Sampling

Background:

Carol Jones is a CPA in solo practice and is performing her annual audit of Seagrass Company.

Previously, Carol used classical variables sampling in performing tests of controls on Seagrass’s accounts receivable. Carol decided to use monetary unit sampling for the current year in confirming accounts receivable. Carol expected to discover many overstatements but presumed that the MUS sample would still be smaller than the corresponding size for classical variables sampling.

Carol thought the MUS sample would automatically result in a stratified sample because each account would have an equal chance of being selected for confirmation. She also thought that negative (credit) balance accounts would be handled without special treatment.

Carol calculated the sample size using the risk of incorrect acceptance, the total recorded book amount of the receivables, and the number of misstated accounts allowed. She divided the total recorded book amount of the receivables by the sample size to determine the sampling interval. Carol also calculated the standard deviation of the dollar amount of the accounts selected for evaluation of receivables. Based on her calculations, Carol’s sample size was 80, and the sampling interval was determined to be $10,000. However, only 78 different accounts were selected because two accounts were so large that the sampling interval caused each of them to be selected twice. Carol sent confirmation requests to 75 of the 78 customers. Three of the accounts initially selected had balances under $20. Carol determined these were too small to be representative so she ignored these and substituted the three largest accounts in the population that had not previously been selected in the sample. Each of these accounts had a balance in excess of $8,000, so Carol sent confirmation requests to those customers in place of the small accounts.

Carol found two differences when the confirmations were returned. One account with an audited amount of $3,000 had been recorded at $4,000. Carol projected this to be a $1,000 misstatement. Another account with an audited amount of $2,000 had been recorded at $1,900. Carol did not count the $100 difference because the purpose of the test was to detect overstatements.

Carol determined that the accounts receivable balance was not overstated because the projected misstatement was less than the allowance for sampling risk.

Instructions:

• Describe each incorrect assumption, statement, and inappropriate application in Carol’s procedures.
• Explain how Carol could have used Generalized Audit Software (GAS) in conducting her sampling and confirmation. (e.g., What would the software have done for Carol?)

Your paper should meet the following requirements:

• 4 pages in length
• Formatted according to CSU-Global Guide to Writing and APA Requirements

Include at least two or three outside sources. The CSU-Global Library is a great place to start.