Upper Limit on Misstatements Calculations: Monetary Unit Sampling. Clyde

Billy is conducting the audit of Hoops Inc. and is examining Hoops's inventory balances. Billy plans to select a sample of inventory items for examination and will verify quantities and perform price tests to ascertain that the items are properly recorded according to generally accepted accounting principles. Billy determined a sampling interval of $100,000 and, using systematic random selection techniques, has identified the following misstatements:

Item No.Recorded BalanceAudited Value

10-865 $ 12,600 $ 8,400

20-954 110,000 95,000

30-781 55,000 44,000

40-269 80,000 60,000

a. Using a 5 percent risk of incorrect acceptance, calculate the upper limit on

misstatements.

b. Provide a brief description of the meaning of the upper limit on misstatements using the information calculated in part (a).

c. Reperform part (a) using a risk of incorrect acceptance of 10 percent.

d. What relationship do you observe between the acceptable level of the risk of incorrect acceptance and the upper limit on misstatements? Provide a brief explanation about what causes this relationship.

e. Based on the levels of the upper limit on misstatements determined in this example, what are the advantages and disadvantages of establishing lower and higher acceptable levels of the risk of incorrect acceptance?