Upper Limit on Misstatements Calculations: Monetary Unit Sampling. Clyde Billy isconducting the audit of Hoops Inc. and is examining Hoops’s inventory balances. Billy plansto select a sample of inventory items for examination and will verify quantities and performprice tests to ascertain that the items are properly recorded according to generally acceptedaccounting principles.Billy determined a sampling interval of $100,000 and, using systematic random selectiontechniques, has identified the following misstatements: Item No. Recorded Balance Audited 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 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 misstatements using theinformation 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 incorrectacceptance and the upper limit on misstatements? Provide a brief explanation about whatcauses this relationship.e. Based on the levels of the upper limit on misstatements determined in this example, whatare the advantages and disadvantages of establishing lower and higher acceptable levelsof the risk of incorrect acceptance?
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 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 |
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 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?
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