Question: An auditor is using difference estimation for the confirmation of accounts receivable in the audit of Lafferty Hardware Supply. A random sample of 100 positive

An auditor is using difference estimation for the confirmation of accounts receivable in the audit of Lafferty Hardware Supply. A random sample of 100 positive confirmations has been sent to customers. Second requests have been mailed to all no-responses. Alternate procedures have been done for all confirmations not received.

After all responses have been received and alternate procedures performed, follow-up procedures are used to determine the value of each error in the sample. Difference estimation is then used to calculate the confidence interval.

Required :

a. Why is difference estimation apt to be a better statistical method than attributes in this situation ?

b. Define what is meant by a nonsampling error. Why might nonsampling errors be a serious problem in the circumstances described in the case?

c. Evaluate the following statement: “The calculation of the confidence interval for hypothesis testing and interval estimation is identical. The difference between the two methods is the use of the results.”

d. Describe how the auditor would use the calculated confidence interval for a hypothesis test.

e. Explain the circumstances in which an adjusting journal entry would be necessary and appropriate when a hypothesis test has been used.

f. Under what circumstances would unstratified difference estimation be an appropriate statistical method for the confirmation of accounts receivable ?

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