Question

Upper Limit on Misstatements Calculation: Monetary Unit Sampling. Jordan Thomas is using MUS to examine a...

Upper Limit on Misstatements Calculation: Monetary Unit Sampling. Jordan Thomas is using MUS to examine a client’s accounts receivable balance. Using a risk of incorrect acceptance of 5%, a tolerable misstatement of $65,000, a sample size of 100 items and a sampling interval of $12,300, Thomas identified the following misstatements:

Item Recorded Balance Audited Value
1 $15,000 $12,500
2 10,000 4,000
3   3,000 2,000

Questions:

1) What is the projected misstatement?

2) What is the basic allowance for sampling risk?

3) What is the incremental allowance for sampling risk?

Business   Accounting   
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Homework Answers

Answer #1
1. Projected Misstatement
Projected Misstatement = Recorded Balance - Audited Balance
Projected Misstatement = $ 28000 - $18500 = $9500
2. Basic Allowance for Sampling Risk
Basic Allowance for Sampling Risk = Sampling Interval * Confidence factor (RIA)
Basic Allowance for Sampling Risk = $12,300 * 3(RIA)
Basic Allowance for Sampling Risk = $36,900
3. Incremental Allowance for sampling risk
Incremental Allowance for sampling risk = Projected Misstatement * Incremental confidence factor
Incremental Confidence Factor = 4.75 - 3 = 1.75
Incremental Allowance for sampling risk = $ 9500 * 1.75 = $16625

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