You have been assigned the task of testing the accuracy of the final inventory c

Question

You have been assigned the task of testing the accuracy of the final inventory compilation for Mt. Hood Furniture. You may assume that you have separately observed the inventory and that you are satisfied that the inventory was accurately counted. However, you need to test that quantities were accurately transcribed to the final accumulation and valuation of inventory and that the inventory is correctly priced and accumulated. The table beginning on page 617 presents the audited values associated with Mt. Hood%u2019s pricing and accumulation of all items in inventory.

$5,600,000 is the Book Value you will need

Required Portion:

1. Identiy the audit objectives that are accomplished by this test.

2. Determine sample size based on the following audit judgements.

      a. Tolerable misstatement is assess at #235,000.

      b. The risk of incorrect acceptance is assessed at 37 percent.

      c. Anticipated misstatement is assessed at $100,000.

3. Develop a scenario that is consistent with setting te risk of incorrect acceptance at 37 percent,

4. Select a PPS sample of the above inventory population using the sample size determined in (2) above.

5. Explain the tests that you would perform to test the correctness of pricing of aw materials, work in progress, and finished goods

6. Determine the amount of projected population misstatement based on your sample.

7. Considering your quantitative and qualitative results, develop a statistical conclusion

and an audit conclusion based on your sample.

Excel table of inventory http://www.mediafire.com/?r1dn1ujy9xwdf5r

Explanation / Answer

Objective:

The objective of this audit is to validate the precision of inventory accumulation. We have previously observed the inventory and are satisfied that it has been accurately counted. In scrutinizing the inventory accumulation, we will administer tests to verify that (1) the quantity of inventory is accurately recorded in the final accumulation and valuation of inventory, and that (2) the inventory is correctly priced and accumulated. Our analysis will focus on this audit objectives used the Probability Proportionate Sampling (PPS) approach to support our investigation. This substantive test will allow us to derive a conclusion in the dollar amounts allocated to inventory rather than the rate of deviation from prescribed controls.

Sample:

The sample size is based on the following audit judgments:

In addition, the sample size is determined by calculating the following formula:

n =

BV x RF

TM - (AM x EF)

Book Value of Population Tested (BV)

$ 6,753,764

Reliability Factor for the Specified Risk of Incorrect Acceptance (RF)

1.00

Tolerable Misstatement (TM)

$ 325,000

Anticipated Misstatement (AM)

$ 100,000

Expansion Factor for Anticipated Misstatement (EF)

1.15

Considering the preceding factors it is determined that an appropriate sample size (n) is 32.

n =

BV x RF

TM - (AM x EF)

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