Question

Gurjot Gill, CPA has randomly selected and audited a sample of 100 of Chrisel Gladson Corporation's accounts receivable. Chrisel Gladson Corp. has 14,000 accounts receivable accounts with a total book value of $14,000,000. Gurjot Gill has determined that the account's tolerable misstatement is $100,000. Her sample results are as follows:

Average audited value                                  $997

Average book value                                        999

Calculate the accounts receivable estimated audited value and projected misstatement of Chrisel Gladson Corp. using the:

1. Mean-per-unit method.
2. Ratio method.
3. Difference method.

Answer 1

1. The mean-per-unit method estimates the total value of the population by using the sample audited mean as an estimate of the true population mean, extending this estimated population mean by the number of items in the population as follows:

$997 × 14,000 accounts = $13,958,000 estimated audited value

The projected misstatement is equal to the client's book value minus the estimated audited value:

$14,000,000 – $13,958,000 = $42,000 projected misstatement (overstatement)

1. The projected misstatement using the ratio method is calculated as follows:

Sample net misstatement / Book vale of sample * population book value

Sample net misstatement = 100 × ($997 – 999)

= –$200

Book value of the sample = 100 × $999 = $99,900

Projected misstatement = –$200 / $99,900 * $14,000,000

= $28,028 overstatement

The estimated audited value would be calculated as follows:

Estimated audited value = Book value – projected overstatement

= $14,000,000 – 28,028

= $13,971,972   

1. The projected misstatement using difference estimation would be calculated as follows:

Projected misstatement = sample net misstatement/sample items * population items

= –$200/100 × 14,000

= $28,000 overstatement

The estimated audited value would be calculated as follows:

  

Estimated misstatement = Book value – projected misstatement

= $14,000,000 – 28,000

= $13,972,000