Marjorie Jorgensen, CPA, is verifying the accuracy of outstanding accounts payable for Marygold Hardware, a large, single-location, retail hardware store. There are 650 vendors listed on the outstanding accounts payable list. She has eliminated from the population 40 verfdors that have large ending balances and will audit them separately from the planned test for this problem. (There are now 610 vendors.)

She plans to do one of three tests for each item in the sample: examine a vendor’s statement in the client’s hands, obtain a confirmation when no statement is on hand, or perform an extensive search for invoices when neither of the first two is obtained. There are no accounts payable subsidiary records available, and a large number of errors are expected. Marjorie has obtained facts or made audit judgments as follows:

a. Under what circumstances is it desirable to use unstratified difference estimation in the circumstances described? Under what circumstances would it be undesirable?

b. Calculate the required sample size for the audit tests of accounts payable, assuming Alpha risk is ignored.

c. Assume the auditor selects exactly the sample size calculated in part

b. The point estimate calculated from the sample results is \($21,000\), and the estimated population standard deviation is 267. Is the population fairly stated as defined by the decision rule ? Explain what causes the result to be acceptable or unacceptable.

d. Calculate the required sample size for the audit tests of accounts payable, assuming Alpha risk is considered.

e. Explain the reason for the large increase of the sample size resulting from including Alpha risk in determining sample size.

f. Fred Lehne calculates the required sample size using the formula without consideration of Alpha risk. After the sample size is determined, he increases the sample size 25%. Fred believes this does the same thing as using Alpha risk without having to bother with making the calculation. Is this approach appropriate? Evaluate its desirability.

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Alpha risk Allowable error Recorded book value 20% $ 45,000 $600,000 Beta risk Expected error Estimated standard deviation 10% $20,000 $ 280