Accounting 408
Problem G-1
You decide to use statistical sampling to test the reasonableness of the recorded
book value of the Key West Company's accounts receivable. Because the
company's internal control procedures over accounts receivable have been
evaluated by you as excellent and you believe few misstatements will be found,
you decide to use probability-proportional-to-size sampling. The company has
4,000 customer accounts with a total book value of $3,000,000. You decide
$150,000 is the maximum tolerable misstatement for this account and estimate
that there may be $30,000 of misstatement in the population. You wish to limit
the risk of incorrect acceptance to 10%. It is your intention to seek positive
confirmation of the accounts included in your sample and to apply alternative
procedures to accounts for which no reply is received.
Required:
a. Compute the sample size.
b. Compute the sampling interval.
c.
Assume the following misstatements were found in the sample:
Sample Item
1
2
3
4
Book Value
$800
$1,500
$13,000
$15,000
Audit Value
$0
$1,350
$0
$14,250
Calculate the upper misstatement limit.
d. State your conclusions based on the results.