SCA Is Auditing a Client's Accounts Receivable Balance Recorded at $10

question 5

Multiple Choice

SCA is auditing a client's accounts receivable balance recorded at $10 million using MUS sampling.The following parameters have been established for this account: • Tolerable misstatement = $500,000
• Expected misstatement = $100,000
• Risk of incorrect acceptance = 10%
Which of the following statements would not be true with respect to the sample size in this situation?

• A) The correct sample size is 69 customer accounts.
• B) Decreasing tolerable misstatement from $500,000 to $200,000 (holding all other factors constant) will reduce the sample size by 331 accounts.
• C) If SCA wishes to reduce its exposure to the risk of incorrect acceptance to 5% (holding all other factors constant), sample size will be increased by 24 accounts.
• D) Increasing expected misstatement to $200,000 (holding all other factors constant) will increase the sample size to 115 customer accounts.

---

Definitions:

Inspection Cost

Expenses associated with the activity of checking and verifying the quality or standards of products or materials.

Mixed Cost

Mixed cost is an expense that has both fixed and variable components, meaning it changes with the level of activity but also incurs a base cost.

Least-squares Regression

A statistical method used to determine the line of best fit by minimizing the sum of squares of the errors between the observed and predicted values.

Variable Cost

Costs that change in proportion to the level of activity or production volume.