(Mt. Hood Furniture%u2014PPS sampling problem) You have been assigned the task o

Question

(Mt. Hood Furniture%u2014PPS 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.

Required

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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