Question: 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 Balance Audited Balance
10-865 $ 12,600 $ 8,400
20-954 110,000 95,000
30-781 55,000 44,000
40-269 80,000 60,000
Required: 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 misstatement using the information calculated in (a).
c. Reperform (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?