Chapter 9, Problem 42OQ

Smith, Inc.

Rachel Robertson wishes to use mean-per-unit sampling to evaluate the reasonableness of the book value of the accounts receivable of Smith, Inc. Smith has 10,000 receivable accounts with a total book value of $1,500,000. Robertson estimates the population’s standard deviation to be equal to $25. After examining the overall audit plan, the auditors believe that the account’s tolerable misstatement is $60,000, and that a risk of incorrect rejection of 5 percent and a risk of incorrect acceptance of 10 percent are appropriate.

Required:

1. a. Calculate the required sample size.
2. b. Assuming the following results:

Book value of items in sample = $149

Average audited value of items in sample = $146

Standard deviation of sample = $28

use the mean-per-unit method to:

1. (1) Calculate the point estimate of the account’s audited value.
2. (2) Calculate the projected misstatement for the population.
3. (3) Calculate the adjusted allowance for sampling risk.
4. (4) State the auditors’ conclusion in this situation (accept or reject).

Use the following replies for the above questions—replies may be used once, more than once, or not at all. In all cases, select the reply closest to your answer.