You are planning to use nonstatistical sampling to evaluate theresults of accounts receivable confirmation for the Meridian Company. You have alreadyperformed tests of controls for sales, sales returns and allowances, and cash receipts, andthey are considered excellent. Because of the quality of the controls, you decide to use anacceptable risk of incorrect acceptance of 10%. There are 3,000 accounts receivable witha gross value of $6,900,000. The accounts are similar in size and will be treated as a singlestratum. An overstatement or understatement of more than $150,000 is considered material.a. Calculate the required sample size. Assume your firm uses the following nonstatistical formula to determine sample size:Sample size = Population Recorded Amount × Confidence FactorTolerable MisstatementA confidence factor of 2 is used for a 10% ARIA.b. Assume that instead of good results, poor results were obtained for tests of controlsand substantive tests of transactions for sales, sales returns and allowances, andcash receipts. How will this affect your required sample size? How will you use thisinformation in your sample size determination?c. Regardless of your answer to part a., assume you decide to select a sample of 100accounts for testing. Indicate how you will select the accounts for testing usingsystematic selection.d. Assume a total book value of $230,000 for the 100 accounts selected for testing. Youuncover three overstatements totaling $1,500 in the sample. Evaluate whether thepopulation is fairly stated.
You are planning to use nonstatistical sampling to evaluate the
results of accounts receivable confirmation for the Meridian Company. You have already
performed tests of controls for sales, sales returns and allowances, and cash receipts, and
they are considered excellent. Because of the quality of the controls, you decide to use an
acceptable risk of incorrect acceptance of 10%. There are 3,000 accounts receivable with
a gross value of $6,900,000. The accounts are similar in size and will be treated as a single
stratum. An overstatement or understatement of more than $150,000 is considered material.
a. Calculate the required
Sample size = Population Recorded Amount × Confidence Factor
Tolerable Misstatement
A confidence factor of 2 is used for a 10% ARIA.
b. Assume that instead of good results, poor results were obtained for tests of controls
and substantive tests of transactions for sales, sales returns and allowances, and
cash receipts. How will this affect your required sample size? How will you use this
information in your sample size determination?
c. Regardless of your answer to part a., assume you decide to select a sample of 100
accounts for testing. Indicate how you will select the accounts for testing using
systematic selection.
d. Assume a total book value of $230,000 for the 100 accounts selected for testing. You
uncover three overstatements totaling $1,500 in the sample. Evaluate whether the
population is fairly stated.
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