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. (Link) 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 auditors 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 (Link) 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 Exhibits 8.11(Link) and 8.12

(Link) (illustrate how this calculation is performed manually. There are four misstatements

identified. Use the values in textbook Exhibit 8.9 (Link) 5% risk of incorrect acceptance column

and the rows 0-4.

6. Evaluate the sampling results. Do they support Dericks 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?

Monetary Unit Sampling Plan Factory Equipment Date: ved b: Date: Lwer strtm debit postings t factory equipment Dllr amount Nmber f items acquired Risk of incorrect acceptance Expected population deviation rate Tolerable rate of deviation Sample size Sampling interva $12,600,000.00 1,246 5.00% 120% 6.00% Prepared by: Brony's Bikes Monetary Unit Sampling Plan Fctory Equipment Date December 31, 20x9 Most Likel ? Tainting.% :.. Sampling . 1, Misstat $Nmber Vendor Interval S145,2001,520,600 $23,660 372134 Loxley Machine Works, Ltd. 1778927 Gerald Equipment and Parts, Inc. 3668498 Cradle Corporation 6333750 Dorr's Machine Parts and Repairs 9873625 Jhnson's Welding and Machining 0224680 Laidlow Parts and Repairs 1440670 Joplin Machinery 12143770 Drexle Freight Handlers ST,665,800 $23,660 $985,300 $12.00 SI 55,70 $287,900 0.00%" 0.00% 0.00% 0.00%) $23,660 $473,300 $12,000 $55,700 5162900 S242,300 12,600 $512,000 $12,000. $100,000 125,000 $T62,900 $12,600 $2,503,060 '0.00% : 12.60 "$2,503,060 WP 11.3C Brony'sBikes Prepared by Date: Monetary Unit Factory E Plan Reviewed by: Dte: Computed Precision and Upper Missttement Limit December 31, 20x Basic Precision REF! Textbook Exhibit '8.9 5% columno Incremental Allowance for Sampling Erro Ranked Incremental Incremental llowance Projected. Confidence rrorsFacto $'Nmber Vendor S0 s0 50 50 IncrementlAllowance tor sampling Risk Upper Misstatement Limit Adit Adjustment No. 1 5100 Cost of Goods Sold-Grand Prix Touring Bike 5200 Cost of Goods Sold-Phoenix Touring Bike 5300 Cost of Goods Sld-Pike's Peak Mountain Bike 5400 stf GOOds. sold-Himalaya Mountain Bike 5500 Cost of Goods Sld-Waisfliner Stationary Bike 1530 Factory Equipment 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 $378,514 5361, 537 5984 346 $242,559 $536,T03 $2,503,060 of cost of goods sold, as fllows: ACCUNY.. NUMBER thousands) PERCENT Cost of Goods Sold: 15% 4% 5100 5200 5300 5400 $34,448 $32903 89,584 S22,075 500$48,790 10% $227,800 100% Monetary Unit Sampling Plan Factory Equipment Date: ved b: Date: Lwer strtm debit postings t factory equipment Dllr amount Nmber f items acquired Risk of incorrect acceptance Expected population deviation rate Tolerable rate of deviation Sample size Sampling interva $12,600,000.00 1,246 5.00% 120% 6.00% Prepared by: Brony's Bikes Monetary Unit Sampling Plan Fctory Equipment Date December 31, 20x9 Most Likel ? Tainting.% :.. Sampling . 1, Misstat $Nmber Vendor Interval S145,2001,520,600 $23,660 372134 Loxley Machine Works, Ltd. 1778927 Gerald Equipment and Parts, Inc. 3668498 Cradle Corporation 6333750 Dorr's Machine Parts and Repairs 9873625 Jhnson's Welding and Machining 0224680 Laidlow Parts and Repairs 1440670 Joplin Machinery 12143770 Drexle Freight Handlers ST,665,800 $23,660 $985,300 $12.00 SI 55,70 $287,900 0.00%" 0.00% 0.00% 0.00%) $23,660 $473,300 $12,000 $55,700 5162900 S242,300 12,600 $512,000 $12,000. $100,000 125,000 $T62,900 $12,600 $2,503,060 '0.00% : 12.60 "$2,503,060 WP 11.3C Brony'sBikes Prepared by Date: Monetary Unit Factory E Plan Reviewed by: Dte: Computed Precision and Upper Missttement Limit December 31, 20x Basic Precision REF! Textbook Exhibit '8.9 5% columno Incremental Allowance for Sampling Erro Ranked Incremental Incremental llowance Projected. Confidence rrorsFacto $'Nmber Vendor S0 s0 50 50 IncrementlAllowance tor sampling Risk Upper Misstatement Limit Adit Adjustment No. 1 5100 Cost of Goods Sold-Grand Prix Touring Bike 5200 Cost of Goods Sold-Phoenix Touring Bike 5300 Cost of Goods Sld-Pike's Peak Mountain Bike 5400 stf GOOds. sold-Himalaya Mountain Bike 5500 Cost of Goods Sld-Waisfliner Stationary Bike 1530 Factory Equipment 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 $378,514 5361, 537 5984 346 $242,559 $536,T03 $2,503,060 of cost of goods sold, as fllows: ACCUNY.. NUMBER thousands) PERCENT Cost of Goods Sold: 15% 4% 5100 5200 5300 5400 $34,448 $32903 89,584 S22,075 500$48,790 10% $227,800 100%