Question: Marjorie Jorgenson, CPA, is verifying the accuracy
Marjorie Jorgenson, CPA, is verifying the accuracy of outstanding accounts payable for Marygold Hardware, a large, single-location retail hardware store. There are 650 vendors listed on the outstanding accounts payable list. She has eliminated from the population 40 vendors that have large ending balances and will audit them separately. There are now 610 vendors. She plans to do one of three tests for each item in the sample: examine a vendor's statement in the client's hands, obtain a confirmation when no statement is on hand, or extensively search for invoices when neither of the first two is obtained. There is no accounts payable master file available, and a large number of misstatements are expected. Marjorie has obtained facts or made audit judgments as follows: 
Required a. Under what circumstances is it desirable to use difference estimation in the situation described? Under what circumstances is it undesirable? b. Calculate the required sample size for the audit tests of accounts payable using difference estimation, assuming that ARIR is ignored. c. Assume that the auditor selects exactly the sample size calculated in part b. The point estimate calculated from the sample results is $21,000 and the estimated population standard deviation is 267. Is the population fairly stated as defined by the decision rule? Explain what causes the result to be acceptable or unacceptable. d. Calculate the required sample size for the audit tests of accounts payable, assuming that the ARIR is considered. e. Explain the reason for the large increase of the sample size resulting from including ARIR in determining sample size.
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ARIR Tolerable misstatement 20% ARIA 10% $ 45,000 $ 600,000 Expected misstatement Estimated standard deviation $ 20,000 Recorded book value 280
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