Calculate the sample size for testing the existence and cut-off of accounts receivable through confirmations
Rose has completed all of the procedures except for the confirmation of accounts receivable. Assume that you need to plan the sample size for sending out accounts receivable confirmations and that you estimate that the error amount in the population will be $31,500. Assume also that the average percentage of error assumption (tainting) is 100%, that the tolerable misstatement is
$70,000 for overstatements and understatements and that ARIA is 10%. Calculate the tolerable deviation rate [(tolerable misstatement ÷ average percent of error assumption) ÷ book value of the population × 100]. Round up the estimated population exception rate and round down the tolerable deviation rate to the nearest whole percentage (ignore decimals). Using the figures you have just calculated, turn to Table 1 in Appendix A of this assignment to look up the sample size.
b. Perform the audit procedures
Assume that Rose mailed 48 confirmations and identified all discrepancies. There are no errors with the possible exception of the differences noted by customers on three returned confirmations (see W/Ps C-6 to C-8). In addition, one confirmation was returned by the post office as undeliverable (see W/P C-9). Rose investigated the differences and wrote explanations on each of these confirmations. Use W/P C-12 to summarize the details of the three reported differences. After reading Rose’s comments, decide whether the discrepancies are client errors and should be projected to the population, or whether they are customer errors and timing differences that can be disregarded. In Procedure 3 of W/P C-2, indicate that there were no changes required to be made to the nature, timing and extent of the planned substantive audit procedures. Please note that W/Ps C-6 to C-8 and W/P C-9 are in another Word document entitled “AppliedExternalAudit-CaseWare-WPC6toC9”
c. Evaluate the results of the accounts receivable confirmation testing and conclude whether accounts receivable is fairly stated
