1 Mt Hood Furniture Company Accuracy Test ACC 491 Contemporary Auditing I Mt Hood Furniture Company Accuracy Test 2 The objectives of this audit are to determine the accuracy of the inventory as reported by Mt Hood Furniture Company The goals are to determine that the inventory is accurately transcribed to the final accumulation and valuation of the inventory and that the inventory is correctly priced and accumulated Also included are tests to determine that the proper pricing of raw materials work in process and finished goods are recorded The formula for finding the sample size is N BV x RF TM AM x EF BV stands for the book value of the total population which is 6 753 764 RF stands for the reliability factor which is 1 TM stands for the tolerable misstatement which is 325 000 Tolerable misstatement represents the maximum misstatement that could occur before the population would be considered materially misstated The lower the required tolerable misstatement relative to the number and dollar size of transactions the lower the needed tolerable deviation rate This rate is inversely related to sample size AM is the anticipated misstatement which is 100 000 and EF is the expansion factor for anticipated misstatement which is 1 15 So N 6 753 764 x 1 00 325 000 100 000 x 1 15 32 16 Assuming that an auditor accepts exposure to a risk of incorrect acceptance of 37 and form an opinion of the financial data based on his or her poor judgment The 37 incorrect acceptance exposure will result in a smaller sample size reliable factor of 1 and expansion factor of 1 5 which change according to incorrect acceptance percentage According to the school material Higher reliability and expansion factors result in a larger sample size assuming the 37 incorrect acceptance exposure and following the n Recoded Balance RF Tolerable error Expected Error EF or 753 764 1 325 000 100 000 1 15 will yield a sample size of 32 One of the important factors before arriving at the final stage the audit which is forming an opinion about the financial data includes obtaining adequate information to include appropriate sample sizes according to the population size Because the risk exposure includes a high 37 exposure low RF and EF result in lower sample amounts which result in poor auditing Probability proportionate to size PPS sampling is a method of 3 n BV RF TM AM EF sampling for substantive tests that uses attribute sampling theory to express a conclusion in dollar amounts rather than as a rate of deviations Boynton Johnson 2006 p 568 First a sample size is determined using the following formula where n equals the sample size BV represents the book value RF is the reliability factor for the specified risk of incorrect acceptance TM stands for the tolerable misstatement AM equals the anticipated misstatement and EF is the expansion factor for the anticipated misstatement p 570 For Mt Hood Furniture s inventory the use of this formula resulted in a sample size of 32 16 rounded up to 33 Using the following formula SI BV n where SI represents the sample interval p 573 resulted in a sample interval of 204 659 52 Choosing a random dollar amount between 1 and 204 659 59 140 determined the first sample 4 Each of the additional 31 samples was determined by adding 204 649 52 to the previous sample as illustrated in the table below On auditing the production cycle including raw material work in progress and finish goods correct pricing the auditor identify the same objectives occurrence completeness accuracy cutoff and classification Testing for correct pricing of the three categories should include verifying purchase orders invoices and the actual existence of inventory In the case of raw material testing should include verifying purchase orders invoices to assert both the existence and valuation and Allocation of Inventory Work in progress pricing testing should include verifying order competition list of material and labor used as well as whether or not the company has any work in progress For example the audit can verify inventory completed and uncompleted as well as cost and proper allocation In the case of finished goods the auditor must verify whether or not the inventory was completed the cost and prices according to proper recoding For example the auditor can verify if the company has the right to record the inventory in its books and whether or not the value on the inventory agree with the actual amounts on hand and prices according to industry The projected population misstatement is equal to the tainting percentage multiplied by the sampling interval The sampling projected misstatement will be equal to 325 933 98 which can be found in question two The book value population was achieved by calculating the recognition of the logical unit in the sample that was represented By calculating the book value minus audit value you will reach the tainted amount for the misstatement the whole unit in which the book value is equal to or greater than the sampling gap projected to the dollar amount that is present When comparing the logical unit to the sampling interval the tainting percentage would not be needed if the logical unit is greater than the sampling interval 5 An audit sampling will be utilized to determine the dollar amount of misstatement in the inventory population for Mt Hood Furniture Company In order to ensure the inventory is correctly priced and gathered an audit sampling will have to be performed by conducting thorough tests this will determine whether quantities were accurately transcribed to the final accumulation and valuation of the inventory The testing will be based on the details of the transactions due to the inventory count and pricing The probability proportionate to size PPS is the audit sampling procedure that will be used to show the conclusion References Boynton W C Johnson R N 2006 Modern Auditing Assurance Services and the Integrity of Financial Reporting 8th ed John Wiley Sons Inc 6 http www4 ncsu edu unity users b buckless www AUSection350 html