Owing to data processing problems and a shortage of accounting personnel at the King Cleaning Supply Company, management has neither records of the balances in accounts payable at the balance sheet date nor a listing of accounts payable in total or by vendor. An audit for the current year is essential. Management has asked its auditor to help come up with a balance in accounts payable.

Chuck Nelson, the engagement manager, has decided to use unstratified variables estimation (mean-per-unit, difference, or ratio estimation) to make a statistical estimate of the balance in accounts payable.

The first step Chuck takes is to obtain a complete list from management of every vendor King Cleaning has done business with in the preceding three years, regardless of whether or not a balance was owed at the balance sheet date. Steps are taken to make sure the listing is complete.

Required :

a. Which of the three statistical methods should Chuck use in this situation ? Explain your answer.

b. Explain why it is essential that the list of vendors with a balance owed be complete. What are the audit implications if several vendors with zero balances were unintentionally excluded from the list ?

c. Assume the auditor selects a random sample of 200 vendors for confirmation and related audit procedures. Explain how an audited balance of zero should be treated.

d. Explain the steps the auditor will follow to determine the accounts payable to record on the client’s statements.

e. Assume that the auditor is confident that all accounts payable at the balance sheet date were paid and recorded in the subsequent-period cash disbursement journal. Many of the subsequent payments were also for subsequent-year transactions. In this situation, why is it likely to be preferable to define the sample unit for accounts payable verification as sub¬ sequent-period check numbers rather than vendors on the list?