Question

Assume that you are preparing to confirm accounts receivable at December 31, 2022, which is one month prior to the fiscal year-end of January 31, 2023. The book value of gross accounts receivable is $71,622,804. Complete the following requirements related to the confirmation of receivables for Cloud 9 based on previous work and the following information. Required Using PPS sampling, determine the sample size that you want to use for sending accounts receivable confirmations. Draw on the information you learned about PPS sampling in Chapter 10. The book value of accounts receivable before the allowance for doubtful accounts is $71,622,804. You make the following assumptions: You set tolerable misstatement for accounts receivable at $3,500,000. Expected misstatement = $750,000. Risk of incorrect acceptance = 37%. Given these parameters: What do you calculate for sample size?

Answer 1

a.

The risk of incorrect acceptance of 37% would be supported by qualitative assumptions as follows:

• Inherent risk for the existence of accounts receivable is probably maximum given that the occurrence of revenues and the existence of receivables is a high risk assertion.
• Control risk for the existence of accounts receivable is probably assessed as low, given strong internal controls. This should be supported by the results of tests of controls.
• This would allow for a detection risk of high, which is consistent with a 37% risk of incorrect acceptance.

b.

Sample size give these assumptions would be 28.
n = (BV*RF)/((TM – (AM * EF))
n = ($71,622,804* 1.0) / (($3,500,000 – ($750,000 * 1.15))
n = 27.15 so round up to 28