EarthWear Hands-on Mini-case

Chapter 10 - Accounts Receivable Tests of Details

AUDITING & ASSURANCE SERVICES 12e © The McGraw-Hill Companies, Inc., 2022

In this mini-case you will complete the test of details on accounts receivable for the 2022 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, 67 accounts receivable balances were
selected for confirmation requests. The first 63 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:

1 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. Please refer to Chapter 9 for a description of how to calculate a sample size
and evaluate errors using IDEA.

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 Connect
or the EarthWear Mini-cases section of the Additional Student Resources guide.

Copy your results from Work Paper 10-1 to the file below and save it to your computer. Import as an
Excel file to an IDEA project and perform MUS statistical evaluation.

IDEA Import File

2 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?

3 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").

4 Please input your answers into Connect or 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 10-1
Evaluation of A/R Confirmations Initial Here
December 31, 2022 7/8/2024

Results of the
Complete A/Rworksheet
Confirmations
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.

A/R Balance per A/R Balance per Difference per Reason(s) for Difference Amount of
Customer ID Customer Name clients' records Customer Customer (i.e., timing difference, transposition error, cut-off error, mistake, etc.) Overstatement Audited Value
652-54310 Red Star Health Group $12,365 Enter Amount Indicate reason(s) for difference here. Enter value of any m
210-38725 Museum of Flight $14,235 Enter Amount Indicate reason(s) for difference here. Enter value of any m
254-62418 Summit Hills Country Club $24,362 Enter Amount Indicate reason(s) for difference here. Enter value of any m
179-26343 Central States Hotels $18,642 Enter Amount Indicate reason(s) for difference here. Enter value of any m
63 additional items $880,560 $880,560 $0 $0 $880,560
Total Dollar Amount of Items in Sample $950,164 $880,560 $0 Net misstatement / Total Audited Value $0 $880,560
Total Dollar Amount of Items in Sampling Population $7,722,000

Nonstatistical Evaluation of Errors Ratio of

Book Value Book Value Known or Factual Misstatements in Projected
Stratum of Stratum of Sample Misstatement Stratum Tested* Misstatement** Evaluation of Test Results
Enter Evaluation Here
>$100,000 $921,000 $921,000 $0 0.0000% $0

<$100,000 $7,722,000 $950,164 $0 0.0000% $0

Total Projected Misstatement $0
* 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 IDEA Monetary Unit Sampling***

Results Overstatements Understatements Evaluation of Test Results
Sample Size 67 67 Enter Evaluation Here
Number of errors 0 0
Gross most likely error Input IDEA Result Input IDEA Result
Net most likely error Input IDEA Result Input IDEA Result
Total precision Input IDEA Result Input IDEA Result
Gross upper error limit Input IDEA Result Input IDEA Result
Net upper error limit Input IDEA Result Input IDEA Result
*** Refer to Chapter 9 of the textbook for additional instructions for evaluating the results with IDEA.

Evaluation Method Comparison

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