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

(Mt. Hood Furniture—PPS sampling problem) 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’s pricing and accumulation of all items in inventory.

The book values will be given to you by your professor. You may assume that you have performed the tests to determine the proper pricing for raw materials, work in process, and finished goods. The student should understand that the auditor will normally obtain this information only for the items included in the sample.

The book values will be given to you by your professor. You may assume that you have performed the tests to determine the proper pricing for raw materials, work in process, and finished goods. The student should understand that the auditor will normally obtain this information only for the items included in the sample.

Required

· 1.Identify the audit objectives that are accomplished by this test.

· 2.Determine sample size based on the following audit judgments.

o a. Tolerable misstatement is assessed at $325,000.

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

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

· 3.Develop a scenario that is consistent with setting the 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 raw materials, work in progress, and finished goods. (The student may wish to consult Chapter 16.)

· 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.

Directions: Answer all questions as shown below in the case study. Each answer should be at least 2 paragraphs. Include the questions on your paper; submit as a Word document.

Projected Misstatement

Memorandum

To: John Smith, Audit Partner

From: ABC

Date: July 31, 20xx

Sub.: Process to Get Solutions

Process

Sample Size:

The sample size is calculated from the following formula –

= (Book value* Reliability factor)/(Tolerable misstatement-(Anticipated misstatement*Expansion factor)) (Boynton & Johnson, 2009)

The following components are included =

Book value = $6,753,764

Tolerable misstatement = 325000

Anticipated misstatement = 100000

Expansion factor = 1.15

Reliability factor = 1

= (6753764*1)/(325000-(100000*1.15)

= 6753764/210000

= 32.16 or 33

After putting the value in the formula the sample size is calculated equal to 32.16 that are rounded off to 33. After determining the appropriate sample size the samples are taken randomly from the values of the inventory given on the problem.

Sampling interval:

After determining the sample size, the process of determining the misstatement in the auditing process of Mt. Hood Furniture is to determine the sampling interval. The sampling interval is determined by the following formula –

= Book value of total inventory/sample size (Delaney & Whittington, 2010)

The total book value of the inventory in the problem is given equal to $6,753,764. The sample size is taken 33 by taking random line from all the 553 lines of the inventory values. The total value of sample size by putting these amounts in the formula is 204659.52 (6753764/33). The risk of incorrect acceptance is taken equal to 37% at which reliability factor is 1 while the expansion factor is 1.15.

Determination of the samples with misstatements:

The next step in determining the misstatement in the inventory accounting of Mt. Hood Furniture is to calculate the tainting rate in the samples taken. The tainting rate is calculated by the following formula –

= Book value -Audited value/Book value (Boynton & Johnson, 2009)

The book value for line 11 is $9600 while the audited value is also $9600. Thus, the difference between the book value and audited value is zero and tainting rate will also be negative that will not be taken for the calculation of projected misstatement.