Concept explainers
a.
Calculate the
a.
Answer to Problem 47P
The required sample size is 25 accounts using mean-per unit sampling.
Explanation of Solution
Sample size:
The sample size is the portion of the total population that represents the total population. The auditor conducts sampling test on the selected sample. Large sample size would represent the population more accurately but considering a large sample size would be a complex and expensive process. The auditor should select the sample size that would represent the entire population precisely and accurately.
Mean-per-unit sampling:
It is a technique of classical variables sampling. Mean-per-unit sampling works on the assumption that the audited mean of the sample size will represent the actual audited mean of the population. First, the mean of the sample size is calculated then the estimation for the value of the population is calculated by multiplying the calculated sample mean to the total of the items in the population. The difference between the value of the population calculated under mean-per unit sampling and the book value of the client is the projected misstatement.
Calculate the sample size for the population of Company J:
Thus, the required sample size is 25 accounts using mean-per unit sampling.
b.
Calculate the projected misstatement and provide an opinion whether the materially misstated account should be accepted or not.
b.
Answer to Problem 47P
The projected misstatement is $30,000 and the auditor should accept that the account is not materially misstated.
Explanation of Solution
Material misstatement:
Risk assessment procedures performed by the auditors is aimed at identifying any misstated information in the financial statements that will lead to any fraud if not audited then it is called the material misstatement of financial records. Some matters are indispensable for the fair representation of the financial statements and to keep the financial statements free from any such material misstatement audit is performed.
Determine the projected misstatement in the population for Company J:
Thus, the projected misstatement is $30,000.
Working note 1:
Calculate the audited value:
Provide an opinion whether the materially misstated account should be accepted or not:
Calculate the adjusted allowance for sampling risk:
Thus, the allowable sampling risk is $100,000.
Suggest whether the auditor should accept the population or not:
The auditor should accept that the account is not materially misstated.
Calculate the confidence internal:
As the upper limit of confidence interval ($130,000) is not exceeding the tolerable misstatement (182,000) then the auditor should accept the population. The chances of excess misstatement are low with this population.
Thus, the auditor should accept that the account is not materially misstated.
c.
Calculate the projected misstatement and provide an opinion whether the materially misstated account should be accepted or not.
c.
Answer to Problem 47P
The projected misstatement is $30,000 and the auditor should accept that the account is not materially misstated.
Explanation of Solution
Material misstatement:
Risk assessment procedures performed by the auditors is aimed at identifying any misstated information in the financial statements that will lead to any fraud if not audited then it is called the material misstatement of financial records. Some matters are indispensable for the fair representation of the financial statements and to keep the financial statements free from any such material misstatement audit is performed.
Determine the projected misstatement in the population for Company J:
Thus, the projected misstatement is $30,000.
Provide an opinion whether the materially misstated account should be accepted or not:
Calculate the adjusted allowance for sampling risk:
Thus, the allowable sampling risk is $116,400.
Suggest whether the auditor should accept the population or not:
The auditor should accept that the account is not materially misstated.
Calculate the confidence internal:
As the upper limit of confidence interval ($146,400) is not exceeding the tolerable misstatement (182,000) then the auditor should accept the population. The chances of excess misstatement are low with this population.
Thus, the auditor should accept that the account is not materially misstated.
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Chapter 9 Solutions
GEN COMBO LL PRINCIPLES OF AUDITING & OTHER ASSURANCE SERVICES; CONNECT AC
- As the auditor for Company A, you discover that a material sale ($500,000 sale; cost of goods of $300,000) was made to a customer this year. Because of poor internal accounting controls, the sale was never recorded. Your client makes a management decision not to bill the customer because such a long time has passed since the shipment was made. You determine, to the best of your ability, that the sale was not fraudulent. Using the framework for ethical decision making, determine whether the auditor should require either a recording or a disclosure of the sales transaction. Instructions: Using the framework for ethical decision making, determine whether the auditor should require either a recording or a disclosure of the sales transaction. Please make sure to use at least 100 words in your response. Once you give your response, please respond to at least two of your peers using at least 50 words in your responses. Remember to follow the netiquette guidelines found in the course…arrow_forwardYou are auditing the accounts receivable for Conor Company as of December 31, 2022 One of your procedures was to send positive confirmations to a sample of 50 accounts. Of those 50 confirmations, 40 have been positively confirmed without comments, 7 had minor differences that have been cleared satisfactorily. The remaining 3 had the following comments: “We received $6,000 of goods on consignment on November 20, 2022. We have not sold them yet.” “We received these goods on January 5, 2023 and mailed a check on January 7, 2023.” “The balance of $2,000 was paid on December 10, 2022.” For each of these comments, identify the steps that you would take to clear (resolve) them.arrow_forwardThe 1,500 accounts receivable of DEF Company have a total book value of $30,000. Bob Smith, Certified Public Accountant (CPA), has selected and audited a sample of 50 accounts with a total book value of $1,050. Using the difference estimation technique, Smith has properly estimated a projected misstatement of an overstatement of $3,000 for the entire population. The total audited value of Smith's sample is: Multiple Choice $900 $1,150 $850 $950arrow_forward
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- A client has a separate sales group for its largest “preferred” customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?a. Prepare a schedule of purchases and payments for these customers.b. Send out negative confirmations on a large sample of these customers.c. Inquire of the sales manager regarding the accounts receivable terms.d. Send out positive confirmations on a large sample of these customers.arrow_forwardThe auditor is testing receivables with the audit procedure the confirmation letters. Book value of the receivables ………… TL 3,500,000 Book value of the sample……………….. TL 2 ,500,000 Dollar amount of error in the sample…… TL 15,000. Dollar amount of anomaly error .................... TL 5, 000 What will be the projected misstatement for the receivables account? A. 20 000 B. 24 000 C. 26 000 26 000 D. 21 000arrow_forwardRoland Company, a retail store, has utilized your services as independent auditor for several years. During the current year, the company opened a new store, and in the course of your annual audit, you verify the cost of the fixtures installed in the new store by examining purchase orders, invoices, and other documents. This audit brings to light an understated invoice nearly a year old in which a clerical error by the supplier, Western Showcase, Inc., caused the total of the invoice to read $28,893.62 when it should have read $82,893.62. The invoice was paid immediately upon receipt without any notice of the error, and subsequent statements and correspondence from Western Showcase, Inc., showed that the account with Roland Company had been paid in full. Assume that the amount in question is material in relation to the financial position of both companies. What action should you take in this situation?arrow_forward
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