BONUS: Up to 10 Points
DUE: Completing this problem requires that you have read the assigned modules and use your critical thinking skills. You probably want to print this one out.
The following is a computer printout generated by audit software using probability-proportional-to-size (PPS) sampling:
Zinko Company
Receivable Sampling Evaluation Results
December 31, 2012
Population book value: $2,400,000
Tolerable misstatement: $280,000
Projected Misstatement
Book Value Audited Value Misstatement Tainting Percentage Sampling Interval Projected Misstatement
$1,000 0 $1,000 100% $80,000 $1,000
750 600 150 20% 80,000 16,000
85,000 60,000 25,000 NA NA 25,000
42,000
Basic precision: 3.0 * $80,000
Incremental Allowance
Reliability Factor Increment (Increment -1) Projected Misstatement Incremental Allowance
3.00
4.75 1.75 .75 $16,000 $12,000
6.30 1.55 .55 1,000 550
12,550
The software uses factors from the following PPS sample table:
Reliability Factors for Overstatements
Number of Overstatements Risk of Incorrect Acceptance
1% 5% 10% 15% 20%
0 4.61 3.00 2.31 1.90 1.61
1 6.64 4.75 3.89 3.38 3.00
2 8.41 6.30 5.33 4.72 4.28
3 10.05 7.76 6.69 6.02 5.52
4 11.61 9.16 8.00 7.27 6.73
1. 1. What is the planned sample size?
2. 2. What is the total misstatement in the sample?
3. 3. What is the most likely total misstatement in the population?
4. 4. Calculate the upper limit on misstatement.
5. 5. Calculate the allowance for sampling risk.
6. 6. Would one accept or reject the population as being materially correct?
7. 7. What is the risk of incorrect acceptance?
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