ACC 640 Module 8 Audit Sampling Assignment Example

Monetary Unit Sample for Wholesale Accounts Receivable

[Student Name]

Southern New Hampshire University

ACC 640: Auditing

Module Eight Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Monetary Unit Sample for Wholesale Accounts Receivable

Objective and Population

The objective is to obtain evidence that wholesale accounts receivable at December 31 are not materially overstated, addressing existence and valuation. The population is the $46.0 million of balances due from 412 retail customers. The sampling unit is the individual dollar, so larger balances are more likely to be selected, which suits an overstatement test. Balances are tested by confirmation under AS 2310 and, where a customer does not reply, by matching January payments and proof of delivery to the open invoices. The sample is designed under AS 2315 (Public Company Accounting Oversight Board, 2016).

Why Monetary Unit Sampling

Monetary unit sampling fits this test for three reasons. The main risk is overstatement, from credits not posted or sales recorded without delivery, and selecting by dollar gives large balances more weight, which is where overstatement would matter. The population has a few large national retailers and hundreds of small independent outfitters, a skewed distribution that would require stratification under classical variables sampling. And few misstatements are expected, the condition under which the method produces efficient sample sizes. Its weakness is that it is poorly suited to finding understatements and zero balances, so completeness of receivables is covered separately by the cutoff tests and the revenue analytics.

Planning the Sample

Tolerable misstatement is $660,000, equal to performance materiality. Expected misstatement is $100,000, based on the predecessor's working papers, which showed small pricing differences each year. The risk of incorrect acceptance is 10 percent, a 90 percent confidence level, because the risk of material misstatement in wholesale receivables was assessed as moderate and other procedures, analytics and cutoff tests, also provide evidence. The firm's tables give a 2.31 reliability factor for zero misstatements at that confidence, with 1.5 as the expansion factor.

To size the sample, the book value is multiplied by the reliability factor and the result is divided by tolerable misstatement after subtracting expected misstatement scaled by the expansion factor: $46,000,000 times 2.31, or $106,260,000, divided by $660,000 less $150,000, or $510,000, which gives 208.4, rounded up to 209. The sampling interval is $46,000,000 divided by 209, $220,096. Starting from a random dollar, every 220,096th dollar after it is picked; three accounts larger than the interval are selected automatically and examined in full.

Results

Of 209 selections, 192 confirmations were returned; the 17 nonresponses were cleared with January cash receipts and shipping records, and none of those alternative tests found a difference. Three differences were found.

Misstatements found

The first difference is a pricing error: the customer was billed list price instead of its contract price. The second is more serious: the customer returned the whole order in November, the goods are back in the warehouse, but the credit memo was never posted. The third is a similar unposted credit on a large account examined in full, so its $8,000 is an actual misstatement, not projected.

Projection and Upper Limit

Misstatements in items smaller than the interval are projected by multiplying the tainting by the interval: $11,005 for the 5 percent tainting and $220,096 for the 100 percent tainting, $231,101 in total. Adding the actual $8,000 from the top stratum gives projected misstatement of $239,101.

Sampling risk is covered by adding basic precision and incremental allowances. Basic precision is the reliability factor for zero misstatements times the interval, 2.31 times $220,096, or $508,421. Incremental allowances apply to taintings ranked from largest to smallest: the increase in the factor from zero to one misstatement, 1.58, less one, times the interval and the 100 percent tainting gives $127,656; the increase from one to two, 1.44, less one, times the interval and the 5 percent tainting gives $4,842.

Upper misstatement limit

Links to Other Accounts

An unposted return credit overstates receivables, but it also overstates revenue and understates inventory, since the returned goods are back in the warehouse but not in the inventory records. The two credits found total $20,500 at selling prices, with about $11,000 of cost. If the problem is widespread, it also affects the returns reserve, because management's reserve estimates returns not yet received, and returns already received but not credited fall between the two calculations. The inventory team will compare warehouse receiving logs for returned wholesale goods with the inventory records, and the revenue team will treat wholesale returns as part of the significant risk identified for the returns reserve rather than as a separate issue.

Conclusion and Response

The upper limit of $880,020 exceeds tolerable misstatement, so the sample does not support the conclusion that receivables are not materially overstated. AS 2315 requires the auditor to consider the nature and cause of misstatements, not only their amount. Two of the three differences are unposted return credits, which suggests a systematic problem rather than random error, and it connects to the returns risk identified in planning: when the customer service team approves a wholesale return, the credit memo depends on a manual request to accounting. Elder et al. (2013) note that evaluating the qualitative character of sample errors is one of the weaker areas of practice, which is why the cause deserves as much attention as the projection.

Expanding the sample would not address a systematic cause efficiently. Instead, we will ask management to compare all wholesale returns received at the warehouses since October with posted credit memos and correct any missing credits; we will test that analysis by selecting returns from warehouse receiving records and tracing them forward. If the corrected balance and our testing of the analysis bring the remaining likely misstatement well below tolerable misstatement, the account can be accepted. We will also report the missing control over wholesale return credits as a deficiency and consider whether it rises to a significant deficiency (Arens et al., 2020).

References

Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.

Elder, R. J., Akresh, A. D., Glover, S. M., Higgs, J. L., & Liljegren, J. (2013). Audit sampling research: A synthesis and implications for future research. Auditing: A Journal of Practice & Theory, 32(Supplement 1), 99-129. https://doi.org/10.2308/ajpt-50394

Public Company Accounting Oversight Board. (2016). Audit sampling (AS 2315). Author.