Prepare a memo to the audit partner which describes the solution
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Your job will be to explain how we got to the answers. Use the starting point in the tables and go from there. Here is the Mt. Hood Furniture solution. Please use the same starting point. The task is to figure out how this was calculated. Write a memo based on the solution. Describe how you got to the solution. (memo to the Audit Partner, John Smith)
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Solution Summary
The expert prepares a memo to the audit partner which describes the solution.
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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. For the line 98, the ...
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