The auditors of Landi Corporation wish to use a structured approach to nonstatistical sampling to evaluate the reasonableness of the accounts receivable. Landi has 15,000 receivable accounts with a total book value of $2,500,000. The auditors have assessed the combined level of inherent and control risk at a moderate level and believe that their other substantive procedures are so limited as to require a “maximum” risk assessment. After considering the overall audit plan, the auditors believe that the test’s tolerable misstatement is $57,500.
a. Calculate the required sample size.
b. Assuming the following results:
Number of items in sample 100
Total audited value of sample items $16,200
Total book value of sample items $17,000
(1) Use the ratio estimation method to calculate the projected misstatement of the population.
(2) Use the difference estimation method to calculate the projected misstatement of the population.
c. Use the results obtained in (b) to arrive at a conclusion as to whether to “accept” or “reject” the population.