Refer to problem 8-26, concerning the audit of accounts receivable and inventory. You have decided to use simple attributes instead of mean-per-unit estimation because no errors are expected in the sample. You are concerned about the combined amount of error in accounts receivable and inventory, but not the individual balances.

Required :

a. Calculate the required sample size using simple attributes, assuming a Beta risk of 5% and an allowable error of \($34,500\).

b. How would you approach selecting a random sample for inventory and accounts receivable in this situation, using systematic selection?

c. Assume you selected the required sample size in part a and found no errors in your audit tests. What would be your statistical and audit conclusions?

d. Assume you selected the required sample size in part a and found four errors in your audit tests. What would you do at this point ?

 Problem 8-26:

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8-26. You are doing the audit of Virginia Tire and Parts, a wholesale auto parts dealer. Unstratified mean-per-unit estimation has been used to calculate sta- tistical information for accounts receivable and inventory. The following data have been calculated or taken from the client's records: Recorded values Statistical values Point estimate of total audited value Standard error of the estimate Accounts receivable Inventory $12,000,000 23,000,000 12,000,000 204,000 22,300,000 306,000 You consider the following amounts to be material: Accounts receivable (Beta risk 5%) Inventory (Beta risk 5%) Combined (Beta risk 21%) REQUIRED: $400,000 800,000 1,000,000 a. State whether each account is misstated by a material amount, using a Beta risk of 5%. b. Determine whether the combined amount is misstated by a material amount, using a Beta risk of 21%. c. What are the auditor's options at this point? Be as specific as possible. d. Justify using a different Beta risk for errors in the individual accounts and for the combined error.