Assume that you are preparing to confirm accounts receivable at December 31, 2022, which is one month prior to the fiscal year-end of January 31, 2023. The book value of gross accounts receivable is $71,622,804. Complete the following requirements related to the confirmation of receivables for Cloud 9 based on previous work and the following information.

Required

a. Using PPS sampling, determine the sample size that you want to use for sending accounts receivable confirmations. Draw on the information you learned about PPS sampling in Chapter 10. The book value of accounts receivable before the allowance for doubtful accounts is $71,622,804. You make the following assumptions:

• You set tolerable misstatement for accounts receivable at $3,500,000.

• Expected misstatement = $750,000.

• Risk of incorrect acceptance = 37%.

Given these parameters:

1. What do you believe to be appropriate qualitative assumptions for inherent risk and control risk given the risk of incorrect acceptance used?

2. What do you calculate for sample size?

3. What do you calculate for sampling interval?

b. After discussion of the sample size with Josh Thomas, the audit team sets tolerable misstatement at $3,000,000, expected misstatement at $1,750,000, and risk of incorrect acceptance at 37%. You use a sample size of 73 confirmations. The sampling interval is $981,134. You may assume that except for the following, you received confirmations from customers that showed no exceptions. Determine whether the following conditions represent errors for purposes of your evaluation. Based on your evaluation and the parameters of the sample you designed above, evaluate the result of confirming accounts receivable.

• Customer No. 00030 disputed the price on stock number 11205, which was priced at $75 per item and should have been priced at $60 per item on 1200 items. Cloud 9 issued a credit memo for $18,000 on January 7, 2023. The book value of the receivable for Customer No. 00030 at December 31, 2022, was $130,500.

• Customer No. 00158 with a receivable balance of $730,225 on December 31 disputed receivables in the amount of $30,500, as a shipment of shoes was not received until January 2, 2023. Further investigation showed that the customer ordered the goods on December 31, 2022, and they were not counted in inventory when the inventory was taken on that date. The freight carrier came by late in the day and picked up the goods, even though the warehouse was normally shut down for inventory on December 31, 2022. The goods were shipped FOB shipping point. The receivable was paid in full on January 29, 2022.

• Customer No. 00651 disputed receivables in the amount of $250,750, as it had been paid on December 30, 2022. The check from Customer No. 00651 was received and deposited by Cloud 9 on January 3, 2022. The book value of the receivable for Customer No. 00651 at December 31, 2022, was $250,750.

• Customer No. 00850 disputed the balance on the confirmation of $35,700 in its entirety. Further investigation showed that the balance was charged to the wrong customer. Goods were shipped to Customer No. 00580. On January 3, 2022, the error was discovered. A credit memo was issued to Customer No. 00850 and an invoice was sent to Customer No. 00580, which was paid in full on January 27, 2022.

• No response was received from Customer No. 10141. Goods in the amount of $944,232 were shipped on November 1, 2022. Additional goods in the amount of $131,824 were shipped on December 12, 2022. The receivable balance was $1,076,056 at December 31, 2022. A review of the cash receipts journal showed that a check for $944,232 was deposited on January 24, 2022. Another check for $131,824 was received on February 1, 2023.

• Customer No. 21287 disputed receivables in the amount of $755 claiming that it did not receive a promised 1% discount associated with the first shipment to a new customer. The book value of the receivables for Customer No. 21287 at December 31, 2022 was $75,500. The customer subsequently paid $74,745 on January 29, 2022, and Cloud 9 issued a credit memo in the amount of $755.

1. Determine the amount of misstatement for each customer listed above.

2. Determine the upper misstatement limit.

3. Draw a conclusion about whether the existence assertion for accounts receivable is presented fairly at December 31, 2022.