Question

You are planning to use monetary unit sampling to evaluate accounts receivable for Purple Company. The accounts receivable account totals $4,000,000. You have assessed a risk of incorrect acceptance of 5 percent, a tolerable misstatement of $140,000, and an expected misstatement of $25,200.

a. Calculate the sample size and sampling interval.

b. Regardless of your answer to (a), use a sample size of 125 and the related sampling interval and calculate the upper limit on misstatements assuming you found the following differences.

Account   115 196

Recorded Balance    $ 3,200 4,850

Audited Value   $ 1,200    1,590

Difference $ 2,000 3,260

Answer 1

a)Ratio of expected to tolerable misstatement=25200/140000=0.18
Tolerable misstatement as a percentage of population = 5%
Sample size from MUS table for risk of incorrect acceptance of 5% and 0.18 = 93
Sampling interval=4000000/93=43010.75
b)sample size=125
sampling interval=4000000/125=32000

taintng percentages:
115:=2000/3200=0.63
196:=3260/4850=0.67

basic allowance for sampling risk=SI*RF=25200*3=75600
projected misstatement:SI*tainting %
115=25200*0.63=16939
196=25200*0.67=15750

Incremenra allowance:
acc 115=16939*(4.75-3-1)=12704
acc 196=15750*(6.3-4.75-1)=8663
total=21366.75

upper limit on misstatements:
Basic allowance for sampling risk=75600
projected misstameent=16939+15750=32689
incremental allowance for risk=21366.75
Upper limit=129655.31