Auditors are evaluating an account with a recorded balance of $600,000 using classical variables sampling.Based on an allowable risk of incorrect acceptance of 5 percent,the auditors have determined the following: -Estimated account balance = $680,000
-Precision = $20,000
-Tolerable misstatement = $50,000
Which of the following best describes the auditors' decision and rationale for that decision?
A)The auditors would accept the account balance as fairly stated,since the sample estimate falls outside of the precision interval.
B)The auditors would conclude that the account balance is not fairly stated,since the sample estimate falls outside of the precision interval.
C)The auditors would accept the account balance as fairly stated,since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement.
D)The auditors would conclude that the account balance is not fairly stated,since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement.

Question

Quizplus · Accepted Answer

The auditors would conclude that the account balance is not fairly stated since the difference between the lower bound of the precision interval and recorded balance exceeds the tolerable misstatement. The precision interval is determined by taking the estimated account balance (plus or minus the precision amount), which in this case is $680,000 ± $20,000 or $660,000 to $700,000. Since the recorded balance of $600,000 falls outside of this range, it is likely that the account balance is misstated. Furthermore, the difference between the lower bound of the precision interval ($660,000) and recorded balance ($600,000) equals $60,000, which exceeds the tolerable misstatement of $50,000 set by the auditors. Therefore, it is likely that the account balance is not fairly stated.

Auditors Are Evaluating an Account with a Recorded Balance of $600,000