Auditing and Assurance Services 1st Edition by Iris Stuart

Exercise 20

Developing a sampling plan for accounts receivable confirmations. The following schedule shows accounts receivable balances for the audit client at yearend. As a staff accountant, you have been assigned to select accounts receivable balances to confirm.
a. What assertion do auditors test when confirming account balances
b. Prepare a sampling plan to perform the test. The desired level of assurance is 95% (5% risk of incorrect acceptance). The ratio of estimated misstatement to tolerable misstatement is 0.05. The materiality level is $25,000, and the population is $129,992. The auditor uses 75% of materiality as the tolerable misstatement.
c. Select a sample of accounts to confirm using systematic random sampling and the sample size that you calculated. Identify the accounts that you selected. Assume the random number generated for the first interval is 4002.
d. You find overstatement errors of $12,000 in your sample. How will you evaluate this misstatement
e. Prepare the journal entries for the proposed audit adjustments you would make. Assume the misstatement is related to unrecorded credit memos for goods returned by the customer.