Auditing And Assurance Services
17th Edition
ISBN: 9780134897431
Author: ARENS, Alvin A.
Publisher: PEARSON
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Chapter 17, Problem 15RQ
To determine
Calculate the overstatement bound for the population and also conclude the result.
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An auditor is determining the appropriate sample size for testinginventory valuation using MUS. The population has 2,620 inventory items valued at$12,625,000. The tolerable misstatement is $500,000 at a 10% ARIA. No misstatementsare expected in the population. Calculate the preliminary sample size
Hattab auditing Co. was conducting the audit of Metro market for the fiscal year ended December 31. The auditor decides that MUS is the appropriate sampling technique to use in order to audit Metros’ inventory account. The balance in the inventory at December 31 was $3,000,000. The auditor has established the following: the desired confidence level of 90%, tolerable misstatement $270,500, and expected misstatement $65,500.
Requirement: 1- Calculate the sample size and sampling interval.
2- The staff accountant performed the audit procedures listed in the invent+ory audit program for each sample item. Using the sample size computed in requirement (1), calculate the upper limit on misstatement based on the following misstatements.
Error Number
Book Value
Audit Value
1
6,000 $
1,000 $
2
24,000 $
39,000 $
3
55,000 $
57,000 $
Baily Cox, an audit manager, judged that the test of controls of the company’s 50,000 purchase transactions should be based on a tolerable rate of deviation of 6 percent, a risk of overreliance of 5 percent, and an expected population deviation rate of 3 percent. Using AICPAsample size tables, Cox determined that the appropriate sample size in this situation would bea. 49.b. 78.c. 132.d. 195
Chapter 17 Solutions
Auditing And Assurance Services
Ch. 17 - Prob. 1RQCh. 17 - Prob. 2RQCh. 17 - Prob. 3RQCh. 17 - Prob. 4RQCh. 17 - Prob. 5RQCh. 17 - Prob. 6RQCh. 17 - Prob. 7RQCh. 17 - Prob. 8RQCh. 17 - Prob. 9RQCh. 17 - Prob. 10RQ
Ch. 17 - Prob. 11RQCh. 17 - Prob. 12RQCh. 17 - Prob. 13RQCh. 17 - Prob. 14RQCh. 17 - Prob. 15RQCh. 17 - Prob. 16RQCh. 17 - Prob. 17RQCh. 17 - Prob. 18RQCh. 17 - Prob. 19RQCh. 17 - Prob. 20RQCh. 17 - Prob. 21.1MCQCh. 17 - Prob. 21.2MCQCh. 17 - Prob. 21.3MCQCh. 17 - Prob. 22.1MCQCh. 17 - Prob. 22.2MCQCh. 17 - Prob. 22.3MCQCh. 17 - Prob. 23.1MCQCh. 17 - Prob. 23.2MCQCh. 17 - Prob. 23.3MCQCh. 17 - Prob. 24.1MCQCh. 17 - Prob. 24.2MCQCh. 17 - Prob. 24.3MCQCh. 17 - Prob. 25DQPCh. 17 - Prob. 26DQPCh. 17 - Prob. 27DQPCh. 17 - Prob. 28DQPCh. 17 - Prob. 29DQPCh. 17 - Prob. 30DQPCh. 17 - Prob. 31DQPCh. 17 - Prob. 32DQPCh. 17 - Prob. 34DQPCh. 17 - Prob. 35DQP
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- In using difference estimation, an auditor took a random sampleof 100 inventory items from a large population to test for proper pricing. Several of theinventory items were misstated, but the combined net amount of the sample misstatementwas not material. In addition, a review of the individual misstatements indicated thatno misstatement was by itself material. As a result, the auditor did not investigate themisstatements or make a statistical evaluation. Explain why this practice is improper.arrow_forwardA CPA company is conducting the audit of Finch Hardware Company for the year ended December 31. The senior-in-charge of the audit plans to use MUS to audit Finch’s inventory account. The balance at December 31 was $9,000,000, tolerable misstatement is $360,000, expected misstatement is $90,000, and the risk of incorrect acceptance is 5%. Compute the required MUS sample size and sampling interval using Table 8-5 in the textbook (round your interval answer to the nearest whole number).arrow_forwardIn an MUS sample with a sampling interval of $5,000, an auditor discovered that aselected accounts receivable with a recorded amount of $10,000 had an audit valueof $8,000. If this is the only error discovered by the auditor, the projected error ofthe sample would be(1) $1,000. (3) $4,000.(2) $2,000. (4) $5,000.arrow_forward
- Assume that an account with a recorded balance of $5,000 has an audited value of $3,000. By using monetary unit sampling, if the sampling interval is $1,500, the projected misstatement would bea. $600.b. $900.c. $2,000.d. $3,000.arrow_forwardCalculate total projected mistreatment if the following three mistreatments were discovered in a PPS sample when the sampling interval is $1,000. Recorded Amount Audit Amount Sampling interval Total Projected Mistreatment 1st mistreatment $400 $320 $1,000 _________________ 2nd mistreatment 500 0 $1,000 _________________ 3rd mistreatment 3,000 2,500 $1,000 _________________arrow_forwardSample Size and Sampling Interval Determination: Monetary Unit Sampling. Reagan Simmons is conducting the audit of Ace Inc., and is using MUS to select a sampleof inventory items for examination. The recorded balance in Ace’s inventory account was$1,200,000. In carrying out the sampling plan, Simmons established a risk of incorrectacceptance of 5 percent, a tolerable misstatement of $100,000, and an expected misstatement of $20,000.Required:a. What parameters would Simmons consider in determining the sample size for Ace’sinventory?b. How would Simmons identify or establish each of these parameters?c. Determine the necessary sample size for the audit of Ace’s inventory.d. Based on the sample size determined in part (c), determine the appropriate samplinginterval.e. Briefly describe how Simmons would select the sample from a computerized inventorylist that Ace maintains.arrow_forward
- Evaluating Results: Classical Variables Sampling. Kyle Berry is using mean-per-unit estimation in the audit of Leonard’s inventory balances. Leonard’s inventory is recorded at $240,000 and comprises 1,200 different items. Berry determined a sample size of 120 items and performed the appropriate substantive procedures. Based on this sample, he determined the following: Average audited value (per item) $204 Standard deviation of audited values $ 22 A summary of some additional parameters estimated by Berry follow: Tolerable misstatement $ 17,500 Expected misstatement $ 7,500 Risk of incorrect acceptance 5% Risk of incorrect rejection 10% Required:a. What is Berry’s estimate of the audited value of Leonard’s inventory?b. Calculate the precision and precision interval for Leonard’s inventory. Provide a briefdescription of the meaning of the precision interval.c. What is Berry’s conclusion with respect to Leonard’s inventory balance?d. Using a risk of incorrect…arrow_forwardThe following are auditor judgments and attributes sampling results for six populations. Assume large population sizes. 1 2 3 4 5 6 EPER (in percent) 2 0.5 1 0 2 5 TER (in percent) 6 4 20 3 8 10 ARO (in percent) 10 5 10 5 5 10 Actual sample size 100 100 20 100 60 60 Actual number of exceptions in the sample 2 3 1 1 1 5 For each population, did the auditor select a smaller sample size than is indicated by using the attributes sampling tables in Table 15-8(p. 519) for determining sample size? What are the implications of selecting either a larger or smaller sample size than those determined using the tables? Calculate the SER and CUER for each population. For which of the six populations should the sample results be considered unacceptable? What options are available to the auditor? Why is analysis of the exceptions necessary even when the populations are considered acceptable? For…arrow_forwardAttributes Sampling with IDEA: Evaluating Sample Results. Based on a population sizeof 388 shipments, a 10 percent desired risk of overreliance, an expected population deviation rate of 1 percent, and a tolerable rate of deviation of 6 percent, the audit team selected asample of 58 items.In performing tests of controls, your audit team identified three shipments that were notsupported by an approved sales order and concluded that these represent deviations from thecontrol activity.Required:a. Use IDEA to determine the ULRD. What would the audit team’s conclusion be withrespect to the functioning of ELM’s control over the authorization of sales transactions?Part (b) is a set of independent scenarios that affect the evaluation of sample results.b. For each of the following numbers of deviations, use IDEA to determine the ULRD andprovide the audit team’s conclusion with respect to the functioning of ELM’s controlover the authorization of sales transactions.1. 0 deviations.2. 1…arrow_forward
- An audit firm is conducting the audit of Diaz Construction Company for the fiscal year ended October 31. Rebecca Smith, the partner in charge of the audit, decides that MUS is the appropriate sampling technique to use in order to audit Diaz’s inventory account. The balance in the inventory at October 31 was $4,250,000. Rebecca has established the following: risk of incorrect acceptance = 5% (i.e., the desired confidence level of 95%), tolerable misstatement = $212,500, and expected misstatement = $63,750. Calculate the sample size and sampling interval using Table 8-5 in the textbook (round your interval answer to the nearest whole number).arrow_forwardIn performing a test of controls for ABC, Inc., the auditor wants to know whether Sales order are approved before goods are picked, packed and shipped to customers. The CPAs has stipulated a Tolerable Deviation Rate (TDR) of 8 percent with a Risk of Assessing Control Risk too low of 5 percent. The CPA also anticipates a deviation rate of 2%. What type of sampling plan should the auditor use for this test? Attribute sampling Monetary samplingarrow_forwardUpper Limit on Misstatements Calculations: Monetary Unit Sampling. Clyde Billy isconducting the audit of Hoops Inc. and is examining Hoops’s inventory balances. Billy plansto select a sample of inventory items for examination and will verify quantities and performprice tests to ascertain that the items are properly recorded according to generally acceptedaccounting principles.Billy determined a sampling interval of $100,000 and, using systematic random selectiontechniques, has identified the following misstatements: Item No. Recorded Balance Audited Value 10-865 $ 12,600 $ 8,400 20-954 110,000 95,000 30-781 55,000 44,000 40-269 80,000 60,000 Required:a. Using a 5 percent risk of incorrect acceptance, calculate the upper limit on misstatements.b. Provide a brief description of the meaning of the upper limit on misstatements using theinformation calculated in part (a).c. Reperform part (a) using a risk of incorrect acceptance of 10 percent.d. What relationship do you…arrow_forward
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