FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Drake is conducting an audit of Newman and is using MUS to select a sample of customer
$10,000,000 and comprise 2,000 customer accounts. Drake has established the following
parameters for the investigation:
∙ Risk of incorrect acceptance = 5%.
∙ Tolerable misstatement = $250,000.
∙ Expected misstatement = $50,000.
Required:
a. Determine the sample size and sampling interval that Drake used in the audit of Newman’s accounts receivable.
b. Based on the calculations in part (a), briefly describe how Drake would select customer
accounts from the population of accounts receivable balances for confirmation.
c. Holding all other factors constant, determine the sample size and sampling interval
assuming each of the following independent changes in Drake’s sampling parameters:
1. Because of improvements in Newman’s internal control policies related to accounts
receivable processing from previous years, Drake believes that a risk of incorrect
acceptance of 10 percent is now acceptable in the current engagement.
2. Because of the closeness of certain ratios to key debt covenants (particularly the current and quick ratios, which are highly influenced by accounts receivable), Drake
believes that the tolerable misstatement should be decreased from $250,000 to
$125,000.
3. Because of unusual circumstances in the previous year, some misstatements occurred
in sales transaction processing that resulted in misstatements in accounts receivable.
These misstatements are not anticipated to occur during the upcoming year. As a
result, Drake believes that expected misstatement can be decreased from $50,000 to
$25,000.
d. How do the changes noted in part (c) illustrate the relationship between sample size and
various factors?
e. Describe the relationship between the sample size and sampling interval. Provide a brief
explanation as to the nature of this relationship.
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