Determine the objectives of the test. You are auditing both quantities and pricing of the final inventory accumulation.

a. Explain the assertions that you are testing.

b. Explain the evidence that you would obtain to test those assertions.

Part 2. Determine sample size based on the following judgments (round sample size to the nearest whole number).

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

b. The risk of incorrect acceptance is assessed at 37%.

c. Expected misstatement is assessed at $100,000. Whether the auditor uses nonstatistical sampling or statistical sampling, the same basic factors are considered in determining sample size. Once the auditor has made professional judgments about these factors, the following formula is used to determine sample size in PPS sampling:

whereBV = book value of population testedRF = reliability factor for the specified risk of incorrect acceptance assuming zero overstatements (see the following table Reliability Factors for Overstatements)TM = tolerable misstatementEM = expected misstatement (see the subsequent table Expansion Factors for Expected Misstatements)EF = expansion factor for expected misstatementDocument your determination of sample size.

Part 3. Develop a scenario that supports the auditor?s conclusion that the appropriate risk of incorrect acceptance is 37%.

Part 4. Select a sample and apply audit procedures. Select the PPS sample using the sample size determined in Part 2 above. Choose your own random start based on the size of the sampling interval (each student should have a different random start). Determine the book value and audited value for each item in your unique sample. Document your sample, the book values and the audited values.

Part 5. Compute the upper misstatement limit (UML) for the sample you selected. Follow the procedures outlined in the chapter. You can use the Reliability Factors for Overstatements table to determine the factors to use for the ?Upper Misstatement Limit.? Document your calculation of UML.

Part 6. Evaluate your results both quantitatively and qualitatively. Develop both a statistical conclusion and an audit conclusion based on your sample. Document your conclusions about your inventory tests.

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(BVx RF) [тм- (ЕМXEF)] п: RELIABILITY FACTORS FOR OVERSTATEMENTS Risk of Incorrect Acceptance Number of Overstatements 1% 5% 10% 13% 15% 20% 25% 30% 37% 4.61 3.00 2.31 2.00 1.90 1.16 1.39 1.21 1.00 6.64 4.75 3.89 3.56 3.38 3.00 2.70 2.44 2.14 2 8.41 6.30 5.33 4.94 4.72 4.28 3.93 3.62 3.25 3 10.05 7.76 6.69 6.25 6.02 5.52 5.11 4.77 4.34 4 11.61 9.16 8.00 7.53 7.27 6.73 6.28 5.90 5.43 5 13.11 10.52 9.28 8.77 8.50 7.91 7.43 7.01 6.49 14.57 11.85 10.54 10.00 9.71 9.08 8.56 8.12 7.56 16.00 13.15 11.78 11.21 10.90 10.24 9.69 9.21 8.63 17.41 14.44 13.00 12.41 12.08 11.38 10.81 10.31 9.68 18.79 15.71 14.21 13.59 13.25 12.52 11.92 11.39 10.74 10 20.15 16.97 15.41 14.77 14.42 13.66 13.02 12.47 11.79 EXPANSION FACTORS FOR EXPECTED MISSTATEMENTS Risk of Incorrect Acceptance 1% 5% 10% 15% 20% 25% 30% 37% Expansion factor 1.90 1.60 1.50 1.40 1.30 1.25 1.20 1.15