deemed a key risk in this audit).

Questions:

1.      Based on the above scenario, how many sales transactions will be tested as part of this sample?

For each question #2-4, assume this is the only change made (all other inputs are based on the original scenario):

2.      If the desired level of assurance is changed to moderate, how is the sample size affected?

3.      If you do not target any transactions, how would this impact the sample population and how many will be tested?

4.      Assume that your testing of internal controls resulted in several control deficiencies in the revenue cycle, and as such, your estimated misstatement is 100,000, how would this impact your sample size?

For each question #5-7, all inputs should be based on the original scenario:

5.      Based on the original scenario, you perform testing and find $2,980 of misstatements in your total sample of $1,254,800. Using the ratio estimation method to project the error onto the entire population, what is your total sample misstatement and total projected misstatement? What conclusion will you make about this testing and what are the next steps?

6.      How would the projected misstatement, total sample misstatement, and your conclusions differ from question #5 if you used the difference estimation method instead?

7.      Assume that you find $8,600 of misstatements in your total sample of $1,254,800. Using the ratio estimation method, what is your total sample misstatement and total projected misstatement? What conclusion will you make about this testing and what are the next steps?