Response to the following problem:
You intend to use MUS as a part of the audit of several accounts for Roynpower Manufacturing Company. You have done the audit for the past several years, and there has rarely been an adjusting entry of any kind. Your audit tests of all tests of controls and substantive tests of transactions cycles were completed at an interim date, and control risk has been assessed as low. You therefore decide to use an ARIA of 10% and a ratio of expected misstatement to tolerable misstatement of 0% for all tests of details of balances. You intend to use MUS in the audit of the three most material asset balance sheet account balances: accounts receivable, inventory, and marketable securities. You feel justified in using the same ARIA for each audit area because of the low assessed control risk. The recorded balances and related information for the three accounts are as follows:
Recorded Value
Accounts receivable $3,600,000
Inventory 4,800,000
Marketable securities 1,600,000
Net earnings before taxes for Roynpower are $2,000,000. You decide that a combined misstatement of $100,000 is allowable for the client. The audit approach to be followed will be to determine the total sample size needed for all three accounts. A sample will be selected from all $10 million, and the appropriate testing for a sample item will depend on whether the item is a receivable, inventory, or marketable security. The audit conclusions will pertain to the entire $10 million, and no conclusion will be made about the three individual accounts unless significant misstatements are found in the sample.
Required:
a. Evaluate the audit approach of testing all three account balances in one sample.
b. Calculate the required sample size for a combined sample of all three accounts. Use $100,000 as the measure of tolerable misstatement for the combined test.
c. Calculate the required sample size for each of the three accounts, assuming you decide that the tolerable misstatement in each account is $100,000.
d. Assume that you select the random sample using computer software. How will you identify which sample item in the population to audit for the number 4,627,871? What audit procedures will be performed?
e. Assume that you select a sample of 200 sample items for testing and you find one misstatement in inventory. The recorded value is $987.12 and the audit value is $887.12. Calculate the misstatement bounds for the three combined accounts and reach appropriate audit conclusions.