Question

Substantive Test

Assume that you are now performing substantive tests on receivables and you want to perform account receivable confirmations. The client’s recorded book value is $2,300,000 made up of 2,650 customers. You have established a tolerable misstatement of $75,000 for accounts receivable. You have selected 200 accounts worth a total of $235,000 to confirm and after sending out the confirmations, four are returned showing the following overstatements.

	Book Value	Audit value
Sonic Trading	12,800	10,350
Bazaar Enterprises	8,300	6,500
Millers Co	18,800	14,150
Mendez Bros.	4,925	3,200

2a.  What is your sample misstatement?

2b.  What is  your projected misstatement using the ratio estimation method?

2.c What do you conclude about the fairness of the accounts receivable account?

2d. Using the difference estimation method, calculate your projected misstatement

2e. What do you conclude about the fairness of the accounts receivable account?

Answer 1

	Book Value	Audit value	Sample misstatement(Book Value-Audit Value)
Sonic Trading	12,800	10,350	2,450
Bazaar Enterprises	8,300	6,500	1,800
Millers Co	18,800	14,150	4,650
Mendez Bros.	4,925	3,200	1,725
Total	44,825	34,200	10,625

2a.Net Sample misstatement= $ 10625

2.b.Projected misstatement using the ratio estimation method

(Net sample misstatement/Book value of Sample)*Population book value

10625/44825*2300000=

545176

(overstatement)

ie. Misstatement ratio=10625/44825=23.70%

23.70% applied on total a/cs rec.=2300000*23.70%= approx. $ 545100

So,estimated audit value of accounts receivables,( eliminating overstatement error)will be

2300000-545176=

1754824

2.c. As this $   545176 is much > the tolerable amt. of $ 75000 --Accounts receivables are likely to be materially misstated.

2d.The projected misstatement using difference estimation method:

Projected misstatement=(Sample net misstatement/No.of Sample items)*No.of population items

ie. 10625/200*2650=

140781

(overstatement)

So,estimated audit value of accounts receivables, will be

2300000-140781=

2159219

2e.Accounts receivables are likely to be materially misstated.