Concept explainers
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:
- a. Calculate the required
sample size . - 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) Calculate the point estimate of the account’s audited value.
- (2) Calculate the projected misstatement for the population.
- (3) Calculate the adjusted allowance for sampling risk.
- (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.
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- 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. Use figure below to determine the reliability factor. Please calculate the sample size. Risk That Other Substantive Procedures Will Fail to Detect a Material Misstatement Combined Assessment of Inherent and Control Risk Maximum Moderate Low Maximum 3.0 2.3 1.9 Slightly below Maximum 2.7 2.0 1.6 Moderate 2.3 1.6 1.2 Low 1.9 1.2 1.0arrow_forwardA scrap metal dealer claims that tye mean of its cash sales in no more than $80, although an Internal revenue service agent believes that the dealer is being dishonest. Observing a sample of 20 cash customers the agent finds the mean cash sales to be $91 with a standard deviation of $21. Assuming the popUlation is distributed Approximately normally, and using the 0.05 level of significance , will the agents suspicion be confirmed?arrow_forwardAn audit firm is conducting the audit of Diaz Construction Company for the fiscal year ended October 31. Rebecca Smith, the partner in charge of the audit, decides that MUS is the appropriate sampling technique to use in order to audit Diaz’s inventory account. The balance in the inventory at October 31 was $4,250,000. Rebecca has established the following: risk of incorrect acceptance = 5% (i.e., the desired confidence level of 95%), tolerable misstatement = $212,500, and expected misstatement = $63,750. Calculate the sample size and sampling interval using Table 8-5 in the textbook (round your interval answer to the nearest whole number).arrow_forward
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