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Mar 19, 2015

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Lakeside Company

© All Rights Reserved

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Lakeside Company

© All Rights Reserved

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SAMPLING FOR VARIABLES

Form Completed By: Carole Mitchell

Audit Area: Accrued Expense

Date of Testing: January 30, 1992

(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.

identify each element within this formula.

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

SAMPLING FOR VARIABLES DIFFERENCE ESTIMATION

Form Completed By: Carole Mitchell

Audit Area: Accrued Expenses

Date of Testing: February 2, 1992

(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.

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.

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.

$ 8,000.

(7) Specify a point estimate of the population misstatement [use the initial sample]:

$ 2,830.

50 samples (given)

Random number generator using computer.

(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:

higher than clients balances)

= $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

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:

$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.

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