Upper Limit on Misstatements Calculation: Monetary Unit Sampling. The auditorsmailed positive confirmations on 60 customers’ accounts receivable balances. The company’saccounts receivable balance comprised 2,356 customer accounts with a total recorded balanceof $19,600,000, and the sampling interval was $280,000. The auditors received four positiveconfirmation returns reporting exceptions. Upon follow-up, they found the following:∙ Account 2333. Recorded balance $8,345. The account was overstated by $1,669 becausethe client made an arithmetic mistake recording a credit memo. The company issued only86 credit memos during the year. The auditors examined all of them for the same arithmetic mistake and found no similar misstatements.∙ Account 363. Recorded balance $7,460. The account was overstated by $1,865 because thecompany sold merchandise to a customer with payment due in six months plus 15 percentinterest. The billing clerk made a mistake and recorded the sales price and the unearnedinterest as the sale and receivable amount. Inquiries revealed that the company alwayssold on “payment due immediately” terms but had made an exception for this customer. Numerous sales transactions had been audited in the sales control audit work, and nonehad shown the extended terms allowed to Account 363.∙ Account 1216. Recorded balance $19,450. The account was overstated by $1,945 becausean accounting clerk had deliberately misadded several invoices to create extra charges toa business that competed with his brother’s business. The accounting clerk (who was atemporary employee) had forged the initials of the supervisor who normally reviewedinvoices for accuracy. The auditors examined all invoices for this and other customersprocessed by this clerk and found no similar misstatements.∙ Account 2003. Recorded balance $9,700. The account was overstated by $1,455 becauseof a fictitious sale submitted by a salesperson, apparently part of an effort to boost thirdquarter sales and commissions. The auditors learned that the salesperson was employedfrom August 20 through October 30 before being dismissed as a result of customer complaints. They examined all other unpaid balances attributed to this salesperson and foundno other fictitious sales.Required:a. Decide which, if any, of the account misstatements should be considered monetary misstatements and included in the calculation of the upper limit on misstatements using MUS.b. Calculate the upper limit on misstatements and decide whether the evidence from thesemisstatements indicates that the accounts receivable balance is or is not materially misstated. (The tolerable misstatement for the accounts receivable was $1,000,000, and theauditors had already decided on a risk of incorrect acceptance of 5 percent.)c. Are any additional procedures required of the audit team regarding account 1216 oraccount 2003?
Upper Limit on Misstatements Calculation: Monetary Unit Sampling. The auditors
mailed positive confirmations on 60 customers’
accounts receivable balance comprised 2,356 customer accounts with a total recorded balance
of $19,600,000, and the sampling interval was $280,000. The auditors received four positive
confirmation returns reporting exceptions. Upon follow-up, they found the following:
∙ Account 2333. Recorded balance $8,345. The account was overstated by $1,669 because
the client made an arithmetic mistake recording a credit memo. The company issued only
86 credit memos during the year. The auditors examined all of them for the same arithmetic mistake and found no similar misstatements.
∙ Account 363. Recorded balance $7,460. The account was overstated by $1,865 because the
company sold merchandise to a customer with payment due in six months plus 15 percent
interest. The billing clerk made a mistake and recorded the sales price and the unearned
interest as the sale and receivable amount. Inquiries revealed that the company always
sold on “payment due immediately” terms but had made an exception for this customer.
Numerous sales transactions had been audited in the sales control audit work, and none
had shown the extended terms allowed to Account 363.
∙ Account 1216. Recorded balance $19,450. The account was overstated by $1,945 because
an accounting clerk had deliberately misadded several invoices to create extra charges to
a business that competed with his brother’s business. The accounting clerk (who was a
temporary employee) had forged the initials of the supervisor who normally reviewed
invoices for accuracy. The auditors examined all invoices for this and other customers
processed by this clerk and found no similar misstatements.
∙ Account 2003. Recorded balance $9,700. The account was overstated by $1,455 because
of a fictitious sale submitted by a salesperson, apparently part of an effort to boost thirdquarter sales and commissions. The auditors learned that the salesperson was employed
from August 20 through October 30 before being dismissed as a result of customer complaints. They examined all other unpaid balances attributed to this salesperson and found
no other fictitious sales.
Required:
a. Decide which, if any, of the account misstatements should be considered monetary misstatements and included in the calculation of the upper limit on misstatements using MUS.
b. Calculate the upper limit on misstatements and decide whether the evidence from these
misstatements indicates that the accounts receivable balance is or is not materially misstated. (The tolerable misstatement for the accounts receivable was $1,000,000, and the
auditors had already decided on a risk of incorrect acceptance of 5 percent.)
c. Are any additional procedures required of the audit team regarding account 1216 or
account 2003?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 8 images
