Choice "D" is correct. Selection of every twentieth item results in a sample that is 5% (1/20.05) of the population. The sample results indicate a net overstatement of $3,500 ($3,700 − $200), which is then projected to the total population as $70,000 ($3,500 / .05). (Alternatively, 3,500 × 20. Since the projected misstatement of $70,000 exceeds the tolerable misstatement of $60,000, there is an unacceptably high risk that the actual misstatement in the population will exceed the tolerable misstatement.
Choice "c" is incorrect. Tolerable misstatement is compared to the projected misstatement, not to the actual error in the sample.
Choices "a" and "b" are incorrect. The asset account is not fairly stated because the projected misstatement exceeds the tolerable misstatement.