Workpaper 1
Reference: WP 1
Charles Cabinets performed by: John Smith
Revenue Collection cycle date: 02/28/PY
Accounts Receivable
Nature of test: Test of details
Objective: The objective of this procedure is to determine the sample size for confirmation testing.
Assertion(s): Existence, Valuation & Allocation
Tolerable Misstatement: For accounts receivable TM has been set at 10% of the account balance $237,198.36 ( 10% x $2,371.983.60 )
Procedure: Calculate the sample size to be used in confirmation testing
Account balance: $2,371,983.60 / N = 930 Customer Account Average = $2,550.52
Tolerable misstatement: 237,198.36 Tolerable Misstatement Average = $ 255.05
Population Standard deviation: 806.81
α = 0.30 Zα/2 = 1.04 risk of incorrect rejection
β = 0.15 Zβ = 1.04 risk of incorrect acceptance
Formula:
Average Tolerable Misstatement (TM) = Beta Z-Score (Zβ) * Standard Deviation (σ) / Sqrt of Sample Size (√n) +
Alpha Z-score (Zα/2) * Standard Deviation (σ) / Sqrt of Sample Size (√n)
TM = Zβ* σ /√n + Zα/2* σ /√n
255.05 = 1.04 * 806.81 / √n + 1.04 * 806.81 / √n
255.05 = 2.08 * 806.81 / √n
√n = 2.08 * 806.81 / 255.05
n = 43.29 => n = 44
Conclusion: Based on the above calculation, we have elected to confirm 44 customer accounts.
Workpaper 2
Reference: WP 2
Charles Cabinets performed by: John Smith
Revenue Collection cycle date: 02/28/PY
Accounts Receivable
Nature of test: Test of details
Objective: The objective of this procedure is to determine if the accounts receivable account is overstated.
Assertion(s): Existence; Valuation & Allocation
Tolerable Misstatement: For accounts receivable TM has been set at 10% of the account balance: $237,198.36 ( 10% x $2,371.983.60 )
Procedure: Evaluation of sample results
Projection of Sample Results to the population
Conclusion: We are unable to conclude that Accounts Receivable is not materially overstated because the projected overstatement plus the desired allowance for sampling risk exceeds the $237,198.36 tolerable misstatement.
Workpaper 3
Reference: WP 3
Charles Cabinets performed by: John Smith
Revenue Collection cycle date: 02/28/PY
Accounts Receivable
Nature of test: Test of details
Objective: The objective of this procedure is to determine if the accounts receivable account is overstated.
Assertion(s): Existence; Valuation & Allocation
Procedure: DC&H, LLP selected a random sample of 44 entries from the accounts receivable sub-ledger. A confirmation letter was sent to each customer in the sample. Due to the large number of unreturned confirmation requests, a second confirmation letter was sent to each customer in the sample who had not responded to the first letter.
For each customer who did not respond to either confirmation, we vouched the account balance on the “Results” worksheet to the invoice, bill of lading and purchase order. We agreed the date, customer name, address, PO number, and amount from the schedule with the invoice. We then agreed the date, customer name, address, and PO number on the invoice with the bill of lading. Finally, we agreed the date, customer name, address, PO number, and amount from the invoice with customer purchase order. We documented our work by recording the balance from these supporting documents within the “Results” worksheet.
Workpaper 1 shows how the appropriate sample size calculated and Workpaper 2 show the evaluation of the sample results.
Conclusion: Based on the sample results we are unable to conclude that accounts receivable are not materially overstated. More extensive substantive tests of details need to be performed to reduce the risk of incorrect acceptance to the desired level.
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