Basic Bound

Basic bound = MDR x BV

= R (reliability factor) x BV
n (sample size)

= 3.0 x $473000
50

= $28,380

Recorded Audited Misstatement amount Misstatement

amount (A) ($) amount (B) ($) (C) proportion (D)
(A-B) ($) (C/A)

1530 1683 (153) (0.1)

3390 2712 678 0.2

220 352 (132) (0.6)

280 490 (210) (0.75)

2350 1175 1175 0.5

200 80 120 0.6

Additions to basic bound (=Projected errors + Incremental Allowance for sampling risk)

IE1 = R1 R0 (reliability factors) x BV x Misstatement Proportion

n(sample size) (ranked in descending order)

Overstatements:

IE1 = 4.75 3.00 x $473,000 x 0.6

50

= $9,933
IE2 = 6.30 4.75 x $473,000 x 0.5
50

= $7,332

IE3 = 7.76 6.30 x $473,000 x 0.2

50

= $2,762

Overstatements: $20027

Understatements:
IE1 = 4.75 3.0 x $473,000 x 0.75
50

= $12,416

IE2 = 6.30 4.75 x $473,000 x 0.6

50

= $8,798

IE3 = 7.76 6.30 x $473,000 x 0.1

50

= $1,381

Understatements : $22,595

Maximum overstatement = BP + additions to basic bound(overstatement)

= $28,380 + $20,027
= $48,407

Maximum understatement = BP + additions to basic bound(understatement)

= $28,380 + $22,595
= $50,975
Projected over/under statement
Projected overstatement = Sum of +ve misstat. Proportions x BV
n (sample size)

= (0.6+0.5+0.2) x 473000
50
= 1.3 x 473000
50

= $12,298

Projected understatement = Sum of -ve misstat. Proportions x BV

n (sample size)

= (0.75+0.6+0.1) x 473000
50
= 1.45 x 473000
50
= $13,717

Net max. overstatement = Max. overstat. - Projected understat.

(Upper Error Limit) = 48407 - 13717
= $34,690

Net max. understatement = Max. understat. - Projected overstat.

(Lower Error Limit) = 50975 - 12298
= $38,677

b.) The book value of accounts receivable is not materially misstated, since the net maximum
overstatement and understatement are below the tolerance level. The Auditor would accept the
account balance as the upper error limit is less than the tolerance error.