Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 406

Evaluating Sample Results: Classical Variables Sampling. You are auditing Hernandez Inc.'s accounts receivable balance using classical variables sampling. Hernandez's accounts receivable comprised 2,500 customer accounts and were recorded at $3,500,000.
Using a risk of incorrect acceptance and a risk of incorrect rejection of 5 percent, you selected a sample of 200 accounts for examination and confirmed the accounts with the customers. The total recorded balance of these 200 accounts was $1,000,000; based on your confirmations as well as an investigation of differences reported by customers, you determined an audited balance of $900,000. Tolerable misstatement was established at $175,000.
Required:
a. What is the sample estimate of Hernandez's accounts receivable balance using meanper-unit estimation.
b. If you used difference estimation or ratio estimation, how would you expect the sample size to be different?
c. In what circumstances should each of the different methods of classical variables estimation be used?
d. If you calculate a sample estimate of $3,000,000 and precision of $750,000, form a precision interval for Hernandez's accounts receivable using mean-per-unit estimation. Briefly describe the meaning of the precision interval as well as your conclusion with respect to Hernandez's accounts receivable balance.