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(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
x
n is the average unit sampled
n
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
= 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.
Sample
N x ( Za+ Zr ) x ESD
TEE
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
(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.
(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.
(7) Specify a point estimate of the population misstatement [use the initial sample]:
$ 2,830.
(10) Recompute the standard deviation using the entire sample selected:
E SD=
Where:
( x)2n
x
n
( )
n1
x
n is the average unit sampled
n
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
114 , 9802 ( 50 )
501
= 48 (rounded)
(11) Calculate the average difference within the entire sample and extend this figure to the
entire population:
(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
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:
(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.