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?

EXCEL FILE 20X9_MUS:

EXHIBITS 8.8 - 8.12

THESE ARE THE QUESTIONS I NEED HELP WITH (IT SAYS TO "Compare your WP calculations with textbook Exhibit 8.8 through 8.12." FOR BOTH QUESTIONS) ******

PLEASE & THANK YOU!! I WOULD REALLY APPRECIATE IT.

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. $

C D F | G | H I 1 VP 11.34 Brony's Bikes Monetary Unit Sampling Plan Factory Equipient Deceber 31, 2019 | E | Prepared by: Date: Revieved by: Date: 6 Lover stratur debit postings to factory equipaent : Dollar arount 8 Number of itens acquired 9 Risk of incorrect acceptance 10 Expected population deviation rate 11 Tolerable rate of deviation 12 Sample size | 13 Sampling interval 14 $12,600,000.00 1,246 5.00% 1.00% 6.00% 15 16 17 VP 11.3B 18 19 Brony's Bikes Honetary Unit Sampling Plan Factory Equipient Projected Hisstatenent Deceber 31, 2019 Prepared by: Date: Revieved by: Date: = (1) (2) (3) (6) (4) (5) Host Likely Tainting % Sampling Misstaterent (BY-AV)/BY Interval (4) x (5) Book Value iudited Value Error (BY-AV) 25 $ Number Vendor 26 27 372134 Loxley Hachine Vorks, Ltd. 28 1778927 Gerald Equipaent and Part 29 3668498 Cradle Corporation 30 6333750 Dorr's Machine Parts and 31 9873625 Johnson's Velding and Mac 32 10224680 Laidlor Parts and Repair 33 11440670 Joplin Machinery 34 12143770 Drexle Freight Handlers $1,665,800 $23,660 $985,300 $12,000 $155,700 $287,900 $1,466,800 $12,600 $145,200 $0 $512,000 SO $100,000 $125,000 $1,224,500 SO $1,520,600 $23, 660 $473,300 $12,000 $55,700 $162,900 $242,300 $12,600 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% $1,520,600 $23,660 $473,300 $12,000 $55,700 $162,900 $242,300 $12,600 $2,503,060 $2,503,060 == = = == = = == = = = == = = == = = == = = Awwww B D E 40 41 VP 11.30 Brony's Bikes Honetary Unit Sampling Plan Factory Equipient Computed Precision and Upper Nisstatenent Linit December 31, 2019 Prepared by: Date: Revieved by: Date: 44 46 TREF! 48 Basic Precision $0 49 Interval froi "P 11 3A above $0 50 Textbook Exhibit 8.9 5% coluu Increnental Alloyance for Sampling Error no ano 56 57_$ Nuber (1) (2) (3) Ranked Increnental Increnental Projected Confidence Allowance Errors Factor (1) x (2) Vendor $0 $0 SO Increnental Allowance for Sampling Risk Upper Misstatenent Linit Audit Adjustuent No. 1 $2,503,060 73 5100 Cost of Goods Sold-Grand Prix Touring Bike $378,514 74 5200 Cost of Goods Sold-Phoenix Touring Bike $361,537 75 5300 Cost of Goods Sold-Pike's Peak Mountain Bike $984,346 76 5400 Cost of Goods Sold-Hinalaya Mountain Bike $242,559 77 5500 Cost of Goods Sold-Waistliner Stationary Bike $536,103 78 1530 Factory Equipient 79 To adjust factory equipient and cost of goods sold accounts 80 for repairs erroneously debited to factory equipaent. 81 The allocation is in proportion to the relative arounts 82 of cost of goods sold, as follovs: 83 84 ACCOUNT AMOUNT NUMBER (thousands) 86 Cost of Goods Sold: 87 5100 $34,448 88 5200 $32,903 5300 $89,584 5400 $22,075 5500 $48,790 85 PERCENT 15% 14% 397 10% 21% ON $227,800 = = = = = == = 100% = = = = = == = = = = = EXHIBIT 8.8 Fixed Interval Sample Selection Customer Cumulative Book Included in Sample? Selection Amount ($) 220 (Yes) (Yes) 22,000 44,000 Book Value ($) Random start 220 2,200 22,000 880 6,128 2,800 45,023 10 8,231 16,894 2,420 24,420 25,300 31,428 34,228 79,251 79,261 87,492 104,386 Cumulative Book Plus Random Start ($) 20,000 20,220 22,420 44,420 45,300 51,428 54,228 99,251 99,261 107,492 124,386 (Yes) 66,000 & 88,000 (Yes) 110,000 1,900 807,906 827,906 EXHIBIT 8.9 Confidence Factors for Sample Evaluation 6.69 8.50 7.67 Number of Risk of Incorrect Acceptance Overstatement Misstatements 5% 10% 15% 20% 25% 30% 35% 37% 50% 3.00 2.31 1.90 1 .61 1.39 1.21 1.05 1.00 0.70 4.75 3.89 3 .38 3.00 2.70 2.442 .22 2.14 1.68 6.30 5.33 4.73 4.28 3.93 3.62 3.35 3.25 2.68 7.76 6.02 5.52 5.11 4.77 4.46 4.35 3.68 9.16 8.00 7.27 6.73 6.28 5.90 5.55 5.43 4.68 10.52 9.28 7.91 7.43 7.01 6.64 6.50 5.68 11.85 10.54 9.71 9.08 8.56 8.12 7.72 7.57 6.67 13.15 11.78 10.90 10.24 9.69 9.21 8.79 8.63 14.44 13.00 12.08 11.38 11 28 1081 10.31 9.85 9.68 8.67 15.71 14.21 13.25 12.52 11.92 11.39 10.92 10.74 9.67 16.97 15.41 14.42 13.66 13.02 12.47 11.98 11.79 10.67 18.21 16.60 15.57 14.78 14.13 13.55 1 3.04 12.84 11.67 19.45 17.79 16.72 15.90 15.22 14.63 14.09 13.89 12.67 20.67 18.96 17.86 17.02 16.32 15.70 15.14 14.93 13.67 21.89 20.13 19.00 18.13 17.40 16.77 16.20 15.98 14.67 23.10 21.30 20.13 19.24 18.49 17.84 17.25 17.02 15.67 24.31 22.46 21.26 20.34 19.58 18.90 18.29 18.06 16.67 25.50 23.61 22.39 21.44 20.66 19.97 1 9.34 19.10 17.67 18 26.70 24.76 23.51 22.54 21.74 21.03 20.38 20.14 18.67 27.88 25.91 24.63 23.64 22.81 22.09 21.43 21.18 19.67 20 29.07 27.05 25.74 24.73 23.89 23.15 22.47 22.22 20.67 Source: Audit Sampling (New York: AICPA, 2012), 155-156. AICPA audit and accounting guides by AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. Copyright 2012 Reproduced with permission of AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS in the format Textbook via Copyright Clearance Center. EXHIBIT 8.10 Total Estimated Misstatement Calculation Summary If No Misstatements Detected If Misstatements Detected Interval x confidence factor Factual misstatement in top-stratum Basic precision + Projected misstatement in lower stratum + Incremental allowance for sampling risk in lower stratum = Total estimated misstatement Amount of factual misstatement Interval x confidence factor Calculate Calculate = Basic precision Sum of the four EXHIBIT 8.11 Example of Calculation of Total Estimated Misstatement When Overstatements Are Detected Confidence Factor* Tainting Percentage Sampling Interval Conclusion 683 41,800 1.9 x 22,000 = 22,000 = Factual misstatement in top stratum Basic precision Projected misstatement in lower-stratum: First largest tainting % Second largest tainting % 3% 1% 4% x 22,000 = Incremental allowance for sampling risk in lower-stratum Total estimated misstatement: 880 394** 43,757 * Confidence factors come from the 15% column in Exhibit 8.9. **See Exhibit 8.12 and the following discussion for the calculation of this value. EXHIBIT 8.12 illustration of Calculating the Incremental Allowance for Sampling Risk Projected Misstatement X Factor (Step 3) 977 + Projected Misstatement Incremental Changes in Confidence Factor (Step 2) 660 + 3.38 1.90 = 1.48 220 4.73 - 3.38 = 1.35 880 (Step 1) Incremental allowance for sampling risk: 297 1,274 (Step 4) 1,274 - 880 = 394 (Step 5) C D F | G | H I 1 VP 11.34 Brony's Bikes Monetary Unit Sampling Plan Factory Equipient Deceber 31, 2019 | E | Prepared by: Date: Revieved by: Date: 6 Lover stratur debit postings to factory equipaent : Dollar arount 8 Number of itens acquired 9 Risk of incorrect acceptance 10 Expected population deviation rate 11 Tolerable rate of deviation 12 Sample size | 13 Sampling interval 14 $12,600,000.00 1,246 5.00% 1.00% 6.00% 15 16 17 VP 11.3B 18 19 Brony's Bikes Honetary Unit Sampling Plan Factory Equipient Projected Hisstatenent Deceber 31, 2019 Prepared by: Date: Revieved by: Date: = (1) (2) (3) (6) (4) (5) Host Likely Tainting % Sampling Misstaterent (BY-AV)/BY Interval (4) x (5) Book Value iudited Value Error (BY-AV) 25 $ Number Vendor 26 27 372134 Loxley Hachine Vorks, Ltd. 28 1778927 Gerald Equipaent and Part 29 3668498 Cradle Corporation 30 6333750 Dorr's Machine Parts and 31 9873625 Johnson's Velding and Mac 32 10224680 Laidlor Parts and Repair 33 11440670 Joplin Machinery 34 12143770 Drexle Freight Handlers $1,665,800 $23,660 $985,300 $12,000 $155,700 $287,900 $1,466,800 $12,600 $145,200 $0 $512,000 SO $100,000 $125,000 $1,224,500 SO $1,520,600 $23, 660 $473,300 $12,000 $55,700 $162,900 $242,300 $12,600 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% $1,520,600 $23,660 $473,300 $12,000 $55,700 $162,900 $242,300 $12,600 $2,503,060 $2,503,060 == = = == = = == = = = == = = == = = == = = Awwww B D E 40 41 VP 11.30 Brony's Bikes Honetary Unit Sampling Plan Factory Equipient Computed Precision and Upper Nisstatenent Linit December 31, 2019 Prepared by: Date: Revieved by: Date: 44 46 TREF! 48 Basic Precision $0 49 Interval froi "P 11 3A above $0 50 Textbook Exhibit 8.9 5% coluu Increnental Alloyance for Sampling Error no ano 56 57_$ Nuber (1) (2) (3) Ranked Increnental Increnental Projected Confidence Allowance Errors Factor (1) x (2) Vendor $0 $0 SO Increnental Allowance for Sampling Risk Upper Misstatenent Linit Audit Adjustuent No. 1 $2,503,060 73 5100 Cost of Goods Sold-Grand Prix Touring Bike $378,514 74 5200 Cost of Goods Sold-Phoenix Touring Bike $361,537 75 5300 Cost of Goods Sold-Pike's Peak Mountain Bike $984,346 76 5400 Cost of Goods Sold-Hinalaya Mountain Bike $242,559 77 5500 Cost of Goods Sold-Waistliner Stationary Bike $536,103 78 1530 Factory Equipient 79 To adjust factory equipient and cost of goods sold accounts 80 for repairs erroneously debited to factory equipaent. 81 The allocation is in proportion to the relative arounts 82 of cost of goods sold, as follovs: 83 84 ACCOUNT AMOUNT NUMBER (thousands) 86 Cost of Goods Sold: 87 5100 $34,448 88 5200 $32,903 5300 $89,584 5400 $22,075 5500 $48,790 85 PERCENT 15% 14% 397 10% 21% ON $227,800 = = = = = == = 100% = = = = = == = = = = = EXHIBIT 8.8 Fixed Interval Sample Selection Customer Cumulative Book Included in Sample? Selection Amount ($) 220 (Yes) (Yes) 22,000 44,000 Book Value ($) Random start 220 2,200 22,000 880 6,128 2,800 45,023 10 8,231 16,894 2,420 24,420 25,300 31,428 34,228 79,251 79,261 87,492 104,386 Cumulative Book Plus Random Start ($) 20,000 20,220 22,420 44,420 45,300 51,428 54,228 99,251 99,261 107,492 124,386 (Yes) 66,000 & 88,000 (Yes) 110,000 1,900 807,906 827,906 EXHIBIT 8.9 Confidence Factors for Sample Evaluation 6.69 8.50 7.67 Number of Risk of Incorrect Acceptance Overstatement Misstatements 5% 10% 15% 20% 25% 30% 35% 37% 50% 3.00 2.31 1.90 1 .61 1.39 1.21 1.05 1.00 0.70 4.75 3.89 3 .38 3.00 2.70 2.442 .22 2.14 1.68 6.30 5.33 4.73 4.28 3.93 3.62 3.35 3.25 2.68 7.76 6.02 5.52 5.11 4.77 4.46 4.35 3.68 9.16 8.00 7.27 6.73 6.28 5.90 5.55 5.43 4.68 10.52 9.28 7.91 7.43 7.01 6.64 6.50 5.68 11.85 10.54 9.71 9.08 8.56 8.12 7.72 7.57 6.67 13.15 11.78 10.90 10.24 9.69 9.21 8.79 8.63 14.44 13.00 12.08 11.38 11 28 1081 10.31 9.85 9.68 8.67 15.71 14.21 13.25 12.52 11.92 11.39 10.92 10.74 9.67 16.97 15.41 14.42 13.66 13.02 12.47 11.98 11.79 10.67 18.21 16.60 15.57 14.78 14.13 13.55 1 3.04 12.84 11.67 19.45 17.79 16.72 15.90 15.22 14.63 14.09 13.89 12.67 20.67 18.96 17.86 17.02 16.32 15.70 15.14 14.93 13.67 21.89 20.13 19.00 18.13 17.40 16.77 16.20 15.98 14.67 23.10 21.30 20.13 19.24 18.49 17.84 17.25 17.02 15.67 24.31 22.46 21.26 20.34 19.58 18.90 18.29 18.06 16.67 25.50 23.61 22.39 21.44 20.66 19.97 1 9.34 19.10 17.67 18 26.70 24.76 23.51 22.54 21.74 21.03 20.38 20.14 18.67 27.88 25.91 24.63 23.64 22.81 22.09 21.43 21.18 19.67 20 29.07 27.05 25.74 24.73 23.89 23.15 22.47 22.22 20.67 Source: Audit Sampling (New York: AICPA, 2012), 155-156. AICPA audit and accounting guides by AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. Copyright 2012 Reproduced with permission of AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS in the format Textbook via Copyright Clearance Center. EXHIBIT 8.10 Total Estimated Misstatement Calculation Summary If No Misstatements Detected If Misstatements Detected Interval x confidence factor Factual misstatement in top-stratum Basic precision + Projected misstatement in lower stratum + Incremental allowance for sampling risk in lower stratum = Total estimated misstatement Amount of factual misstatement Interval x confidence factor Calculate Calculate = Basic precision Sum of the four EXHIBIT 8.11 Example of Calculation of Total Estimated Misstatement When Overstatements Are Detected Confidence Factor* Tainting Percentage Sampling Interval Conclusion 683 41,800 1.9 x 22,000 = 22,000 = Factual misstatement in top stratum Basic precision Projected misstatement in lower-stratum: First largest tainting % Second largest tainting % 3% 1% 4% x 22,000 = Incremental allowance for sampling risk in lower-stratum Total estimated misstatement: 880 394** 43,757 * Confidence factors come from the 15% column in Exhibit 8.9. **See Exhibit 8.12 and the following discussion for the calculation of this value. EXHIBIT 8.12 illustration of Calculating the Incremental Allowance for Sampling Risk Projected Misstatement X Factor (Step 3) 977 + Projected Misstatement Incremental Changes in Confidence Factor (Step 2) 660 + 3.38 1.90 = 1.48 220 4.73 - 3.38 = 1.35 880 (Step 1) Incremental allowance for sampling risk: 297 1,274 (Step 4) 1,274 - 880 = 394 (Step 5)