Concept explainers
a.
Calculate the
a.
Answer to Problem 47P
The required sample size is 25 accounts using mean-per unit sampling.
Explanation of Solution
Sample size:
The sample size is the portion of the total population that represents the total population. The auditor conducts sampling test on the selected sample. Large sample size would represent the population more accurately but considering a large sample size would be a complex and expensive process. The auditor should select the sample size that would represent the entire population precisely and accurately.
Mean-per-unit sampling:
It is a technique of classical variables sampling. Mean-per-unit sampling works on the assumption that the audited mean of the sample size will represent the actual audited mean of the population. First, the mean of the sample size is calculated then the estimation for the value of the population is calculated by multiplying the calculated sample mean to the total of the items in the population. The difference between the value of the population calculated under mean-per unit sampling and the book value of the client is the projected misstatement.
Calculate the sample size for the population of Company J:
Thus, the required sample size is 25 accounts using mean-per unit sampling.
b.
Calculate the projected misstatement and provide an opinion whether the materially misstated account should be accepted or not.
b.
Answer to Problem 47P
The projected misstatement is $30,000 and the auditor should accept that the account is not materially misstated.
Explanation of Solution
Material misstatement:
Risk assessment procedures performed by the auditors is aimed at identifying any misstated information in the financial statements that will lead to any fraud if not audited then it is called the material misstatement of financial records. Some matters are indispensable for the fair representation of the financial statements and to keep the financial statements free from any such material misstatement audit is performed.
Determine the projected misstatement in the population for Company J:
Thus, the projected misstatement is $30,000.
Working note 1:
Calculate the audited value:
Provide an opinion whether the materially misstated account should be accepted or not:
Calculate the adjusted allowance for sampling risk:
Thus, the allowable sampling risk is $100,000.
Suggest whether the auditor should accept the population or not:
The auditor should accept that the account is not materially misstated.
Calculate the confidence internal:
As the upper limit of confidence interval ($130,000) is not exceeding the tolerable misstatement (182,000) then the auditor should accept the population. The chances of excess misstatement are low with this population.
Thus, the auditor should accept that the account is not materially misstated.
c.
Calculate the projected misstatement and provide an opinion whether the materially misstated account should be accepted or not.
c.
Answer to Problem 47P
The projected misstatement is $30,000 and the auditor should accept that the account is not materially misstated.
Explanation of Solution
Material misstatement:
Risk assessment procedures performed by the auditors is aimed at identifying any misstated information in the financial statements that will lead to any fraud if not audited then it is called the material misstatement of financial records. Some matters are indispensable for the fair representation of the financial statements and to keep the financial statements free from any such material misstatement audit is performed.
Determine the projected misstatement in the population for Company J:
Thus, the projected misstatement is $30,000.
Provide an opinion whether the materially misstated account should be accepted or not:
Calculate the adjusted allowance for sampling risk:
Thus, the allowable sampling risk is $116,400.
Suggest whether the auditor should accept the population or not:
The auditor should accept that the account is not materially misstated.
Calculate the confidence internal:
As the upper limit of confidence interval ($146,400) is not exceeding the tolerable misstatement (182,000) then the auditor should accept the population. The chances of excess misstatement are low with this population.
Thus, the auditor should accept that the account is not materially misstated.
Want to see more full solutions like this?
Chapter 9 Solutions
Principles Of Auditing & Other Assurance Services
- You are auditing the accounts receivable for Conor Company as of December 31, 2022 One of your procedures was to send positive confirmations to a sample of 50 accounts. Of those 50 confirmations, 40 have been positively confirmed without comments, 7 had minor differences that have been cleared satisfactorily. The remaining 3 had the following comments: “We received $6,000 of goods on consignment on November 20, 2022. We have not sold them yet.” “We received these goods on January 5, 2023 and mailed a check on January 7, 2023.” “The balance of $2,000 was paid on December 10, 2022.” For each of these comments, identify the steps that you would take to clear (resolve) them.arrow_forwardThe Bizayeva CPA firm is auditing Hagopian, Inc. The company is a manufacturer. It manufactures laptops and ships them to stores. The company had a good year, with (unaudited) $2,500,000 in accounts receivable at year-end. Bizayeva decides to test management’s assertion of the existence of this amount of accounts receivable by using Monetary Unit Sampling. Bizayeva decides, based on last year’s audit, on a 90% confidence level. Bizayeva expects the accounts receivable are misstated by $25,000. Bizayeva decides that a misstatement of as much as $100,000 is tolerable, for accounts receivable to be regarded as materially correct. What is the required sample size?arrow_forwardYou are the audit partner of ‘Power Auditors’ and you are auditing your client ‘FreefallIncorporated’.After finishing all the tests on the client’s financial information you determine that there is amaterial misstatement in the accounts receivable account of your client. This misstatementhas also caused the sales revenue account to be materially misstated. You have notified theclient about the misstatement but as of reporting date, client has not made any corrections.You also found misstatements in the fixed assets and accounts payable accounts, but theyare not material as per your assessment. You found no other misstatements in the otheraccounts.In addition to this, you also notice that the client has a large amount of debt which will bedue next year. As the business has suffered a loss this year and does not have enough cashflow at the end of the year to pay the debt next year, the client will need to secure someform of refinancing next year. Without this refinancing, there is a…arrow_forward
- A client has a separate sales group for its largest “preferred” customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?a. Prepare a schedule of purchases and payments for these customers.b. Send out negative confirmations on a large sample of these customers.c. Inquire of the sales manager regarding the accounts receivable terms.d. Send out positive confirmations on a large sample of these customers.arrow_forwardss.arrow_forwardAssume that a continuing audit client has recorded Accounts Receivable and Equipment both in the amount of $1,000,000. In a typical audit, which account would take more time to audit?arrow_forward
- The bank account of Kendrick Boats has an available balance of $1,215 and a check book balance of $1,422. There are uncollected deposits totaling $740. What is the amount of the disbursement float on this account? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardSandol Corporation has numerous customers. A customer file is kept on disk storage. Each customer file contains name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to: a. Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations. O b. Request a printout of a sample of account balances so they can be individually checked against the credit limits. c. Request a printout of all account balances so they can be manually checked against the credit limits. O d. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.arrow_forwardWhich of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? O Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file. O Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions. O Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.arrow_forward
- You are auditing Hawthorne Industries. The preliminary risk assessment resulted in a high potential for fraud given the number of offices it has across Canada and the high volume of travel-related expenses, as well as the weak controls around expense management. The travel expense account has been assigned to you for substantive testing and you would like to design an ADA to perform the testing. The data you have available include:• The general ledger• Corporate credit card data (in aggregate, as well as employee daily totals, location of charges, and vendor category, e.g., restaurant, fuel, hotel)• Payroll records that include start/end date, vacation and absenteeism data, and roleWhat are the main assertions related to the travel expense account? (Several choices may be correct.) Completeness Cut-off Classification Accuracy Occurrence Existencearrow_forwardAs the manager of the accounts receivable department for Beavis Leather Goods, Ltd., you recently noticed that Kelly Collins, your accounts receivable clerk who is paid $12000 per month, has been wearing unusually tasteful and expensive clothing. (This is Beavis's first year in business.) This morning, Collins drove up to work in a brand new Lexus. Naturally suspicious by nature, you decide to test the accuracy of the accounts receivable balance of $1,320,000 as shown in the ledger. The following information is available for your first year (precisely 9 months ended September 30, 2010) in business. Collections from customers .......................$1,980,000 Merchandise purchased................................3,600,000 Ending merchandise inventory........................900,000 Goods are marked to sell at 40% above cost. Assuming all sales were made on account, compute the ending balance that should appear in the ledger, noting any apparent shortage.arrow_forwardA client operates two plants. In Plant A, throughout the entire cutoff test window, all sales have been recorded as FOB shipping point. In Plant B, all sales have been recorded as FOB shipping point in the cutoff window prior to year-end and either FOB shipping point or FOB destination in the cutoff window subsequent to year end. Which plant would an auditor judge to have higher fraud risk? Question 27 options: Plant A would have higher fraudulent financial reporting risk than Plant B. Plant B would have higher risk of the misappropriation of assets than Plant A. Plant A would have higher risk of the misappropriation of assets than Plant B. Plant B would have higher fraudulent financial reporting risk than Plant A.arrow_forward
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning