Reference no: EM131625952

Question: Upper Limit on Misstatements Calculation: Monetary Unit Sampling. The auditors mailed positive confirmations on 60 customers' accounts receivable balances. The company's accounts receivable balance comprised 2,356 customer accounts with a total recorded balance of $19,600,000, and the sampling interval was $280,000. The auditors received four positive confirmation returns reporting exceptions. Upon follow-up, they found the following:

• Account 2333. Recorded amount $8,345. The account was overstated by $1,669 because the client made an arithmetic mistake recording a credit memo. The company issued only 86 credit memos during the year. The auditors examined all of them for the same arithmetic mistake and found no similar misstatements.

• Account 363. Recorded amount $7,460. The account was overstated by $1,865 because the company sold merchandise to a customer with payment due in six months plus 15 percent interest. The billing clerk made a mistake and recorded the sales price and the unearned interest as the sale and receivable amount. Inquiries revealed that the company always sold on "payment due immediately" terms but had made an exception for this customer. Numerous sales transactions had been audited in the sales control audit work and none had shown the extended terms allowed to Account 363.

• Account 1216. Recorded amount $19,450. The account was overstated by $1,945 because an accounting clerk had deliberately misadded several invoices to create extra charges to a business that competed with his brother's business. The accounting clerk (who was a temporary employee) had forged the initials of the supervisor who normally reviewed invoices for accuracy. The auditors examined all invoices for this and other customers processed by this clerk and found no similar misstatements.

• Account 2003. Recorded amount $9,700. The account was overstated by $1,455 because of a fictitious sale submitted by a salesperson, apparently part of an effort to boost thirdquarter sales and commissions. The auditors learned that the salesperson was employed from August 20 through October 30 before being dismissed as a result of customer complaints. They examined all other unpaid balances attributed to this salesperson and found no other fictitious sales.

Required: a. Decide which, if any, of the account misstatements should be considered monetary misstatements and included in the calculation of the upper limit on misstatements using MUS.

b. Calculate the upper limit on misstatements and decide whether the evidence from these misstatements indicates that the accounts receivable balance is or is not materially misstated. (The tolerable misstatement for the accounts receivable was $1,000,000, and the auditors had already decided on a risk of incorrect acceptance of 5 percent.)

c. Are any additional procedures required of the audit team regarding account 1216 or account 2003?