BUS 425 Auditing
Sampling Project
Accounts receivable
Go to my web page
- left hand column - “Sample Size Project”
The security settings on my computer are set such that I must open the spreadsheet in a
New Tab or a New Window. You will need to “Enable Macros” to allow the spreadsheet to open
and be functional. If your security settings are too restrictive, you may not be allowed to enable
the macros. In which case you either need to use a friend’s computer or relax the security settings
on your computer.
Go to the “Summary” tab at the bottom of the spreadsheet. The Summary page provides
the number of accounts, sum of the account balances and standard deviation for the recorded
balances in the population. Assume tolerable error is equal to 10% of the account balance and
you are to limit the risk of incorrect acceptance to 20% and the risk of incorrect rejection to 20%.
Use this information to calculate the required sample size.
Enter the required sample size you calculated as the Sample Size on the spreadsheet.
Then push the Generate button. The program will ask you if it is OK to delete earlier work and
you will respond “Delete.” This process will create a random list of accounts to be sampled
which can be seen on the “RandomNumbers” tab. You should notice that the number of random
numbers created equals the “sample size” you entered.
Return to the “Summary” tab and push the “Create” button. This will select those
customers whose account numbers were randomly selected. You can go to the “Sample” tab to
see the sample of customers who have been selected. Accounts receivable confirmation letters
will be sent to these customers. Remember these are customers of our audit client.
Return to the “Summary” tab and push the “First” button. This will create the results of
from those customers who responded to the first confirmation letters. You go to the “Results” tab
to see the early responses to your confirmations.
Return to the “Summary” tab and push the “Second” button. This will create results from
those customers who responded to the second confirmation letters. The “Results” tab will show
the responses to your confirmations.
We do not have enough time remaining to send a third confirmation. Assume we have
performed alternative procedures. These might include subsequent cash receipts from customers
paying their account. Subsequent cash receipts provide evidence that the account existed. Or we
might vouch from the customer’s account to an invoice indicating the client billed the customer;
to a shipping document indicating the goods were shipped before 12/31/2007; and to a sales
order indicating the customer ordered the goods. Further assume that that our alternative
procedures provide evidence that the recorded balance is correct for those customers who did not
respond to our confirmation letter,
Use your sample results to set up a test that the actual balance exceeds $2,617,330.00
with 20% risk of incorrect acceptance. Calculate the critical value for your test. Compare your
sample results to the critical value and determine whether you will accept that the recorded book
value is not materially overstated or fail to accept. Present you answers in the form of
workpapers.
Work Paper 1
Miller Motor Co.
Revenue Collection cycle
Accounts Receivable
performed by:
date:
Tad
2/29/08
nature of test Test of details of transactions
objective
The objective of this procedure is to determine if the accounts receivable account
is overstated.
assertion(s)
Existence or Occurrence, and Valuation
procedure
M&M LLP selected a random sample of 49 entries from the accounts receivable
sub-ledger. On Feb. 10, 2008, a confirmation letter was sent to each customer in
the sample. On Feb. 17, 2008 a second confirmation letter was sent to each
customer in the sample who had not responded to the first letter.
For customers who did not respond to either confirmation, we vouched their
account balance to invoices, shipping documents and sales orders. The date,
customer name and amount from the accounts receivable sub-ledger were agreed
to the invoice. The invoice was vouched to the related shipping document where
the customer information, items sold and quantities on the invoice were agreed to
the shipping document. The shipping document and invoice were vouched to the
related sales order where the customer information, items sold and quantities on
the shipping document were agreed to the sales order.
Work Paper 2 shows the required sample size calculation and the evaluation of
the sample results.
Workpaper 3 shows the results of our sample
conclusion
Based on our sample results we are unable to conclude that accounts receivable
are not materially overstated. More extensive substantive tests of details need to
be performed.
Work Paper 2
Miller Motor Co
Revenue Collection cycle
Accounts Receivable
performed by:
date:
Tad
2/29/08
nature of test Test of details of transactions
objective
The objective of this procedure is to determine if the accounts receivable account
is overstated.
assertion(s)
Existence or Occurrence, and Valuation
procedure
Sample size calculation
Ho: μ = 2,908.14 – 290.81
α = 0.40
Zα/2 = 0.84
β = 0.20
Zβ = 0.84
tolerable error is 10% of the recorded balance
risk of incorrect rejection
risk of incorrect acceptance
CV = LL
μ + Zβ* Sx/√n = BV - Zα/2* Sx/√n
Zβ* Sx/√n = BV - μ - Zα/2* Sx/√n
Zα/2* Sx/√n + Zβ* Sx/√n = BV - μ
0.84*1,204.33/√n + .84*1,204.33/√n = 290.81
1.68*1,204.33/√n = 290.81
1.68*1,204.33 / 290.81 = √n
6.96 = √n
48.41 = n => n = 49
Calculation of Critical Value using sample results
CV = μ + Zβ * Sx/√n
= 2,617.33 + 0.84 * 1,284.72 / √49
= 2,617.33 + 154.17
= $2,771.50
Evaluation of Sample Results
Sample Mean $2,711.89
.
less than CV of $2,771.50
Work Paper 3
Miller Motor Co
Revenue Collection cycle
Accounts Receivable
nature of test
objective
recorded
balance
date:
Tad
2/29/2008
Test of details of transactions
The objective of this procedure is to determine if
accounts receivables are overstated.
Existence/Occurrence and Valuation
assertion(s)
customer
account
performed by:
confirmation responses alternate
1st
2nd
procedures
16
49
1,309.07
3,500.06
1,309.07
3,500.06
62
66
89
116
120
151
162
174
191
203
217
224
276
293
303
364
371
380
399
402
418
432
464
469
2,274.43
2,635.15
4,191.70
1,675.16
2,630.21
3,780.23
2,477.48
2,418.13
3,962.70
4,222.18
3,531.73
1,460.20
-2,239.29
4,218.15
3,910.57
1,595.91
4,730.13
1,664.10
4,467.59
2,426.68
1,555.20
1,544.71
2,805.96
3,546.59
2,274.43
1,581.09
132,882.39 Sample Total
2,711.89 Sample Average
1,284.72 Sample Std Dev
discrepencies
-1,054.06
4,191.70
1,675.16
2,630.21
2,268.14
-1,512.09
2,477.48
2,418.13
3,962.70
4,222.18
3,531.73
1,460.20
-2,239.29
4,218.15
3,910.57
1,595.91
4,730.13
1,664.10
4,467.59
2,426.68
1,555.20
1,544.71
2,805.96
3,546.59