Biltrite Bicycles Inc. – Module IV MUS Sampling – Factory Equipment Additions By: Ernst & Young 1) What is the objective of performing this test? What is the sampling unit? What is the population? The objective of performing this test is to determine the extent of misstatements in classifying expenditures as repairs and maintenance expense expense or factory equipment additions. The sampling unit is dollars. The population is $12,600,000.
2) Calculate the sample size and sampling interval assuming Derick has set the following parameters: Risk of incorrect acceptance acceptance – 5%; Anticipated misstatement - $100,000; Tolerable misstatement $640,000. The sampling interval = 160,000 The sample size = 79 3) What factors did he consider in setting these parameters? The design of an MUS sample requires the auditor to determine (1) detection risk, (2) tolerable misstatement (based on materiality), materiality), and (3) expected misstatement misstatement in the account balance. balance. The use of detection risk as sampling risk in an MUS sample is based on the view that non-sampling risk has been reduced to a negligible negligible level. 4) What factor determines whether a “tainting percentage” appears in c olumn 4? If the book value of the sample is less than the sampling interval, than the tainting percentage is zero. If however, the book value of the sample is larger than the sampling interval, than the tainting percentage is equal to the (book (book value – audited audited value)/book value. 5) Please see Spreadsheet 6) Print the Document 7) Explain the meaning of the following amounts: The upper misstatement limit when no misstatements are detected in an MUS Basic Precision – The sample; computed by multiplying the sampling interval by the reliability factor. A provision for additional sampling error when Incremental allowance for sampling error – A misstatements are detected in an MUS sample. Factors are determined from tables tables derived from the underlying sampling distribution. distribution. – The The difference between a sample estimate and the projected Allowance for sampling risk – population characteristic characteristic at a specified sampling risk. risk. This allowance is also the the difference between the expected error rate and the tolerable deviation rate.
The maximum dollar overstatement that might exist in a Upper misstatement limit (UML) – The population, given the sample errors noted, at the specified specified level of detection risk. risk.
8) Evaluate the sampling results. Do they support Derick’s concerns regarding possible material misstatement? Note the audit adjustment based on misstatements discovered while examining the sample. Is this adjustment adequate to bring the population into acceptable bounds? If not, what alternate actions might you choose to pursue, based on the sampling results. The sampling results DO support Derick’s concerns regarding possible material misstatement. The audit adjustment given in the supporting documents is not adequate to bring the population into acceptable bounds. I would suggest Derick use the results found during the MUS sampling to create the correct entry required to bring the accounts to acceptable bounds.
