Edwards has decided to use probability-proportional-to-size (PPS) sampling, sometimes called dollar-unit sampling, in the audit of a client’s accounts receivable balance. Few, if any, misstatements of the account balance are expected.

Edwards plans to use the following PPS sampling table:

.:.

a. Identify the advantages of using PPS sampling over classical variables sampling.

b. Calculate the sampling interval and the sample size Edwards should use given the following information:

Tolerable misstatement ……………………. $ 15,000

Risk of incorrect acceptance …………………….. 5%

Estimated misstatement …………………… $ 0

Recorded amount of accounts receivable … $300,000

c. Assuming a sampling interval of $5,000, calculate the total projected misstatement if the following three errors were discovered in a PPS sample:

d. Calculate basic precision and incremental allowance.

e. Calculate the upper limit on misstatements.

f. Will you accept or reject the account as materially correct? Explain.

g. Use ACL to calculate the sampling interval and the sample size using the information in b.

h. Use ACL to calculate results using the errors in c.

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Number of Overstatement Misstatements Risk of Incorrect Acceptance 10% 15% 20% 4.61 6.64 8.41 10.05 11.61 3.00 4.75 6.30 7.76 9.16 2.31 3.89 5.33 6.69 8.00 1.90 3.38 4.72 6.02 7.27 1.61 3.00 4.28 5.52 6.73 Misstatement Book Value S 400 500 6,000 Audited Value s 320 2,500