Wade Wallace designed a classical variables sampling application to examine the accounts receivable for Rasheed Inc. After considering several possibilities, Wallace decided to use mean- per- unit estimation. The following parameters are noted through a review of Wallace’s audit documentation:

Recorded balance of accounts receivable $ 800,000 Number of customer accounts included in accounts receivable balance 2,000 Risk of incorrect acceptance 5% Risk of incorrect rejection 20% Tolerable misstatement $ 50,000 Expected misstatement $ 10,000 Standard deviation of audited value $ 52

Required:

a. Describe how Wallace would establish each of these parameters.

b. What is the appropriate sample size for this application?

c. Assume that Wallace is considering an increase in the necessary level of the risk of incorrect acceptance to 10 percent. How would this increase affect the sample size?

d. Using a 5 percent risk of incorrect acceptance, assume that Wallace determined a $ 380 average audited value per item and a $ 50 standard deviation of audited values. Construct the precision interval for Rasheed’s accounts receivable.

e. Based on the precision interval in ( d), provide Wallace’s conclusion with respect to Rasheed’s accounts receivable.

f. Repeat (d) and (e) assuming that the average audited value per item is $ 405. Why does Wallace’s conclusion differ from that reached in (e)?