Comprehensive Problem: Monetary Unit Sampling. Clint Walker was examiningthe accounts receivable of Country Music Inc. Its accounts receivable were recorded at$1,500,000. Based on past audits, Walker established tolerable misstatement at 10 percent ofthe recorded account balance and anticipated a very small level of misstatement in CountryMusic’s accounts receivable ($50,000). In his previous assessments of audit risk, risk ofmaterial misstatement, and analytical procedures risk, Walker had established a necessaryrisk of incorrect acceptance of 10 percent.Required:a. Calculate the sampling interval and sample size that Walker would use in the audit ofCountry Music.b. Reperform the calculations in part (a) if Walker had established a risk of incorrect acceptance of (1) 5 percent and (2) 20 percent. Based on your calculations, describe the relationship between the necessary level of the risk of incorrect acceptance and the samplesize and sampling interval.c. [Note: Part (c) is unrelated to parts (a) and (b).] If Walker had detected the followingfour overstatements, determine the projected misstatement. Recorded Balance Audited Value Sampling Interval $ 3,500 $ 1,750 $ 8,000 1,000 200 8,000 12,000 10,000 8,000 5,000 4,000 8,000 d. Based on the results in part (c) and using a 10 percent risk of incorrect acceptance, calculate the upper limit on misstatements.e. Reperform the calculation in part (d) using a risk of incorrect acceptance of (1) 5 percentand (2) 20 percent. Based on your calculation, describe the relationship between the necessary level of the risk of incorrect acceptance and the upper limit on misstatements.f. Using a risk of incorrect acceptance of (1) 5 percent, (2) 10 percent, and (3) 20 percent,determine what Walker’s conclusion would be with respect to Country Music’s accountsreceivable. How do different levels of the risk of incorrect acceptance influence the likelihood of concluding that the account balance is fairly stated?
Comprehensive Problem: Monetary Unit Sampling. Clint Walker was examining
the
$1,500,000. Based on past audits, Walker established tolerable misstatement at 10 percent of
the recorded account balance and anticipated a very small level of misstatement in Country
Music’s accounts receivable ($50,000). In his previous assessments of audit risk, risk of
material misstatement, and analytical procedures risk, Walker had established a necessary
risk of incorrect acceptance of 10 percent.
Required:
a. Calculate the sampling interval and
Country Music.
b. Reperform the calculations in part (a) if Walker had established a risk of incorrect acceptance of (1) 5 percent and (2) 20 percent. Based on your calculations, describe the relationship between the necessary level of the risk of incorrect acceptance and the sample
size and sampling interval.
c. [Note: Part (c) is unrelated to parts (a) and (b).] If Walker had detected the following
four overstatements, determine the projected misstatement.
| Recorded Balance | Audited Value | Sampling Interval |
| $ 3,500 | $ 1,750 | $ 8,000 |
| 1,000 | 200 | 8,000 |
| 12,000 | 10,000 | 8,000 |
| 5,000 | 4,000 | 8,000 |
d. Based on the results in part (c) and using a 10 percent risk of incorrect acceptance, calculate the upper limit on misstatements.
e. Reperform the calculation in part (d) using a risk of incorrect acceptance of (1) 5 percent
and (2) 20 percent. Based on your calculation, describe the relationship between the necessary level of the risk of incorrect acceptance and the upper limit on misstatements.
f. Using a risk of incorrect acceptance of (1) 5 percent, (2) 10 percent, and (3) 20 percent,
determine what Walker’s conclusion would be with respect to Country Music’s accounts
receivable. How do different levels of the risk of incorrect acceptance influence the likelihood of concluding that the account balance is fairly stated?
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