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The auditor ia auditing accounts receivable for a long-time client that has good internal controls. The auditor has assessed control risk as low and...

The auditor ia auditing accounts receivable for a long-time client that has good internal controls. The auditor has assessed control risk as low and assigns a control risk assessment of 20 % and a desired audit risk of 5 %. Other factors considered by the auditor:
1. The auditor will not be performing any other substantive audit procedures.
2. Inherent risk, by firm policy, is assessed at 1.00.
3. Client book value is $9,325,000.
4. Tolerable misstatement is assessed at $215,000.
5. Previous audits have shown an expected error of $45,000 over-statement is reasonable.

REQUIRED:
a- Calculate the detection risk
b- Calculate (and show the calculation) of the sample selection interval.
c- Assume the auditor rounds the sampling interval down to the next nearest $5,000. Calculate the approximate largest sample size the auditor would expect.
d- The auditor found the following differences when performing the audit work:

BOOK VALUE AUDITED VALUE AUDIT DIFF
32,500 15,000 -17,500 was billed to
wrong Co. for error
in transcription.
55000 20000 - Merchandise was
returned before
year end, but credit
was not recorded
until next period.

125000 $??? Incurred 60000
105000 85000 -Dispute on product quality
disputed for 6 months but
customer satisfied.
500 400 -Credit was supposed to be
issued, but was not.

REQUIRED:
a- Calculate the most likely error and the upper error limit for accounts receivable
b- Discuss the audit implications, that is, whether the audit work supports book value or whether additional audit work should be recommended, and, if so, the nature of the audit work.
The auditor ia auditing accounts receivable for a long-time client that has good internal controls. The auditor has assessed control risk as low and assigns a control risk assessment of 20 % and a desired audit risk of 5 %. Other factors considered by the auditor: 1. The auditor will not be performing any other substantive audit procedures. 2. Inherent risk, by firm policy, is assessed at 1.00. 3. Client book value is $9,325,000. 4. Tolerable misstatement is assessed at $215,000. 5. Previous audits have shown an expected error of $45,000 over-statement is reasonable. REQUIRED: a- Calculate the detection risk b- Calculate (and show the calculation) of the sample selection interval. c- Assume the auditor rounds the sampling interval down to the next nearest $5,000. Calculate the approximate largest sample size the auditor would expect. d- The auditor found the following differences when performing the audit work: BOOK VALUE AUDITED VALUE AUDIT DIFF $32,500 $15,000 -17,500 was billed to wrong Co. for error in transcription. $55000 $20000 - Merchandise was returned before year end, but credit was not recorded until next period. $125000 $??? Incurred 60000 to keep the customer happy and collect the receivable. The staff is debating whether the audited value should be 125000 or 65000. You decide and justify. $105000 $85000 -Dispute on product quality disputed for 6 months but customer satisfied.
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$500 $400 -Credit was supposed to be issued, but was not. REQUIRED: a- Calculate the most likely error and the upper error limit for accounts receivable b- Discuss the audit implications, that is, whether the audit work supports book value or whether additional audit work should be recommended, and, if so, the nature of the audit work.
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