Bicycles Biltrite 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 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 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), and (3) expected misstatement in the account
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 level.
4) What factor determines whether a tainting percentage appears in column 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 value audited value)/book value.
5) Please see Spreadsheet
6) Print the Document
7) Explain the meaning of the following amounts:
Basic The Precision upper misstatement limit when no misstatements are detected in an
MUS sample; computed by multiplying the sampling interval by the reliability factor.
Incremental allowance for sampling error A provision for additional sampling error
when misstatements are detected in an MUS sample. Factors are determined from tables
derived from the underlying sampling distribution.
Allowance for sampling risk The difference between a sample estimate and the projected
population characteristic at a specified sampling risk. This allowance is also the difference
between the expected error rate and the tolerable deviation rate.
Upper misstatement limit (UML) The maximum dollar overstatement that might exist in
a population, given the sample errors noted, at the specified level of detection risk.
8) Evaluate the sampling results. Do they support Dericks 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 Dericks 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.