AUDIT SAMPLING CASE MEMO

TEAM C LaToya Arceneaux, Victoria Gaddie, Stephanie Jackson, John Klein, Eric Roth University of Phoenix 12 March 2012 Acct 490/Aaron Strenkoski

MT. HOOD FURNITURE

Final Inventory Compilation Review

AUDIT OBJECTIVES
Obtain reasonable assurance that an assertion is

presented fairly concerning material respects

Use audit sampling to estimate dollar amount of a

population or to estimate the dollar amount of misstatement in a population

Used to value inventory based on a sample size

Sample Size
Nonstatistical or Statistical
Factors: book value, risk of incorrect acceptance,

tolerable misstatement, anticipated misstatement N = BV X RF / TM (AM X EF) BV- book value, RF- reliability factor, TM- tolerable miststaement, AM- anticipated misstatement, EFexpansion factor N = 6,753,764 / 210 N = 32.16

Scenarios
Many scenarios
Control Risk Audit risk Analytical tests 37 percent- high to leave control risk lower Sample size = 33

PPS Sample
Expensive
Not difficult Number of overstatements = zero Population book value has not been misstated

Testing the Correctness of Pricing

Test for accuracy of inventories to ensure they are

correctly priced Various types of testing for correctness which are dependent on the level of complexity of the item: 1. Raw Materials Least complex, little effort 2. Processed and Finished Goods- more complex requires multiple reviews and help from a specialist 3. Inventory valuation testing is most complex and requires testing of standards for accuracy and a calculated valuation as support

Projected Population Mission Statement

No misstatements were found therefore the projected

misstatement (PM) could not be calculated

PM = Tainting Percentage x Sample Interval Instead calculated allowance for sampling risk factor

using the basic precision

Basic Precision is amount of est. misstatement Basic Precision = Reliability Factor (RF) for Zero misstatements x Sampling Interval Based on conclusion of RF = 1.0

Calculations
To find the Sample Interval (SI) the following

calculations were used

SI=BV/n SI = 6,753,764 / 33 SI = 204,660 (rounded to the nearest dollar)

Basic Precision is then calculated BP = 1.0 x 204,660 BP = 204,660 Because projected misstatement is 0, basic precision

was used to determine if misstatement exceeds pop.

Audit Conclusion
Based on calculations, the following conclusion was

made
Mt. Hood Furnitures final inventory book value has not

been overstated by more than the tolerable misstatement of 37%.

Conclusion was reached by using various statistical

calculations

Support Calcuations
These data points were used to make the necessary

calculations
Sample size of 33 using the more expensive PPS sample Sample tested had 0 misstatements Fewer misstatements means lower likely hood of

misstatements in the population sample

0 misstatements does not guarantee that there are not

errors To help reduce risk and determine the upper limit of tolerance, used basic precision method Upper statement of $204,660 < tolerated $325,000

Findings
With an upper misstatement limit of $204,660 being

less than the tolerated misstatement of $325,000 Mt. Hood Furniture has not overstated the book value of the population by more than the tolerable amount