Based on the information provided above, calculate the sample size for the customer balances for confirmation testing. Additionally, document your calculation for the sampling interval.

Your audit firm, Hawk & Soar, PLLC, has been engaged to perform the annual audit of TealDeal, Inc. The Company manufactures and sells board shorts, t-shirts, and visors with customized designs and/or logos. TealDeal, Inc. is required to submit audited financial statements as part of the terms of its loan with the bank. Hawk & Soar has audited TealDeal for the past four years. During the current year audit, your team has already performed the majority of the audit work; you are being asked to help tie up some loose ends in order to finish the audit and issue the audit report.

Audit Sampling

Another member of your audit team (Jamie) performed the audit testing for accounts receivable. Accounts receivable (gross) for the current year total $300,000. Hawk & Soar’s sampling guidance for substantive testing is based on statistical sampling, specifically probability-proportionate-to-size (PPS) sampling. Therefore, Jamie utilized PPS sampling procedures to select a sample of customer balances for confirmation testing. Unfortunately, Jamie neglected to properly document the preliminary work used to determine the sample size. Additionally, Jamie has not had time to document the final analysis of the sample testing performed. Jamie informed you that the errors were small, similar to the prior year, so Jamie is confident that the substantive testing supports a conclusion that accounts receivable is fairly stated as of year-end. Your job is to complete the necessary documentation, in addition to documenting the final evaluation based on Jamie’s audit testing.

Hawk & Soar’s controls testing sampling policy indicates that to place a high reliance on substantive testing procedures (i.e., to support a low level of remaining detection risk) the test must be performed at a high level of assurance, which they define as 95 percent confidence. Thus, only the sample size table associated with 95 percent confidence is provided.

Your review of the prior year audit testing for accounts receivable indicates that the client has had small errors in the past, which are likely to continue in the current year. Prior errors approximated 2% of the total tested balance. Therefore, you expect errors in the current year testing to approximate $6,000. Lastly, your review of the current year audit file indicates that the tolerable misstatement set at planning for accounts receivable is $15,000.

Refer to the Hawk & Soar sample size table (Appendix A) and determine the appropriate sample size for the substantive testing related to accounts receivable. Additionally, determine the sampling interval required for this sample selection. This information should be documented in the table provided.

Based on your review of the audit workpapers, you find that Jamie randomly selected the appropriate sample size you have calculated. Jamie performed the appropriate confirmation testing and/or alternative procedures related to each of the selected sample items. Jamie’s testing identified three audit differences, detailed below:

Error	Book Value	Audit Value
1	$400	$320
2	$500	$0
3	$3,000	$2,500

In order to determine the appropriate conclusion based on Jamie’s testing, the tainting factors, projected misstatements, allowance for sampling risk, and upper misstatement limits need to be calculated. According to Firm policy, some allowance for sampling risk must always exist when using audit sampling because sampling involves sampling risk. You must compute the allowance for sampling risk and the incremental allowance for sampling risk based on the results of Jamie’s testing.

Graded components:

(1) Calculate the sample size required for confirmation testing of accounts receivable (question [1]). Utilize the table provided below to document your results.

(2) Complete the tables below (questions [2] and [4]). Some information has been completed for you (leave this information as is), but all other items need to be completed based on the information provided above.

(3) Provide a thorough response to questions [3] and [5]. To receive full credit, you must provide a response to all parts of each question with sufficient detail to show that you put some thought into your response. Please make sure your responses are well-written using full sentences.

Answer rating: 100% (QA)

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