Auditing And Assurance Services
17th Edition
ISBN: 9780134897431
Author: ARENS, Alvin A.
Publisher: PEARSON
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Chapter 17, Problem 11RQ
To determine
Determine how auditor can identify physical inventory items associated with each sample dollar
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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…
An auditor is determining the appropriate sample size for testing inventory valuation using MUS The population has 3,140 inventory items valued at
Calculate the preliminary sample size.
Select the formula, then enter the amounts and calculate the sample size. (Abbreviation used TM tolerable misstatement Enter amounts in the for
(Click the icon to view the table for determining the confidence factor)
Confidence Factor
4.33
TM as Percentage of Population Value
39.75
ECCEED
Sample Size
Upper 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…
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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- Sample 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_forwardAn auditor is going to choose a sample of accounts receivable balances at year end to test and has determined the appropriate sampling interval to be 4 with a random start of the second balance in the list. Presented below are the first 10 accounts in the list (in order). Determine the first 2 account balances (including the random start) that will be sampled and tested using the sampling interval. Beads Galore $678 Beads N Such $5,125 Island Time Beads $235 Premier Beads $4,020 Regal Beads $567 Seattle Bead Xchange $321 Shipwreck Beads $3,502 The Bead Place $870 The Bead Place Too $450 The Bead Place Too Phoenix $125arrow_forwardIdentify the factors an auditor uses to decide the appropriateARO. Compare the sample size for an ARO of 10% with that of 5%, all other factorsbeing equal.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_forwardEvaluating Sample Results: Nonstatistical Sampling. Finley Gunny is using nonstatistical sampling in the examination of Highway Company’s accounts receivable, which were recorded at $350,000. Gunny determined a tolerable misstatement of $15,000 and a sample size of 49 items.Required:a. How does Gunny determine sample size using nonstatistical sampling?b. If the items selected by Gunny had an aggregate recorded balance of $50,000 and an aggregate audited value of $45,000, calculate the estimated audited value.c. What would Gunny conclude with respect to the fairness of Highway’s accounts receivable?arrow_forwardUsing difference estimation, an auditor has taken a sample of 75 from a population's 25,000 items; that population has a book value of $125,000. She found that in her sample the average audited value was $4.50, while the average book value was $5.20. What is the estimated total audited value of the population? Multiple Choice $125,000. $107,500. $108,173. $112,500.arrow_forward
- The accounting department of the client reports that the balance of Accounts Receivable is $210,000. Using classical variable sampling, the auditor computes an estimated total population value of $216,500 and computed a 95% achieved allowance for sampling risk of +- $8,500. The auditor should conclude that the accounts receivable balance is fairly stated. on Select one: O a. False Ob. True Iarrow_forwardMonetary Unit Sampling with IDEA: Determining Sample Size. Assume that your audit team has established the following parameters for the examination of ELM’s sales transactions: Risk of incorrect acceptance 10% Tolerable misstatement $311,711 (or 8% of the recorded balance of the transactions) Expected misstatement $77,928 (or 2% of the recorded balance of the transactions) Required:a. Use IDEA to determine the necessary sample size, given the above parameters.Parts (b), (c), and (d) are independent scenarios that affect the sample size in this example.b. Assume that your audit team has decided to increase their reliance on internal controland permit a corresponding increase in the risk of incorrect acceptance from 10 percentto 15 percent, which maintains overall audit risk at the same level. What is the necessarysample size, holding all other factors constant?c. Assume that your audit team has decided to reduce the level of tolerable misstatementfrom $311,711 to $233,783 (or…arrow_forwardMonetary Unit Sampling with IDEA: Determining Sample Size and Selecting Sample Items. Assume that your audit team has established the following parameters for the examination of ELM’s sales transactions: Risk of incorrect acceptance 10% Tolerable misstatement $389,638 (or 10% of the recorded balance of the transactions Expected misstatement $58,446 (or 1.5% of the recorded balance of the transactions) Required:a. Use IDEA to determine the necessary sample size, given the above parameters.b. What is the sampling interval? Show how the sampling interval can be arithmeticallydetermined from the sample size and the population size.c. Assuming a random start of 5,678, use IDEA to extract sample items from the population. List the transactions associated with the sample items selected by your audit teamfor examination. (Be sure to use “fixed interval extraction” and “high values in database”as options.)d. Describe how IDEA extracts sample items from the population of sales…arrow_forward
- Sample Size and Sampling Interval Determination: Monetary Unit Sampling. CaseyPaul is considering the use of MUS in examining Stanley’s accounts receivable, which wererecorded at $300,000. Using the audit risk model, Paul has identified a necessary risk ofincorrect acceptance of 10 percent and has established a tolerable misstatement of $25,000and an expected misstatement of $10,000.Required:a. Determine the necessary sample size for the audit of Stanley’s accounts receivable.b. Based on the sample size determined in part (a), what is the appropriate sampling interval?c. Briefly describe how Paul would select the sample from a computerized customer listthat Stanley maintains.d. How would each of the following changes in Paul’s sampling plan impact the sample size andsampling interval? For each change, use the original parameters noted in the problem. (Verifyyour answer by calculating the sample size associated with each change.)1. A reduction in the necessary level of the risk of…arrow_forwardUpper Limit on Misstatements Calculations: Monetary Unit Sampling. Assume that Parker Fran has calculated a sampling interval for Tide Inc.’s inventory of $10,000 and has conducted an examination of a sample of inventory balances. Fran has identified the following three misstatements: Item No. Recorded Balance Audited Value X-21 $ 3,000 $ 1,200 Z-24 550 440 AA-02 6,000 1,500 Required:Calculate the upper limit on misstatements for the following levels of the risk of incorrect acceptance. In general, what relationship do you observe between the risk of incorrectacceptance and the upper limit on misstatements?a. 5 percent.b. 10 percent.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_forward
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