For each of the following populations concerning the valuation of raw- materials inventory, the client and auditor have agreed to an adjustment of the client’s recorded value equal to the amount of the point estimate if they can be confident that there will not be a material error after the adjustment. Difference estimation is being used.

Required:

a. Distinguish between interval estimation as used in this problem and hypothesis testing as used in 6-24.

b. For which of the populations would the population not be acceptable if the book value were adjusted?

c. Prepare the appropriate adjusting entries for the populations that would be acceptable after the adjustment.

6-24:

For each of the following populations concerning the valuation of raw- materials inventory, the auditor has established an allowable error for hypothesis testing using difference estimation. The auditor has also calculated actual statistical results after the audit tests have been conducted.

Required :

a. Show by means of a graph, using the appropriate decision rule, which of populations 1 through 6 should be accepted as fairly stated without audit adjustment.

b. Show with the same graph, which of populations 1 through 6 cannot be made acceptable by adjusting the client’s book value.

c. What options does the auditor have for any sample result in part b ?

d. Show with the same graph as for part a, which of populations 1 through 6 should not be accepted as fairly stated but can be made fairly stated by an adjusting entry. Prepare the minimum adjusting entry that can be made for each population.

Transcribed Image Text:

Point estimate of the population error Computed Allowable Population error (Understated book value is in parentheses) precision interval 123456 $25,000 $ (6,000) $16,000 25,000 0 24,000 25,000 (14,000) 18,000 25,000 21,000 30,000 25,000 12,000 16,000 25,000 0 27,000