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Module IV: MUS SamplingFactory Equipment Additions

Richard Derick has asked you to develop a sampling plan to determine the extent of misstatements in classifying expenditures as repairs and maintenance expense or factory equipment additions. Given the problems noted during control testing (as described in Module II), Derick believes that significant misstatements may have occurred.

The same vendor's invoice frequently contains charges for parts and supplies as well as equipment, and the Brony's Bikes employees preparing the vouchers sometimes fail to distinguish among the charges and simply indicate "factory equipment" as the debit if the invoice amount is large. Inasmuch as this type of misstatement would cause an overstatement in the factory equipment account, Derick instructs you to use MUS sampling for the lower stratum to determine the extent to which such misstatements may have occurred during 20X9. In the Johnstone textbook, MUS is used interchangeably with the term PPS, which MUS is a subset. Of the total debits, $89,860,000 to factory equipment during 20X9, major additions in the amount of $77,260,000 have been made to replace worn-out equipment. The lower stratum contains 1,246 items for a total dollar amount of $12,600,000. Derick has decided to audit the upper stratum of the population containing the major additions in its entirety. You are asked to test the lower stratum on a sampling basis.

Requirements

1. What is the objective of performing the test of factory equipment expenditures? What is the population? What is the sampling unit?

2. Using Excel download the file labeled "20X9_mus." Locate the following documentation in the file: WP 11.3AMonetary unit sampling plan; WP 11.3BMonetary unit sampling planprojected misstatement; and WP 11.3CMonetary unit sampling plancomputed precision and upper misstatement limit.

Scroll to WP 11.3A, "Monetary Unit Sampling Plan." Determine sample size from textbook Exhibit 8.5 Table 1 assuming Derick has set the parameters stated below. Calculate the sampling interval.

Risk of incorrect acceptance:	5% or 95% confidence
Expected population deviation rate:	1% based on auditor's prior experience with the entity
Tolerable rate of deviation:	6% determined by auditor; if actual exceeds 6%, the control probably has failed

3. What factors did Derick consider in setting these parameters?

4. Scroll to WP 11.3B, "Monetary Unit Sampling PlanProjected Misstatement." This document summarizes all invoices containing posting errors and calculates the projected misstatement. Column 3 is already computed for you to determine the amount of the misstatement for that item. The equations for columns 4, 5 and 6 have been incorporated into the worksheet for you. Refer to textbook Exhibit 8.11 to see how the formulas were determined. What factor determines whether a "tainting percentage" appears in column 4?

5. Scroll to WP 11.3C, "Monetary Unit Sampling PlanComputed Precision and Upper Misstatement Limit." Complete the "Incremental Allowance for Sampling Risk" schedule by ranking the projected misstatements as appropriate. Textbook Exhibit 8.11 and Exhibit 8.12 (illustrate how this calculation is performed manually. There are four misstatements identified. Use the values in textbook Exhibit 8.9 5% risk of incorrect acceptance column and the rows 0-4.

6. Explain the meaning of the following amounts: a. Basic precision; b. Incremental allowance for sampling error; c. Upper misstatement limit.

7. Evaluate the sampling results. Do they support Derick's concerns regarding possible material misstatement? Note the audit adjustment based on misstatements discovered while examining the sample. Is this adjustment adequate to bring the population into acceptable bounds? If not, what alternate actions might you choose to pursue, based on the sampling results?

Select the correct answer from the drop-down from the following:

1. The objective of testing factory equipment expenditures is to determine whether the factory equipment accounts are materially overstatedSelectmaterially understatedmaterially overstatedproperly classifiedfully disclosedbeing depreciatedItem 1 .

2. For this test, what is the sampling unit? Each dollar of factory expenditureSelectNumber of factory equipment invoicesNumber of items of factory equipmentAverage dollar amount of equipment expendituresEach dollar of factory expenditureItem 2

3. For this test, what is the population? Factory equipment expenditures in the lower stratumSelectAll assetsAll liabilitiesAll expendituresFactory equipment expenditures in the lower stratumFactory equipment expenditures in the upper stratumItem 3

4. Refer to Module IV requirement 2 and the file named 20X9 attrib.xlsx WP 11-3A. Enter the sample size for this test.

5. In setting the risk of incorrect acceptance of the sample findings, Derick determined that he wanted what confidence level that the upper error limit represents the maximum amount of error in the population, within the specified range of precision. %

6. Enter the amount of the projected misstatement total determined in column 6. $

7. Enter the amount of upper misstatement limit determined in column 3. $

8. Based on WP 11.3B and 11.3C totals used for questions 6 and 7, is the sample result within Derick's parameters appears to be acceptable. FalseSelectTrueFalseItem 8

9. Basic precisionSelectFactual misstatementBasic precisionProjected misstatementIncremental allowance for sampling riskItem 9 is the amount of error you are confident of not exceeding if no errors are detected in the sample.

I need number 5 "In setting the risk of incorrect acceptance of the sample findings, Derick determined that he wanted what confidence level that the upper error limit represents the maximum amount of error in the population, within the specified range of precision." Please help me!

Module IV: MUS Sampling-Factory Equipment Additions Richard Derick has asked you to develop a sampling plan to determine the extent of misstatements in classifying expenditures as repairs and maintenance expense or factory equipment additions. Given the problems noted during control testing (as described in Module II), Derick believes that significant misstatements may have occurred. The same vendor's invoice frequently contains charges for parts and supplies as well as equipment, and the Brony's Bikes employees preparing the vouchers sometimes fail to distinguish among the charges and simply indicate "factory equipment" as the debit if the invoice amount is large. Inasmuch as this type of misstatement would cause an overstatement in the factory equipment account, Derick instructs you to use MUS sampling for the lower stratum to determine the extent to which such misstatements may have occurred during 20X9. In the Johnstone textbook, MUS is used interchangeably with the term PPS, which MUS is a subset. Of the total debits, $89,860,000 to factory equipment during 20X9, major additions in the amount of $77,260,000 have been made to replace worn-out equipment. The lower stratum contains 1,246 items for total dollar amount of $12,600,000. Derick has decided to audit the upper stratum of the population containing the major additions in its entirety. You are asked to test the lower stratum on a sampling basis. Requirements 1. What is the objective of performing the test of factory equipment expenditures? What is the population? What is the sampling unit? 2. Using Excel download the file labeled "20X9_mus." Locate the following documentation in the file: WP 11.3A-Monetary unit sampling plan; WP 11.3B-Monetary unit sampling plan-projected misstatement; and WP 11.3C-Monetary unit sampling plan-computed precision and upper misstatement limit. Scroll to WP 11.3A, "Monetary Unit Sampling Plan." Determine sample size from textbook Exhibit 8.5 Table 1 assuming Derick has set the parameters stated below. Calculate the sampling interval. Risk of incorrect 5% or 95% confidence acceptance: Expected population 1% based on auditor's prior experience with the entity deviation rate: Tolerable rate of deviation: 6% determined by auditor; if actual exceeds 6%, the control probably has failed 3. What factors did Derick consider in setting these parameters? 4. Scroll to WP 11.3B, "Monetary Unit Sampling Plan-Projected Misstatement." This document summarizes all invoices containing posting errors and calculates the projected misstatement. Column 3 is already computed for you to determine the amount of the misstatement for that item. The equations for columns 4, 5 and 6 have been incorporated into the worksheet for you. Refer to textbook Exhibit 8.11 to see how the formulas were determined. What factor determines whether a "tainting percentage" appears in column 4? 5. Scroll to WP 11.3C, "Monetary Unit Sampling Plan-Computed Precision and Upper Misstatement Limit." Complete the "Incremental Allowance for Sampling Risk" schedule by ranking the projected misstatements as appropriate. Textbook Exhibit 8.11 and Exhibit 8.12 (illustrate how this calculation is performed manually. There are four misstatements identified. Use the values in textbook Exhibit 8.9 5% risk of incorrect acceptance column and the rows 0-4. 6. Explain the meaning of the following amounts: a. Basic precision; b. Incremental allowance for sampling error; c. Upper misstatement limit. 7. Evaluate the sampling results. Do they support Derick's concerns regarding possible material misstatement? Note the audit adjustment based on misstatements discovered while examining the sample. Is this adjustment adequate to bring the population into acceptable bounds? If not, what alternate actions might you choose to pursue, based on the sampling results? Select the correct answer from the drop-down from the following: 1. The objective of testing factory equipment expenditures is to determine whether the factory equipment accounts are materially overstated A. 2. For this test, what is the sampling unit? Each dollar of factory expenditure 3. For this test, what is the population? Factory equipment expenditures in the lower stratum 4. Refer to Module IV requirement 2 and the file named 20x9 attrib.xlsx WP 11-3A. Enter the sample size for this test. 79 5. In setting the risk of incorrect acceptance of the sample findings, Derick determined that he wanted what confidence level that the upper error limit represents the maximum amount of error in the population, within the specified range of precision. % 6. Enter the amount of the projected misstatement total determined in column 6. $ 7. Enter the amount of upper misstatement limit determined in column 3. $ 8. Based on WP 11.38 and 11.3C totals used for questions 6 and 7, is the sample result within Derick's parameters appears to be acceptable. False 9. Basic precision is the amount of error you are confident of not exceeding if no errors are detected in the sample. WP 11.3A Brony's Bikes Prepared by: Monetary Unit Sampling Plan Date: Factory Equipment Reviewed by: December 31, 20X9 Date: Lower stratum debit postings to factory equipment : Dollar amount $12,600,000.00 Number of items acquired 1,246 Risk of incorrect acceptance 5.00% Expected population deviation rate 1.00% Tolerable rate of deviation 6.00% Sample size Sampling interval WP 11.3B Brony's Bikes Prepared by: Monetary Unit Sampling Plan Date: Reviewed by: Factory Equipment Projected Misstatement Date: December 31, 20x9 (0) (1) (3) (4) (5) Most Likely Tainting % Sampling Misstatement $ Number Vendor Book Value Audited Value Error (BV-AV) (BV-AV) /BV Interval (4) X (5) 372134 Loxley Machine Works, Ltd. $1,665,800 $145, 200 $1,520,600 0.00% $0 $1,520, 600 1778927 $23,660 $0 $23,660 0.00% $0 $23, 660 3668498 $985,300 $512,000 0.00% $0 $473,300 Gerald Equipment and Parts, Inc. Cradle Corporation Dorr's Machine Parts and Repairs Johnson's Welding and Machining 6333750 $12,000 $0 $473,300 $ 12,000 $55,700 0.00% $0 $12,000 9873625 $155,700 $100,000 0.00% $0 10224680 Laidlow Parts and Repairs $287,900 $125,000 $162,900 0.00% $0 $55,700 $ 162,900 $242,300 $12,600 11440670 $1,224,500 $242,300 0.00% $0 Joplin Machinery Drexle Freight Handlers $1,466,800 $12,600 12143770 $0 $12,600 0.00% $0 $2,503,060 $2,503,060 II WP 11.30 Brony's Bikes Prepared by: Date: Monetary Unit Sampling Plan Factory Equipment Reviewed by: Computed Precision and Upper Misstatement Limit Date: December 31, 2009 Basic Precision $0 Interval from WP 11 3A above $0 Textbook Exhibit 8.95% column 0 3 Incremental Allowance for Sampling Error (1) (2) (3) Ranked Incremental Incremental Projected Confidence Allowance $ Number Vendor Errors Factor (1) x (2) $0 $0 $0 $0 === Incremental Allowance for Sampling Risk $0 === === Upper Misstatement Limit ===== ===== Audit Adjustment No. 1 5100 Cost of Goods Sold-Grand Prix Touring Bike $378,514 5200 Cost of Goods Sold-Phoenix Touring Bike $361,537 5300 Cost of Goods Sold-Pike's Peak Mountain Bike $984,346 5400 Cost of Goods Sold-Himalaya Mountain Bike $242,559 5500 $536,103 Cost of Goods Sold-Waistliner Stationary Bike Factory Equipment 1530 $2,503,060 To adjust factory equipment and cost of goods sold accounts for repairs erroneously debited to factory equipment. The allocation is in proportion to the relative amounts of cost of goods sold, as follows: ACCOUNT AMOUNT NUMBER (thousands) PERCENT Cost of Goods Sold: 5100 $34,448 15% 5200 $32,903 14% 39% 5300 $89,584 5400 $22,075 10% 5500 $48,790 21% $227,800 100% = Module IV: MUS Sampling-Factory Equipment Additions Richard Derick has asked you to develop a sampling plan to determine the extent of misstatements in classifying expenditures as repairs and maintenance expense or factory equipment additions. Given the problems noted during control testing (as described in Module II), Derick believes that significant misstatements may have occurred. The same vendor's invoice frequently contains charges for parts and supplies as well as equipment, and the Brony's Bikes employees preparing the vouchers sometimes fail to distinguish among the charges and simply indicate "factory equipment" as the debit if the invoice amount is large. Inasmuch as this type of misstatement would cause an overstatement in the factory equipment account, Derick instructs you to use MUS sampling for the lower stratum to determine the extent to which such misstatements may have occurred during 20X9. In the Johnstone textbook, MUS is used interchangeably with the term PPS, which MUS is a subset. Of the total debits, $89,860,000 to factory equipment during 20X9, major additions in the amount of $77,260,000 have been made to replace worn-out equipment. The lower stratum contains 1,246 items for total dollar amount of $12,600,000. Derick has decided to audit the upper stratum of the population containing the major additions in its entirety. You are asked to test the lower stratum on a sampling basis. Requirements 1. What is the objective of performing the test of factory equipment expenditures? What is the population? What is the sampling unit? 2. Using Excel download the file labeled "20X9_mus." Locate the following documentation in the file: WP 11.3A-Monetary unit sampling plan; WP 11.3B-Monetary unit sampling plan-projected misstatement; and WP 11.3C-Monetary unit sampling plan-computed precision and upper misstatement limit. Scroll to WP 11.3A, "Monetary Unit Sampling Plan." Determine sample size from textbook Exhibit 8.5 Table 1 assuming Derick has set the parameters stated below. Calculate the sampling interval. Risk of incorrect 5% or 95% confidence acceptance: Expected population 1% based on auditor's prior experience with the entity deviation rate: Tolerable rate of deviation: 6% determined by auditor; if actual exceeds 6%, the control probably has failed 3. What factors did Derick consider in setting these parameters? 4. Scroll to WP 11.3B, "Monetary Unit Sampling Plan-Projected Misstatement." This document summarizes all invoices containing posting errors and calculates the projected misstatement. Column 3 is already computed for you to determine the amount of the misstatement for that item. The equations for columns 4, 5 and 6 have been incorporated into the worksheet for you. Refer to textbook Exhibit 8.11 to see how the formulas were determined. What factor determines whether a "tainting percentage" appears in column 4? 5. Scroll to WP 11.3C, "Monetary Unit Sampling Plan-Computed Precision and Upper Misstatement Limit." Complete the "Incremental Allowance for Sampling Risk" schedule by ranking the projected misstatements as appropriate. Textbook Exhibit 8.11 and Exhibit 8.12 (illustrate how this calculation is performed manually. There are four misstatements identified. Use the values in textbook Exhibit 8.9 5% risk of incorrect acceptance column and the rows 0-4. 6. Explain the meaning of the following amounts: a. Basic precision; b. Incremental allowance for sampling error; c. Upper misstatement limit. 7. Evaluate the sampling results. Do they support Derick's concerns regarding possible material misstatement? Note the audit adjustment based on misstatements discovered while examining the sample. Is this adjustment adequate to bring the population into acceptable bounds? If not, what alternate actions might you choose to pursue, based on the sampling results? Select the correct answer from the drop-down from the following: 1. The objective of testing factory equipment expenditures is to determine whether the factory equipment accounts are materially overstated A. 2. For this test, what is the sampling unit? Each dollar of factory expenditure 3. For this test, what is the population? Factory equipment expenditures in the lower stratum 4. Refer to Module IV requirement 2 and the file named 20x9 attrib.xlsx WP 11-3A. Enter the sample size for this test. 79 5. In setting the risk of incorrect acceptance of the sample findings, Derick determined that he wanted what confidence level that the upper error limit represents the maximum amount of error in the population, within the specified range of precision. % 6. Enter the amount of the projected misstatement total determined in column 6. $ 7. Enter the amount of upper misstatement limit determined in column 3. $ 8. Based on WP 11.38 and 11.3C totals used for questions 6 and 7, is the sample result within Derick's parameters appears to be acceptable. False 9. Basic precision is the amount of error you are confident of not exceeding if no errors are detected in the sample. WP 11.3A Brony's Bikes Prepared by: Monetary Unit Sampling Plan Date: Factory Equipment Reviewed by: December 31, 20X9 Date: Lower stratum debit postings to factory equipment : Dollar amount $12,600,000.00 Number of items acquired 1,246 Risk of incorrect acceptance 5.00% Expected population deviation rate 1.00% Tolerable rate of deviation 6.00% Sample size Sampling interval WP 11.3B Brony's Bikes Prepared by: Monetary Unit Sampling Plan Date: Reviewed by: Factory Equipment Projected Misstatement Date: December 31, 20x9 (0) (1) (3) (4) (5) Most Likely Tainting % Sampling Misstatement $ Number Vendor Book Value Audited Value Error (BV-AV) (BV-AV) /BV Interval (4) X (5) 372134 Loxley Machine Works, Ltd. $1,665,800 $145, 200 $1,520,600 0.00% $0 $1,520, 600 1778927 $23,660 $0 $23,660 0.00% $0 $23, 660 3668498 $985,300 $512,000 0.00% $0 $473,300 Gerald Equipment and Parts, Inc. Cradle Corporation Dorr's Machine Parts and Repairs Johnson's Welding and Machining 6333750 $12,000 $0 $473,300 $ 12,000 $55,700 0.00% $0 $12,000 9873625 $155,700 $100,000 0.00% $0 10224680 Laidlow Parts and Repairs $287,900 $125,000 $162,900 0.00% $0 $55,700 $ 162,900 $242,300 $12,600 11440670 $1,224,500 $242,300 0.00% $0 Joplin Machinery Drexle Freight Handlers $1,466,800 $12,600 12143770 $0 $12,600 0.00% $0 $2,503,060 $2,503,060 II WP 11.30 Brony's Bikes Prepared by: Date: Monetary Unit Sampling Plan Factory Equipment Reviewed by: Computed Precision and Upper Misstatement Limit Date: December 31, 2009 Basic Precision $0 Interval from WP 11 3A above $0 Textbook Exhibit 8.95% column 0 3 Incremental Allowance for Sampling Error (1) (2) (3) Ranked Incremental Incremental Projected Confidence Allowance $ Number Vendor Errors Factor (1) x (2) $0 $0 $0 $0 === Incremental Allowance for Sampling Risk $0 === === Upper Misstatement Limit ===== ===== Audit Adjustment No. 1 5100 Cost of Goods Sold-Grand Prix Touring Bike $378,514 5200 Cost of Goods Sold-Phoenix Touring Bike $361,537 5300 Cost of Goods Sold-Pike's Peak Mountain Bike $984,346 5400 Cost of Goods Sold-Himalaya Mountain Bike $242,559 5500 $536,103 Cost of Goods Sold-Waistliner Stationary Bike Factory Equipment 1530 $2,503,060 To adjust factory equipment and cost of goods sold accounts for repairs erroneously debited to factory equipment. The allocation is in proportion to the relative amounts of cost of goods sold, as follows: ACCOUNT AMOUNT NUMBER (thousands) PERCENT Cost of Goods Sold: 5100 $34,448 15% 5200 $32,903 14% 39% 5300 $89,584 5400 $22,075 10% 5500 $48,790 21% $227,800 100% =