Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 221

Comprehensive Problem: Monetary Unit Sampling. Clint Walker was examining the accounts receivable of Country Music Inc. Its accounts receivable were recorded at $1,500,000. Based on past audits, Walker established tolerable misstatement at 10 percent of the recorded account balance and anticipated a very small level of misstatement in Country Music's accounts receivable ($50,000). In his previous assessments of audit risk, risk of material misstatement, and analytical procedures risk, Walker had established a necessary risk of incorrect acceptance of 10 percent.
Required:
a. Calculate the sampling interval and sample size that Walker would use in the audit of Country Music.
b. Reperform the calculations in (a) if Walker had established a risk of incorrect acceptance of (1) 5 percent and (2) 20 percent. Based on your calculations, describe the relationship between the necessary level of the risk of incorrect acceptance and the sample size and sampling interval.
c. [ Note: Requirement (c) is unrelated to requirements (a) and (b).] If Walker had detected the following four overstatements, determine the projected misstatement.

d. Based on the results in (c) and using a 10 percent risk of incorrect acceptance, calculate the upper limit on misstatements.
e. Reperform the calculation in (d) using a risk of incorrect acceptance of (1) 5 percent and (2) 20 percent. Based on your calculation, describe the relationship between the necessary level of the risk of incorrect acceptance and the upper limit on misstatements.
f. Using a risk of incorrect acceptance of (1) 5 percent, (2) 10 percent, and (3) 20 percent, determine what Walker's conclusion would be with respect to Country Music's accounts receivable. How do different levels of the risk of incorrect acceptance influence the likelihood of concluding that the account balance is fairly stated?