Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 258

Monetary Unit Sampling. Dylan Mays is auditing the accounts receivable of Channel Company. Channel's accounts receivable were recorded at $2,000,000 and comprised more than 1,500 customer accounts. However, Channel's 10 largest customers' balances comprised a high percentage of the recorded accounts receivable (over $500,000, or 25 percent). As a result, Mays is considering the use of MUS.
Based on prior audits and other judgments, Mays has established the following parameters:

Required:
a. Briefly identify what factors Mays should consider in determining sample size and how these factors would be assessed.
b. Calculate the necessary sample size and sampling interval used by Mays in the audit of Channel Company.
c. Given the information in (b), describe how Mays would select the sample from Channel's computerized accounts receivable ledger.
d. [ Note: Requirement (d) is unrelated to requirements (b) and (c).] If Mays detected the following three misstatements, determine the projected misstatement.

e. Based on the results in (d) and a 5 percent risk of incorrect acceptance, calculate the upper limit on misstatements.
f. Based on the calculation in (e), determine what Mays's conclusion would be with respect to Channel Company's accounts receivable.