For each of the following populations concerning the valuation of raw- materials inventory, the client and auditor

Question:

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. Ratio estimation is being used.

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Required :

a. Distinguish between the use of interval estimation as used in this problem and hypothesis testing as used in 6-26.

b. Which of the populations would 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.

d. How would your answers compare if all information were identical, but difference estimation were being used rather than ratio estimation ?

6-26:

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

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Required :

a. Show with 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 adjusting entry.

e. How would your answers compare if all information were identical, but difference estimation were being used instead of ratio estimation ?