Question

Monetary Unit Sampling. Blythe Drake is conducting an audit of Newman and is using MUS to select a sample of customer accounts receivable for confirmation. Newman’s accounts receivable are recorded at $ 10,000,000 and comprise 2,000 customer accounts. Drake has established the following parameters for the investigation:
• Risk of incorrect acceptance 5 5 percent.
• Tolerable misstatement 5 $ 250,000.
• Expected misstatement 5 $ 50,000.

Required:
a. Determine the sample size and sampling interval that Drake used in the audit of New-man’s accounts receivable.
b. Based on the calculations in (a), briefly describe how Drake would select customer accounts from the population of accounts receivable balances for confirmation.
c. Holding all other factors constant, determine the sample size and sampling interval assuming each of the following independent changes in Drake’s sampling parameters:
1. Because of improvements in Newman’s internal control policies related to accounts receivable processing from previous years, Drake believes that a risk of incorrect acceptance of 10 percent is now acceptable in the current engagement.
2. Because of the closeness of certain ratios to key debt covenants (particularly the cur-rent and quick ratios, which are highly influenced by accounts receivable), Drake believes that the tolerable misstatement should be decreased from $ 250,000 to $ 125,000.
3. Because of unusual circumstances in the previous year, some misstatements occurred in sales transaction processing that resulted in misstatements in accounts receivable. These misstatements are not anticipated to occur during the upcoming year. As a result, Drake believes that expected misstatement can be decreased from $ 50,000 to $ 25,000.
d. How do the changes noted in (c) illustrate the relationship between sample size and various factors?
e. Describe the relationship between the sample size and sampling interval. Provide a brief explanation as to the nature of this relationship.



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  • CreatedOctober 27, 2014
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