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a)
Compute the necessary
a)
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Explanation of Solution
Sample size: Sample size indicates the number of items that the audit team inspects within a population of interest
Compute the necessary sample size for the audit of Company S’s accounts receivable:
The required sample size for the audit of Company S’s inventory is as follows:
Particulars | Sample size | Workings |
Risk of incorrect acceptance | 10% | |
Ratio of expected to tolerable misstatement | 40% | |
Tolerable misstatement as a percentage of population | 8.30% | |
Table (1)
Note: The tolerable misstatement as a percentage of population is 8.3 % which ranges from 8% (sample size 72) to 10% (sample size 58).
Calculate the sample size for the audit of Company S’s accounts receivables:
Step 1: Calculate the difference in sample size for an 8% tolerable misstatement and a 10% tolerable misstatement
Step 2: As the actual tolerable misstatement (8.3 percent) is one-third of the difference above
Note: Refer to EXHIBIT E.4.
Step 3: Adjust the sample size for the 8 percent tolerable misstatement by the result in step 2 to determine a sample size of 70 items
Therefore, according to the above explanation, sample size is 70.
Note: Refer to exhibit GA.1.
b)
Identify the suitable sampling interval based on the sample size computed in requirement (a).
b)
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Explanation of Solution
Sampling interval: The samples units from a larger population are picked corresponding to an arbitrary beginning point however with a fixed interval. This fixed interval is referred as sampling interval.
Sampling interval is calculated as follows:
The sample interval computed by Person CP is as follows:
Therefore, the sampling interval is $4286.
c)
Explain the manner Person CP could choose the sample from computerized customer list that Company S maintains.
c)
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Explanation of Solution
Person CP might arbitrarily choose a beginning point between 0 and 4,286 and pick a dollar in the computerized accounts receivable list related to that dollar. He could then pick every 4,286th dollar in the accounts receivables list till an entire 70 dollar units were picked.
d)
Analyze the impact on the sample size and sampling interval due to the changes in Person CP’s sampling plan.
d)
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Explanation of Solution
1. Compute the necessary sample size for the audit of Company S’s accounts receivable:
The required sample size for the audit of Company S’s inventory is as follows:
Particulars | Sample size | Workings |
Risk of incorrect acceptance | 5% | |
Ratio of expected to tolerable misstatement | 40% | |
Tolerable misstatement as a percentage of population | 8.30% | |
Table (2)
Note: The tolerable misstatement as a percentage of population is 8.3 % which ranges from 8% (sample size 102) to 10% (sample size 81).
Calculate the sample size for the audit of Company S’s accounts receivables:
Step 1: Calculate the difference in sample size for an 8% tolerable misstatement and a 10% tolerable misstatement
Step 2: As the actual tolerable misstatement (8.3 percent) is one-third of the difference above
Note: Refer to EXHIBIT E.4.
Step 3: Adjust the sample size for the 8 percent tolerable misstatement by the result in step 2 to determine a sample size of 99 items
Therefore, according to the above explanation, sample size is 99.
Note: Refer to exhibit GA.1.
The sample interval computed by Person CP is as follows:
Therefore, the sampling interval is $3030.
2. Compute the necessary sample size for the audit of Company S’s accounts receivable:
The required sample size for the audit of Company S’s inventory is as follows:
Particulars | Sample size | Workings |
Risk of incorrect acceptance | 10% | |
Ratio of expected to tolerable misstatement | 50% | |
Tolerable misstatement as a percentage of population | 8.30% | |
Table (3)
Note: The tolerable misstatement as a percentage of population is 8.3 % which ranges from 8% (sample size 100) to 10% (sample size 80).
Calculate the sample size for the audit of Company S’s accounts receivables:
Step 1: Calculate the difference in sample size for an 8% tolerable misstatement and a 10% tolerable misstatement
Step 2: As the actual tolerable misstatement (8.3 percent) is one-third of the difference above
Note: Refer to EXHIBIT E.4.
Step 3: Adjust the sample size for the 8 percent tolerable misstatement by the result in step 2 to determine a sample size of 97items
Therefore, according to the above explanation, sample size is 97.
Note: Refer to exhibit GA.1.
The sample interval computed by Person CP is as follows:
Therefore, the sampling interval is $3,093.
3. Compute the necessary sample size for the audit of Company S’s accounts receivable:
The required sample size for the audit of Company S’s inventory is as follows:
Particulars | Sample size | Workings |
Risk of incorrect acceptance | 10% | |
Ratio of expected to tolerable misstatement | 50% | |
Tolerable misstatement as a percentage of population | 6.7% | |
Table (4)
Note: The tolerable misstatement as a percentage of population is 6.7 % which ranges from 8% (sample size 100) to 6% (sample size 134).
Calculate the sample size for the audit of Company S’s accounts receivables:
Step 1: Calculate the difference in sample size for an 8% tolerable misstatement and a 6% tolerable misstatement
Step 2: As the actual tolerable misstatement (8.3 percent) is one-third of the difference above
Note: Refer to EXHIBIT E.4.
Step 3: Adjust the sample size for the 8 percent tolerable misstatement by the result in step 2 to determine a sample size of 122 items
Therefore, according to the above explanation, sample size is 122 items.
Note: Refer to exhibit GA.1.
The analysis in (1) through (3) specifies that the risk of incorrect acceptance and the tolerable misstatement has an inverse relationship with sample size. The expected misstatement has a direct relationship with sample size.
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Chapter G Solutions
Auditing & Assurance Services (Auditing and Assurance Services)
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