Zimmerman is auditing a client's accounts balance recorded at $1 million using monetary unit sampling.After assessing the appropriate parameters,Zimmerman determined an appropriate sample size of 100 items.The following two misstatements were identified as a result of the substantive tests: $$\begin{array} { c c }
\text { Recorded Balarice } & \text { Audited Value } \
\$ 20,000 & \$ 16,000 \
\$ 5,000 & \$ 2,000
\end{array}$$ Assume that Zimmerman's parameters included a tolerable misstatement of $60,000 and a risk of incorrect acceptance of 5 percent.(Confidence factors for a 5 percent risk of incorrect acceptance are shown below): $$\begin{array} { c c }
\text { Gverstatemert } & \text { Factor } \
\text { ETcrs } & \
0 & 3.00 \
1 & 4.75 \
2 & 6.30
\end{array}$$ Which of the following is not true with respect to the above?
A)The actual misstatement detected by Zimmerman is $6,500.
B)The projected misstatement is $7,000.
C)The basic allowance for sampling risk is $30,000.
D)If the upper limit on misstatements is $46,750,Zimmerman should accept the account balance as fairly stated.

Question

Zimmerman is auditing a client's accounts balance recorded at $1 million using monetary unit sampling.After assessing the appropriate parameters,Zimmerman determined an appropriate sample size of 100 items.The following two misstatements were identified as a result of the substantive tests: $$\begin{array} { c c } 
\text { Recorded Balarice } & \text { Audited Value } \
\$ 20,000 & \$ 16,000 \
\$ 5,000 & \$ 2,000
\end{array}$$ Assume that Zimmerman's parameters included a tolerable misstatement of $60,000 and a risk of incorrect acceptance of 5 percent.(Confidence factors for a 5 percent risk of incorrect acceptance are shown below): $$\begin{array} { c c } 
\text { Gverstatemert } & \text { Factor } \
\text { ETcrs } & \
0 & 3.00 \
1 & 4.75 \
2 & 6.30
\end{array}$$ Which of the following is not true with respect to the above?
A)The actual misstatement detected by Zimmerman is $6,500.
B)The projected misstatement is $7,000.
C)The basic allowance for sampling risk is $30,000.
D)If the upper limit on misstatements is $46,750,Zimmerman should accept the account balance as fairly stated.

Quizplus · Accepted Answer

To determine whether the account balance is fairly stated, Zimmerman needs to compare the projected misstatement to the tolerable misstatement, including the basic allowance for sampling risk.

First, we need to calculate the basic allowance for sampling risk (BASR):

BASR = factor x tolerable misstatement
BASR = 4.75 x 60,000
BASR = $285,000

Next, we can calculate the upper limit on misstatements (UL):

UL = audited value + (factor x sampling error)
UL = 1,000,000 + (4.75 x SQRT[(1 - 100/1,000) / 100/999 x 1,000,000])
UL = $1,046,750

Now we can calculate the projected misstatement (PM):

PM = misstatement detected / sample percentage x 100
PM = [(16,000 - 20,000) + (2,000 - 5,000)] / 100 x 1,000,000
PM = -$7,000

Note that the PM is negative because the audited values are lower than the recorded balances.

Finally, we need to determine whether UL is greater than or equal to the sum of the PM and BASR:

UL >= PM + BASR
1,046,750 >= -7,000 + 285,000

Therefore, the account balance is fairly stated and Zimmerman should not issue a qualified opinion.

Option A is not correct because the actual misstatement detected by Zimmerman is the sum of the misstatements identified in the sample: $16,000 - $20,000 + $2,000 - $5,000 = -$7,000

Option B is not correct because the projected misstatement is the sum of the misstatements in the sample adjusted for the size of the population: -7,000 / 0.01 = -$700,000

Option C is correct because the BASR is $285,000.

Option D is not correct because the UL is greater than the sum of the PM and BASR, indicating that the account balance is fairly stated.