The accounting firm of Johnson and Johnson has decided to design a non-statistical sample to examine the accounts receivable balance of Francisco Fragrances, Inc., at October 31. As of October 31, there were 1,500 accounts receivable accounts with a balance of $ 5.5 million. The accounts receivable population can be segregated into the following strata:

Number and Size of Accounts Book Value of Stratum 

10 accounts > $ 50,000 ……………..             $ 750,000

440 accounts > $ 5,000 ………………..          3,000,000

1,050 accounts < $ 5,000 ……………..          1,750,000

Jonathan L. Gren, senior-in-charge of the audit, has made the following decisions:

• Based on the results of the tests of controls and risk assessment procedures, a low assessment is made for the risk of material misstatement.

• The desired confidence level is moderate.

• The tolerable misstatement allocated to accounts receivable is $ 155,000, and the expected misstatement is $ 55,000.

• All the balances greater than $ 50,000 will be audited.

Required: 

a. Using the non-statistical sampling formula included in the textbook, compute the suggested sample size for this test.

b. Gren confirmed the accounts receivable accounts selected and noted the following results:

Using ratio projection, what is the total projected misstatement? What conclusion should Gren make concerning the accounts receivable balance?

Transcribed Image Text:

Book Value of ookValue of Sample Auct Value of Sampie Amount of Stratum Stratum Overstatement $50,000 5,000 5,000 3,000,000 1,750,000 750,000 $750,000 910,000 70,000 $746,500 894.750 68,450 s 3,500 15,250 1,550