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# Abernethy and Chapman

## DETERMINATION OF INITIAL SAMPLE SIZE

SAMPLING FOR VARIABLES

## Client: Lakeside Company

Form Completed By: Carole Mitchell
Audit Area: Accrued Expense
Date of Testing: January 30, 1992

## Year Ending: December 31, 1991

(1) Estimate the standard deviation of the population. Show the formula being used and
identify each element within this formula.

ESD=

Where:

(x)2n

x
n

( )

n1

## is the value of each unit sampled

x
n is the average unit sampled
n

## is the number of units sampled

The initial 30 items selected in Exhibit 12-2 shows 26 differences with a zero balance and
four with either positive and negative balances.

( x)2

205
49
(110)
156

42,025
2,401
12,100
24,336

80,862

= 300

x
n

## Estimated Standard Deviation =

= 300/30 or 10

80 , 86230 ( 10 )
301

= 52 (rounded)

(2) Specify the acceptable level of risk for incorrect acceptance. Identify the confidence
coefficient (Z value) for this percentage. Include any considerations that were used in
arriving at this parameter.
The risk of incorrect acceptance was set at 10% but no information was provided in
this case to indicate the rationale for this decision. The Z Value for a 10% risk of incorrect
acceptance is 1.28 according to Exhibit 12-1.

(3) Specify the acceptable level of risk for incorrect rejection. Identify the confidence
coefficient (Z value) for this percentage. Include any considerations that were used in
arriving at this parameter.
The risk of incorrect rejection was set at 30% but no information was provided in this
case giving the rationale for this decision. The Z value for a 30% risk of incorrect rejection is
1.04 is according to Exhibit 12-1.

(4) Specify a tolerable misstatement for this population. Include any considerations that
were used in arriving at this parameter.
Tolerable error is \$8,000 which is a figure apparently set judgment by Dan Cline.

(5) Specify a point estimate of the population misstatement. Describe the method by
which this determination was made.
The initial sample of 30 items had an average error of \$10 as computed in (1) above.
Since 283 items make up the entire population, the point estimate of the population error is
\$2,830.

## (6) Calculate the appropriate initial sample size.

identify each element within this formula.

Sample

N x ( Za+ Zr ) x ESD
TEE

## Show the formula being used and

Where:
N is the population size
Za is the confidence coefficient for the acceptable risk of incorrect acceptance
Zr is the confidence coefficient for the acceptable risk of incorrect rejection
ESD is the estimate of the standard deviation of the difference
TE is the tolerable misstatement of the population
E is the point estimate of the population misstatement

283 x ( 1.28+1.04 ) x 52
Sample
80002830

= 44

## Abernethy and Chapman

SAMPLING FOR VARIABLES DIFFERENCE ESTIMATION

## Client: Lakeside Company

Form Completed By: Carole Mitchell
Audit Area: Accrued Expenses
Date of Testing: February 2, 1992

## Year Ending: December 31, 1991

(1) State the objectives of the audit testing and define misstatement conditions:
To determine the reasonableness of the clients year-end cut-off to arrive at accrued
expenses.

## (2) Define the population:

All differences between the year-end accrual (as determined by the client) and the
audited balance. Accruals were computed using all invoices deceive by the client in
December 1991 and January 1992.

## (3) Define the sampling unit:

The difference between year-end accrual determined by the client and the proper
balance as calculated by the independent auditors.

(4) Specify the acceptable level of risk for incorrect acceptance and identify the
confidence coefficient (Z value) for this percentage:
Risk of incorrect acceptance is 10 % with a confidence coefficient of 1.28.

(5) Specify the acceptable level of risk for incorrect rejection and identify the confidence
coefficient (Z value) for this percentage:
Risk of incorrect acceptance is 30 % with a confidence coefficient of 1.04.

## (6) Specify a tolerable misstatement for this population:

\$ 8,000.

(7) Specify a point estimate of the population misstatement [use the initial sample]:
\$ 2,830.

## (8) Compute appropriate sample size:

50 samples (given)

## (9) Indicate the method used to draw a random sample:

Random number generator using computer.

(10) Recompute the standard deviation using the entire sample selected:

E SD=

Where:

( x)2n

x
n

( )

n1

## is the value of each unit sampled

x
n is the average unit sampled
n

## is the number of units sample

All 50 items sampled in Exhibit 12-2 and 12-3 show 43 differences with zero balance and
seven with either positive or negative balances.

(x)2

205
49
(110)
156
(97)
(150)
47

42,025
2,401
12,100
24,336
9,409
22,500
2,209

114,980

= 100

x
n

= 100/50 or 2

## Estimated Standard Deviation =

114 , 9802 ( 50 )
501

= 48 (rounded)

(11) Calculate the average difference within the entire sample and extend this figure to the
entire population:

## = \$2 difference per unit (audited numbers are

higher than clients balances)

## Estimated Total Difference = 283 items X \$2

= \$566 (client figure is understated).

(12) Determine the precision interval. Show the formula being used and identify each
element within this formula (all computations should be included):

Precision Interval =

N x Za x

SD
N n
x
N
n

SD

Za

48

## Precision Interval = 283 x 1 .28 x 50 x

28350
=\$ 2 , 232
283

(13) Identify the upper and lower confidence limits of the population based on the
precision interval and the average difference of the sample:

## Actual population of difference is estimated to be between an understatement of

\$2,798 (\$566 + \$2,232) and an overstatement of \$1,666 (\$566 \$2,232).

(14) Indicate whether the upper and lower confidence limits lie entirely within the tolerable
error parameters:
No portion of the computed range of total errors falls outside of the \$8,000 tolerable
error limit.

(15) Recommendation:
The clients accrual of \$46,311 should be accepted as a fair representation of the
year-end liability.