Assume that your audit team has established the following parameters for the examination of ELM's sales transactions:

LO G-3

Risk of incorrect acceptance .................................................................. 10%

Tolerable misstatement ... $311,711 (or 8% of the recorded balance of the transactions)

Expected misstatement ..... $77,928 (or 2% of the recorded balance of the transactions)

Required:

a. Use IDEA to determine the necessary sample size, given the above parameters. Parts (b), (c), and (d) are independent scenarios that affect the sample size in this example.

b. Assume that your audit team has decided to increase their reliance on internal control and permit a corresponding increase in the risk of incorrect acceptance from 10 percent to 15 percent, which maintains overall audit risk at the same level. What is the necessary sample size, holding all other factors constant?

c. Assume that your audit team has decided to reduce the level of tolerable misstatement from $311,711 to $233,783 (or 6 percent of the recorded balance of the transactions). What is the necessary sample size, holding all other factors constant?

d. Assume that based on additional controls implemented by ELM, your audit team has decided to reduce the expected misstatement from $77,928 to $19,482 (0.5 percent of the recorded balance of the transactions.) What is the necessary sample size, holding all other factors constant?

e. How do the results in parts (b), (c), and (d) reflect the relationship between various parameters and sample size?