Comprehensive Problem: Monetary Unit Sampling. Zachary Mayo is a new staff accountant participating in his first audit engagement. He has been assigned to the Foley Companyengagement and is examining Foley’s accounts receivable. Foley maintains a computerizedledger of its accounts receivable balances, which are recorded at $5,000,000 and comprise5,560 individual customer accounts.Mayo established the following parameters for use in this year’s audit. In so doing, herelied extensively on parameters established in prior audits:∙ Expected misstatement is established at $100,000, which is the average amount of misstatement identified in the past five audits. During the past year, Foley has experienced agreat deal of turnover among its sales processing personnel and has made some relativelylarge sales that present some unusual revenue recognition issues. In addition, accountsreceivable have increased by almost 15 percent from the prior year.∙ The tolerable misstatement is 10 percent of the ending accounts receivable balance, or$500,000 ($5,000,000 × 0.10). Compared to previous years, Foley’s financial conditionhas slightly deteriorated. Its current and quick ratios, although still above levels necessary to satisfy its debt covenants, have deteriorated.∙ The risk of incorrect acceptance is 10 percent, which is the same as that used in the previous year. In evaluating the components of the audit risk model, some of the issues related tothe turnover among sales processing personnel as well as the more limited use of analyticalprocedures during the current audit represent important differences from previous years.Mayo sent positive confirmations to Foley’s customers. His work identified the followingdifferences between audited values and recorded balances. Customer Recorded Balance Audited Value R. Gerer $ 15,000 $ 10,000 D. Wings 25,000 20,000 L. Goss 60,000 30,000 K. David 120,000 90,000 Unfortunately, Mayo resigned from the firm shortly after identifying these differences.The only documentation you were able to locate was information related to (1) the levels ofexpected misstatement, tolerable misstatement, and risk of incorrect acceptance that wasused in the Foley audit and (2) the four confirmations returned by customers indicating differences between their records and Foley’s recorded balances.Required:a. Mayo decided to use MUS primarily because it had been used in previous audits of Foley.Based on the nature of this sampling application and the composition of Foley’s accountsreceivable, was the use of MUS appropriate?b. Based on the parameters established by Mayo, determine the sample size and samplinginterval he used in the sampling application.c. Describe the sample selection process used by Mayo. Are you able to replicate or otherwise determine which customer balances he confirmed? d. Based on the four overstatements identified by Mayo, calculate the upper limit on misstatements. Based on this upper limit on misstatements, what general statement can bemade with respect to the extent of misstatement in the account balance?e. What is your initial decision with respect to the fairness of Foley’s accounts receivablebalance?f. Review each of the parameters established by Mayo (expected misstatement, tolerable misstatement, and risk of incorrect acceptance). Do any differences in the currentengagement raise questions with respect to the level of these parameters?g. What are the potential effect(s) of the changes in parameters noted in part (f) on the sampling application?
Comprehensive Problem: Monetary Unit Sampling. Zachary Mayo is a new staff accountant participating in his first audit engagement. He has been assigned to the Foley Company
engagement and is examining Foley’s
ledger of its accounts receivable balances, which are recorded at $5,000,000 and comprise
5,560 individual customer accounts.
Mayo established the following parameters for use in this year’s audit. In so doing, he
relied extensively on parameters established in prior audits:
∙ Expected misstatement is established at $100,000, which is the average amount of misstatement identified in the past five audits. During the past year, Foley has experienced a
great deal of turnover among its sales processing personnel and has made some relatively
large sales that present some unusual revenue recognition issues. In addition, accounts
receivable have increased by almost 15 percent from the prior year.
∙ The tolerable misstatement is 10 percent of the ending accounts receivable balance, or
$500,000 ($5,000,000 × 0.10). Compared to previous years, Foley’s financial condition
has slightly deteriorated. Its current and quick ratios, although still above levels necessary to satisfy its debt covenants, have deteriorated.
∙ The risk of incorrect acceptance is 10 percent, which is the same as that used in the previous year. In evaluating the components of the audit risk model, some of the issues related to
the turnover among sales processing personnel as well as the more limited use of analytical
procedures during the current audit represent important differences from previous years.
Mayo sent positive confirmations to Foley’s customers. His work identified the following
differences between audited values and recorded balances.
| Customer | Recorded Balance | Audited Value |
| R. Gerer | $ 15,000 | $ 10,000 |
| D. Wings | 25,000 | 20,000 |
| L. Goss | 60,000 | 30,000 |
| K. David | 120,000 | 90,000 |
Unfortunately, Mayo resigned from the firm shortly after identifying these differences.
The only documentation you were able to locate was information related to (1) the levels of
expected misstatement, tolerable misstatement, and risk of incorrect acceptance that was
used in the Foley audit and (2) the four confirmations returned by customers indicating differences between their records and Foley’s recorded balances.
Required:
a. Mayo decided to use MUS primarily because it had been used in previous audits of Foley.
Based on the nature of this sampling application and the composition of Foley’s accounts
receivable, was the use of MUS appropriate?
b. Based on the parameters established by Mayo, determine the sample size and sampling
interval he used in the sampling application.
c. Describe the sample selection process used by Mayo. Are you able to replicate or otherwise determine which customer balances he confirmed?
d. Based on the four overstatements identified by Mayo, calculate the upper limit on misstatements. Based on this upper limit on misstatements, what general statement can be
made with respect to the extent of misstatement in the account balance?
e. What is your initial decision with respect to the fairness of Foley’s accounts receivable
balance?
f. Review each of the parameters established by Mayo (expected misstatement, tolerable misstatement, and risk of incorrect acceptance). Do any differences in the current
engagement raise questions with respect to the level of these parameters?
g. What are the potential effect(s) of the changes in parameters noted in part (f) on the sampling application?
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