The auditor is auditing accounts receivable. The company is a long-time client. Because of problems encountered in previous years, the auditor has assessed control risk as moderate and assigns a control risk assessment of 50% and a desired audit risk of 5%. Other factors considered by the auditor:

1. The auditor believes the other substantive audit procedures will be 50% effective in detecting material misstatements.

2. Inherent risk, by firm policy, is assessed at 100%.

3. Client book value is $8,425,000.

4. Tolerable misstatement is set at $200,000.

5. Previous audits have shown an expected error of $40,000 overstatement is reasonable.

Required

a. Calculate the test of details risk.

b. Calculate (and show the calculation) of the sample selection interval.

c. Assume that the auditor rounds the sampling interval down to the next nearest 10,000. Calculate the largest sample size the auditor would expect.

d. Assume the auditor found the following differences when performing the audit work:

Show all calculations for the items requested below:
1. Calculate the most likely misstatement and the upper misstatement limit for accounts receivable.
2. Discuss the audit implications, that is, whether the audit work supports book value or whether additional audit work should be recommended, and, if so, the nature of the auditworks.

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Book Value Audited Value Nature of Difference $10,000 was billed to Jason Company, but it should have been billed to Johnson Company. Subsequent follow-up work confirmed that it should be billed to Johnson, and Johnson acknowledged the $10,000 debt. $25,000 $15,000 $40,000 $20,000 Merchandise was returned before year end, but credit was not recorded until the next period. Major dispute on cost overrun charges. Subsequent review supports customer position. Another dispute on cost overrun. Again customer position is correct. A credit memo was supposed to have been issued for defective merchandise but was not. $325,000 $250,000 $105,000 $100,000 $122 $0