You are the auditor of Jexel, an auto air conditioner service and repair company, and you have decided to use the mean-per-unit method to test the existence and gross valuation of recorded accounts receivable. The client’s records include 10,000 accounts with a total book value of $1,250,000. You decide to use tolerable misstatement of $182,000, an incorrect acceptance risk of 5 percent, and an incorrect rejection risk of 4.6 percent. Using generalized audit software, you estimated the standard deviation of the population as $25.
a. Determine the sample size.
b. Assume you tested the sample and got the following results: The mean audited value of the 25 accounts was $122. Assuming that the standard deviation of the sample’s audited value is also $25, will you accept the account as not being materially misstated? What is the projected misstatement for the population?
c. Assuming that the standard deviation of the sample’s audited value is $20, will you accept the account as not being materially misstated? Show your calculations. What is the projected misstatement for the population?