Problem 9-23a McMullen and Mulligan, CPAs, were conducting the audit of Cusick Machine Tool Company for the year ended December 31. Jim Sigmund, senior-in-charge of the audit, plans to use MUS to audit Cusick's inventory account. The balance at December 31 was $9,000,000. Required: a. Based on the following information, compute the required MUS sample size: Tolerable misstatement =$360,000 Expected misstatement =$90,000 Risk of incorrect acceptance =5% Steps in MUS Application Planning 1. Determine the test objectives. 2. Define the population characteristics: - Define the population - Define the sampling unit - Define a misstatement 3. Determine the sample size, using the following inputs: - Desired confidence level - Tolerable misstatement - Expected population misstatement - Population size Performance 4. Select sample items. 5. Perform the auditing procedures. Evaluation 6. Calculate the projected misstatement and the upper limit on misstatement. 7. Draw final conclusions. Book Example: Calculate the Projected Misstatement and the ULM Basic Precision using the Table If no misstatements are found in the sample, the best estimate of the population misstatement would be zero An W2 m $26,8823.0=$80,646 upper misstatement limit Calculate the Projected Misstatement and the ULM Misstatements Detected In the sample, the following misstatements were found: $3,284$21,893=15% Because the Axa balance of $32,549 is greater than the interval of $26,882, no sampling risk is added. Since all the dollars in the large accounts are audited, there is no sampling risk associated with large accounts. Calculate the Projected Misstatemen and the ULM Computed Upper Misstatement Limit We compute the upper misstatement limit by calculating basic precision and ranking the detected misstatements based on the size the tainting factor from the largest to the smallest. UML for Good Hospital is (0.15$26,8821.4=$5,645) Draw Final Conclusions We compare the tolerable misstatement to the upper misstatement limit. - If the upper misstatement limit is tolerable misstatement - Conclude that the balance is materially misstated - Auditor has 4 options in this scenario 1. Increase the sample size 2. Perform other substantive procedures 3. Request that management adjust the account balance 4. If management refuses to adjust, consider issuing a qualified or an adverse cpinion. McMullen and Mulligan, CPAs, were conducting the audit of Cusick Machine Tool Company for the year ended December 31. Jim Sigmund, senior-in-charge of the audit, plans to use MUS to audit Cusick's inventory account. The balance at December 31 was $9,000,000. b. Nancy Van Pelt, staff accountant, used the sample items selected in part (a) and performed the audit procedures listed in the inventory audi program. She notes the following misstatements: Using this information, calculate the upper misstatement limit. What conclusion should Van Pelt make concerning the inventory? Problem 9-23a McMullen and Mulligan, CPAs, were conducting the audit of Cusick Machine Tool Company for the year ended December 31. Jim Sigmund, senior-in-charge of the audit, plans to use MUS to audit Cusick's inventory account. The balance at December 31 was $9,000,000. Required: a. Based on the following information, compute the required MUS sample size: Tolerable misstatement =$360,000 Expected misstatement =$90,000 Risk of incorrect acceptance =5% Steps in MUS Application Planning 1. Determine the test objectives. 2. Define the population characteristics: - Define the population - Define the sampling unit - Define a misstatement 3. Determine the sample size, using the following inputs: - Desired confidence level - Tolerable misstatement - Expected population misstatement - Population size Performance 4. Select sample items. 5. Perform the auditing procedures. Evaluation 6. Calculate the projected misstatement and the upper limit on misstatement. 7. Draw final conclusions. Book Example: Calculate the Projected Misstatement and the ULM Basic Precision using the Table If no misstatements are found in the sample, the best estimate of the population misstatement would be zero An W2 m $26,8823.0=$80,646 upper misstatement limit Calculate the Projected Misstatement and the ULM Misstatements Detected In the sample, the following misstatements were found: $3,284$21,893=15% Because the Axa balance of $32,549 is greater than the interval of $26,882, no sampling risk is added. Since all the dollars in the large accounts are audited, there is no sampling risk associated with large accounts. Calculate the Projected Misstatemen and the ULM Computed Upper Misstatement Limit We compute the upper misstatement limit by calculating basic precision and ranking the detected misstatements based on the size the tainting factor from the largest to the smallest. UML for Good Hospital is (0.15$26,8821.4=$5,645) Draw Final Conclusions We compare the tolerable misstatement to the upper misstatement limit. - If the upper misstatement limit is tolerable misstatement - Conclude that the balance is materially misstated - Auditor has 4 options in this scenario 1. Increase the sample size 2. Perform other substantive procedures 3. Request that management adjust the account balance 4. If management refuses to adjust, consider issuing a qualified or an adverse cpinion. McMullen and Mulligan, CPAs, were conducting the audit of Cusick Machine Tool Company for the year ended December 31. Jim Sigmund, senior-in-charge of the audit, plans to use MUS to audit Cusick's inventory account. The balance at December 31 was $9,000,000. b. Nancy Van Pelt, staff accountant, used the sample items selected in part (a) and performed the audit procedures listed in the inventory audi program. She notes the following misstatements: Using this information, calculate the upper misstatement limit. What conclusion should Van Pelt make concerning the inventory