Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 443

Comprehensive Problem: Classical Variables Sampling. Jessie Howe is examining Met Company's accounts receivable balance and has decided to use mean-per-unit estimation. Met's accounts receivable were recorded at $650,000 and comprised 2,000 individual customer accounts. Howe established tolerable misstatement at = percent of the recorded balance. Based on prior experience with Met, Howe assessed expected misstatement at $22,500 and estimated a standard deviation of the mean audited value of $30.
Required:
a. Using the preceding parameters, identify the appropriate sample size for the following combinations of risk of incorrect acceptance (RIA) and risk of incorrect rejection (RIR):
1. RIA = 1 percent, RIR = 5 percent.
2. RIA = 1 percent, RIR = 10 percent.
3. RIA = 5 percent, RIR = 10 percent.
b. What factors would Howe consider in establishing the risk of incorrect acceptance and the risk of incorrect rejection?
c. Based on the results in (a), explain how the risk of incorrect acceptance and the risk of incorrect rejection influence the determination of sample size.
d. If Howe had determined an audited value of $330 per account and a standard deviation of audited values of $30, determine the precision interval for each of the following combinations of the risk of incorrect acceptance (RIA) and risk of incorrect rejection (RIR). In each of these cases, what is Howe's conclusion with respect to Met's accounts receivable?
1. RIA = 1 percent, RIR = 5 percent.
2. RIA = 1 percent, RIR = 10 percent.
3. RIA = 5 percent, RIR = 10 percent.
e. Based on the results in (d), explain how the risk of incorrect acceptance and risk of incorrect rejection influence the precision interval and evaluation of results.