Chapter 9, Problem 9.23P

a

To determine

Introduction:

Monetary Unit Sampling (MUS): It is a method used to gauge the amount of misstatement in financials. MUS helps auditors to overcome difficulties in other sampling systems. MUS is normally used for testing accounts related to monetary assets.

The sample size and sampling interval for the given information.

Answer to Problem 9.23P

Sample size = 156

Explanation of Solution

Tolerable misstatement :$360,000

Expected misstatement :$90,000

Desired confidence level :95%

Recorded amount of accounts receivable: $9,000,000

Computation of Sample size:

  $\begin{array}{c}\text{Tolerable}\text{misstatement}\text{percent}=\frac{\text{Tolerable}\text{misstatement}}{\text{Recorded}\text{}\text{Accounts}\text{receivable}}\\ =\frac{\$360,000}{\$9,000,000}\\ =0.04\end{array}$

  $\begin{array}{c}\text{Expected}\text{misstatement}\text{percent}=\frac{\text{Expected}\text{misstatement}}{\text{Recorded}\text{}\text{Accounts}\text{receivable}}\\ =\frac{\$90,000}{\$9,000,000}\\ =0.01\end{array}$

When tolerable misstatement is 4% and the expected misstatement is 1% sample size can be determined using table 8-5 as 156.

Computation of sampling interval:

b

To determine

Introduction:

Monetary Unit Sampling (MUS): It is a method used to gauge the amount of misstatement in financials. MUS helps auditors to overcome difficulties in other sampling systems. MUS is normally used for testing accounts related to monetary assets.

The Upper misstatement limit UML for the following misstatements.

Answer to Problem 9.23P

UML for misstatement:

1. $43,269
2. $32,365
3. $86,538
4. $16,153

Explanation of Solution

To calculate UML first sampling interval is required

  $\begin{array}{c}\text{Sampling interval}=\frac{\text{Accounts receivable}}{\text{Sample Size}}\\ =\frac{\$9,000,000}{156}\\ =\$57,692\end{array}$

Tolerable misstatement :$360,000

Expected misstatement :$90,000

Desired confidence level :95%

Recorded amount of accounts receivable : $9,000,000

Sample size :156

Sampling interval :$57,692

Computation of UML:

Computation of tainting factor:

misstatements	Book value	Audit value	Difference	Tainting factorDifference ÷ book value
1	$10,000	$7,500	$2,500	0.25
2	9,000	6,000	3,000	0.33
3	60,000	0	60,000	1
4	800	640	160	0.2

Computation of Upper Misstatement limit:

Misstatement	Tainting Factor1	Sampling interval2	Projected Misstatement3(1 × 2)	95% Misstatement Factor. 4	UML5(3 × 4)
1	0.25	$57,692	$14,423	3	$43,269
2	0.33	57,692	19,038	1.7	32,365
3	1	57,692	57,692	1.5	86,538
4	0.2	57,692	11,538	1.4	16,153
Total			$102,691		$178,325

The conclusion of whether inventory account balance is materially misstated is made by comparing the tolerable misstatement to the UML. As UML is $178,325 and it is less than the tolerable misstatement of $360,000, it can be concluded that the account balance is not materially misstated.

c

To determine

Introduction:

Monetary Unit Sampling (MUS): It is a method used to gauge the amount of misstatement in financials. MUS helps auditors to overcome difficulties in other sampling systems. MUS is normally used for testing accounts related to monetary assets.

The net projected population misstatement.

Answer to Problem 9.23P

Projected population misstatement is $6,750,000

Explanation of Solution

The projected population misstatement can be calculated by computing ratio of misstatements to total dollars sampled that is

  $\text{Ratio of misstatements = audited difference ÷ book value}$

misstatements	Book value	Audit value	Difference
1	$10,000	$7,500	$2,500
2	9,000	6,000	3,000
3	60,000	0	60,000
4	800	640	160
5	6,000	6,500	-500
6	750	800	-50
Total	86,550		65,110

  $\begin{array}{l}\text{Ratio of misstatements = 65,110 ÷ 86,550}\\ =0.75\end{array}$

  $\begin{array}{c}\text{Projected population misstatement}\text{=}\text{Ratio of misstatement}\times \text{ Account balance}\\ \text{=0}\text{.75}\times \text{\$9,000,000}\\ \text{=\$6,750,000}\end{array}$