EarthWear Hands-on Mini-case

Chapter 10 - Accounts Receivable Tests of Details

The McGraw-Hill Companies, Inc., 2012

In this mini-case you will complete the test of details on accounts receivable for the 2012 audit of
EarthWear Clothiers, Inc. The principal test of detail involves sending "confirmations" or letters to
customers so that they can confirm that they owe EarthWear the reported balance. All six customer
accounts receivable balances exceeding $100,000 were targeted for testing. These six balances,
aggregated total of $921,000, were confirmed without exceptions. The remaining accounts are of
similar size and total $7,722,000 and will be tested via audit sampling. Inputs for the sample size
determination were, Desired Confidence Level--95%, Tolerable Misstatement--$600,000, and Expected
Misstatement--$154,440. Based on these inputs, 68 accounts receivable balances were selected for
confirmation requests. The first 64 accounts receivable confirmations have already been reviewed by
other staff members and no errors have been found. The remaining four confirmations require your
review as they were returned with notes from customers indicating a potential misstatement. Please
note that legitimate timing differences do not result in misstatements.

INSTRUCTIONS:

Review the four confirmation responses in the PDF file downloaded from the mini-case website (a link
is also provided below). Enter the information into Work Paper 10-1. For each confirmation response,
please determine whether the difference noted by the customer represents a misstatement or a timing
difference. After reviewing all four confirmations, please complete both the nonstatistical and the
statistical evaluation options outlined on Work Paper 10-1 unless your instructor tells you otherwise.
Chapter 9 of the text provides guidance on both nonstatistical and statistical evaluation. You will need
to obtain the Sampling Interval before evaluating the results statistically using ACL. One approach you
can use to obtain the sampling interval is to calculate the sample size in ACL using the inputs provided
above. Please refer to Chapter 9 for a description of how to calculate a sample size and evaluate errors
using ACL. Please be careful as you enter your results from ACL to the work paper as the items may
not be listed in the same order.

Fields you are to complete on work papers are colored yellow. The color will disappear when the field is completed.

You should download the PDF files required to complete this case from the
EarthWear Mini-Cases section of the Student Online Learning Center.
http://www.mhhe.com/messier8e

After completing both the nonstatistical and statistical evaluation methods, please briefly discuss how
the results compare to each other in the space provided on Work Paper 10-1. Are the monetary
amounts and overall conclusions similar?

When you are finished evaluating the sample results, enter your initials in the yellow box in the upper
right-hand corner of Work Paper 10-1 (box indicates "Initial Here").

Please print a hard copy of Work Paper 10-1 to submit unless your instructor requests an electronic
submission. The work paper is formatted to fit on one page.

Name:
Class:
EARTHWEAR CLOTHIERS
Evaluation of A/R Confirmations
December 31, 2012

10-1
Initial Here
1/16/2016

Results of A/R Confirmations

Complete the worksheet below by reviewing the accounts receivable confirmation file contained in the Instructions. Complete the cells below in yellow. If you determine that the difference
noted by the customer is a misstatement, record the amount of difference in the "Amount of Misstatement" column.

Customer ID

Customer Name

652-54310
Red Star Health Group
210-38725
Museum of Flight
254-62418
Summit Hills Country Club
179-26343
Central States Hotels
64 additional items
Total Dollar Amount of Items in Sample

Nonstatistical Evaluation of Errors

Amount of
Ratio of Misstatements
Misstatement
in Sample
$0

Enter Ratio or
Formula*

A/R Balance per A/R Balance

clients' records per Customer
$12,365
$14,235
$24,362
$18,642
$880,560
$950,164

Difference per
Customer

Enter Amount
Enter Amount
Enter Amount
Enter Amount
$880,560

Amount of
Misstatement

Indicate reason(s) for difference here.

Indicate reason(s) for difference here.
Indicate reason(s) for difference here.
Indicate reason(s) for difference here.
$0

Projected
Misstatement
Enter Amount
or Formula**

Reason(s) for Difference (i.e., timing difference,

transposition error, cut-off error, mistake, etc.)

Enter value of any misstatement here. If

Enter value of any misstatement here. If
Enter value of any misstatement here. If
Enter value of any misstatement here. If
$0
Net misstatement
$0
Total Dollar Amount of Items in Sampling Population
$7,722,000

Evaluation of Test Results

Enter Evaluation Here

* The ratio of misstatements is simply the computation of the percentage error in dollars tested in the sample. You can find this formula and an illustration of the computation in Chapter 9 (Nonstatistical Sampling section).
** Projected misstatement is the application of the misstatement ratio to the population subject to audit sampling. You can find this formula and an illustration of the computation in Chapter 9 (Nonstatistical Sampling section)

Statistical Evaluation of Errors using ACL Monetary Unit Sampling***

Item
Error
Most Likely Error
Basic Precision
1
2
3
4
Totals
0.00

Upper Error Limit

Input ACL Result

Evaluation of Test Results

Enter Evaluation Here

0.00

*** To evaluate the results with ACL, you will need to obtain the Sampling Interval. One method you can use is to calculate the Sample Size in ACL using the inputs in the instructions.

Evaluation Method Comparison

In this space please briefly discuss how the results compare to each other. Are the monetary amounts and overall conclusions similar?