The accounting firm of Johnson & Johnson has decided to design a non-statistical sample to price test the inventory of ABC Company as December 31st. As of December 31st, there were 3,180 items included in the inventory listing with a balance of $7,220,000. The inventory population can be segregated into the following strata:

Number and Size of Accounts Book Value of Stratum

20 items > $70,000 1,430,000

360 items > $10,000 4,240,000

2, 800 items < $10,000 1,550,000

Wendy Smith, senior-in-charge of the audit, has made the following decisions:

-Based on the results of the tests of controls and risk assessment procedures, the company has elected not to rely on internal controls and the desired confidence level is high.

-The tolerable misstatement allocated to accounts receivable is $175,000, and the expected misstatement is $75,000.

- All the items greater than $70,000 will be audited.

Assessment of RMM Desired Level of Confidence: High Desired Level of Confidence: Moderate Desired Level of Confidence: Low

High 3.0 2.3 2.0

Moderate 2.3 1.6 1.2

Low 2.0 1.2 1.0

Required Questions

1. Using the nonstatistical sampling formula, compute the suggested sample size for this test.

2. Provide two specific ways to reduce your sample size.

3. Smith tested the selected inventory items and noted the following results:

Stratum Book Value of Stratum Book Value of Sample Audit Value of Sample Amount of Over-Statement

>$70,000 1,430,000 1,430,000 1,420,000 10,000

>$10,000 4,240,000 1,240,000 1,225,000 15,000

<$10,000 1,550,000 150,000 149,000 1,000

4.

Using ratio projection, what is the total projected misstatement? What conclusion should Smith make concerning the inventory balance?