The Dorans Dairy's principal activity is buying milk from dairy farmers, processing the milk, and delivering the milk to retail customers. You are engaged in auditing the retail accounts receivable of the company and determine the following:

1. The company has 50 retail routes; each route consists of 100 to 200 accounts, the number that can be serviced by a driver in a day.

2. The driver enters cash collections from a day's deliveries to each customer directly on a statement form in record books, of which one is maintained for each route. Mail remittances are posted in the route record books by office personnel. At the end of the month the statements are priced, extended, and footed. Photocopies of the statements are prepared and left in the customers' milk boxes with the next milk delivery.

3. The statements are reviewed by the office manager, who prepares a list for each route of accounts with 90-day balances or older. The list is used for intensive collection action.

4. The audit program used in prior audits for the selection of retail accounts receivable for confirmation stated: "Select two accounts from each route, one to be chosen by opening the route book at random and the other as the third item on each list of 90-day or older accounts." Your review of the accounts receivable leads you to conclude that statistical sampling techniques may be applied to their examination.

1. Give the reasons why the audit procedure previously used for selection of accounts receivable for confirmation (as given in No. 4 above) would not produce a valid statistical sample.

2. What are the audit objectives or purposes in selecting 90-day accounts for confirmation? Can the application of statistical sampling techniques help in attaining these objectives or purposes? Discuss.

3. Assume that the company has 10,000 accounts receivable and that your statistical sampling disclosed six errors in a sample of 200 accounts. Is it reasonable to assume that 300 accounts in the entire population are in error? Explain.