17-24 (Objective 17-2 ) You are evaluating the results of a nonstatistical sample of

85 accounts receivable confirmations for the Bohrer Company. Information on the

sample and population are included below. Tolerable misstatement for accounts
receivable confirmation sampling is $100,000.

The confirmation responses were received without exception, other than the
following items:

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Required
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a. Evaluate each of the confirmation exceptions to determine whether they

represent misstatements.
Account 147 – $1,095 misstatement - pricing error
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Account 228 – $26,003 misstatement - Cutoff error

Account 278 – $0 misstatement - timing difference
Account 497 – $15,319 misstatement - cutoff error
Account 564 - $539 misstatement - Error in quantity shipped
Account 653 – $13,359 misstatement - cutoff error

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 Account 830 – $0 misstatement - timing difference

b. Estimate the total amount of misstatement in the accounts receivable

population. Ignore sampling risk in the calculation.

Sample value Sample Book value Projected

misstatement misstatement
Stratum 1 $1,287,643 $26,003 $1,287,643 $26,003
Stratum 2 $1,349,678 $29,773 $4,348,268 $95,920
Stratum 3 $94,637 $539 $947,682 $5,397
Totals $2,731,958 $56,315 $6,583,593 $127,320

c. Is the population acceptable? If not, indicate what follow-up action(s) you

consider appropriate in the circumstances.

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The projected misstatement of $127,320 exceeds the tolerable misstatement

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of $100,000; therefore, the population is not acceptable. The auditor may

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suggest an adjustment or increase testing. The auditor should expand testing

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in this area and propose an adjustment for the errors found since several
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misstatements were due to cutoff errors. Because the cutoff errors were
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identified and testing was expanded within this area, the cutoff errors would
not be included in the projection of error for each of the stratums.
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7-26 (Objective 17-3 ) The accounts receivable population for Jake’s Bookbinding
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Company follows. This table is the same as Table 17-1 , except that cumulative
amounts are included to assist you in completing the problem. The population is
smaller than is ordinarily the case for statistical sampling, but an entire population
is useful to show how to select PPS samples.
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Required
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a. Select a random PPS sample of 10 items, using computer software.

Using Excel the formula would be: =RANDBETWEEN(1,207295) The command for
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selecting the random numbers can be entered directly onto the spreadsheet, or can
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be selected from the function menu functions. Once the formula is entered, it can be
copied down to select additional random numbers.

b. Select a sample of 10 items using systematic PPS sampling. Use a starting

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point of 1857. Identify the physical units associated with the sample dollars.

Sample Dollar Item #

1857 2
22587 6

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 43317 8
64047 8
84777 15
105507 20
126327 26
146967 30
167697 30
188427 35

c. Which sample items will always be included in the systematic PPS sample
regardless of the starting point? Will that also be true of random PPS
sampling?
All items larger than the interval will be automatically included. Items 8 and
30 will be included at least one time. It’s not true when using random

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sampling.

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d. Which method is preferable in terms of ease of selection in this case?

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Both methods could be used

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e. Why will an auditor use MUS?
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It focuses on large dollar amounts and it’s efficient.
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 m
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17-27 (Objective 17-3 ) In the audit of Price Seed Company for the year ended
September 30, the auditor set a tolerable misstatement of $50,000 at an ARIA of
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10%. A PPS sample of 100 was selected from an accounts receivable population that
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had a recorded balance of $1,975,000. The following table shows the differences
uncovered in the confirmation process:
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Required

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a. Calculate the upper misstatement bound on the basis of the client

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misstatements in the sample.

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Adjustment of lower misstatement bound:
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Point estimate for overstatement amounts = sum of misstatement
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percent x recorded value/sample size = (.694 + .084) x (1,975,000 / 100)
= .778 x 19,750 = 15,366
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Adjusted bound = initial bound - point estimate for overstatements

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= 75,058 - 15,366= 59,692

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Adjustment of upper misstatement bound:

Point estimate for understatement amounts = sum of misstatement percent x
recorded value / sample size
= (.892 + .030 + .024) x (1,975,000 / 100)
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= .946 x 19,750 = 18,684

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Adjusted bound = initial bound - point estimate for understatement amounts

= 69,678 - 18,684= 50,994
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b. Is the population acceptable as stated? If not, what options are available to

the auditor at this point? Which option should the auditor select? Explain.
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The population is not acceptable as stated because both the lower misstatement
bound and upper misstatement bound exceed materiality. In this situation, the
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auditor would have the following options: 1. Segregate a specific type of

misstatement and test it separately (for the entire population). The sample would
then not include the specified type of misstatement since it is being tested
separately. 2. Increase the sample size. 3. Adjust the account balance (i.e., propose an
adjustment). 4. Request the client to review and correct the population. 5.Consider
qualifying the opinion is the client refuses to correct the problem. 6.Consider the

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 criteria used in the test, possibly in connection with additional audit work in areas
outside of accounts receivable.

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