Your audit firm is planning the audit of a company’s accounts receivable, which consists of 1,032 customer accounts with a total recorded amount (book value) of $300,000. You have already decided that the accounts receivable can be overstated by as much as $10,000, and the financial statements would not be considered materially misstated. Judging by the experience of past audits on this client, only a negligible amount of misstatement is expected to exist in the account. 

Preliminary calculations of sample sizes have been made for several possible control risk levels. These calculations were based on a “base” risk of incorrect rejection of 0.01. Minimum sample sizes based on the alternative risks of incorrect rejection shown below were also calculated.

Audit work on the accounts will cost $8 per sampling unit when the accounts are selected for the initial sample. However, if the sample indicates a rejection (material overstatement) decision, the audit of additional sampling units will cost $19 each.

Required:

For each of the control risk levels shown above, calculate the expected cost savings from auditing the initial alternative (minimum) sample. Assume that the action in the event of a rejection decision is to expand the work by selecting additional units up to the number in the base sample. Discuss the potential audit efficiencies and possible inefficiencies from beginning the audit work with the alternative (minimum) sample size.

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CONTROL RISK "BASE" SAMPLE ALTERNATIVE RIR ALTERNATIVE (MINIMUM) SAMPLE 0.20 0.02 0.02 0.03 0.03 0.03 0.03 0.03 80 53 62 68 74 78 82 86 89 0.30 0.40 96 107 116 122 128 133 137 141 0.50 0.60 0.70 0.80 0.90 0.03 1.00 RIR – risk of incorrect rejection.