The firm of Le and Lysius was conducting the audit of Coomes Molding Corporation for the fiscal year ended October 31. Michelle Le, the partner in charge of the audit, decides that MUS (Monetary Unit Sampling, a form of Probability Proportional to Size (PPS) sampling) is the appropriate sampling technique to use in order to audit Coomes's inventory account. The balance in the inventory at October 31 was $4,250,000.
Michelle has established the following: risk of incorrect acceptance = 5%, tolerable misstatement = $212,500, and expected misstatement = $63,750.
a. Calculate the sample size and sampling interval.
b. Hon Zhu, staff accountant, performed the audit procedures listed in the inventory audit program for each sample item. Calculate the upper limit on misstatement based on the following misstatements. What should Hon conclude about Coomes's inventory account?
Error Number Book Value Audit Value
1. 6000 2000
2. 24000 20000
3. 140000 65000
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We know you are looking for a desired confidence level of 95% (you are given risk of incorrect acceptance of 5% so 100-5=95). You also have a given tolerable misstatement of $212,500 which is 5% (or $212,500  $4,250.000). Finally you are given the expected misstatement of %63,750, or 1.5% ($63,750  $4,250,000). Looking at Table 8-7 that I have included below (Messier, William F. Auditing & assurance services: a systematic approach. 4th ed. 2006. McGraw-Hill Irwin), you see that the sample size is equal to 124 (Left column, 1.5; top row 5%). Therefore the sampling interval ...
This in-depth solution shows step-by-step calculations to determine sample size and sampling interval . It also analyzes the Coomes' inventory account.