L12 Notes_Part_7 - $ XBar = $60,000 TM = $50,000 UML...

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Steps in MUS Sampling Application Evaluation 6. Calculate the projected misstatement and the upper limit on misstatement 7. Draw final conclusions. The misstatements detected in the sample must be projected to the population. Consider the following information about the inventory account balance of an audit client: Book value of inventory account balance 3,000,000 $ Book value of items sampled 100,000 $ Audited value of items sampled 98,000 Total amount of overstatement observed in audit sample 2,000 $
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The ratio of misstatement in the sample is 2% ($2,000 ÷ $100,000) Applying the ratio to the entire population produces a best estimate of misstatement of inventory of $60,000. ($3,000,000 × 2%) Book value of inventory account balance 3,000,000 $ Book value of items sampled 100,000 $ Audited value of items sampled 98,000 Total amount of overstatement observed in audit sample 2,000
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Unformatted text preview: $ XBar = $60,000 TM = $50,000 UML > XBar > TM Therefore, reject the balance as being fairly stated. ETF = the expected tainting factor or average percent of misstatement assumption usually = 1.00 UML = upper misstatement limit x j = recorded value of item j BV = total population recorded dollars a j = audited value of item j R (Poisson rate from table) d j = x j-a j I = Interval = BV/n Is the balance fairly stated? => Is UML < TM? We need UML UML = Projected Misstatement (PM) + Allowance for Sampling Risk Allowance for Sampling Risk = Basic Precision(BP) + Incremental Allowance(IA) UML = BP + IA + PM or more formally BP = BV/n*R *ETF= I * R *ETF = TM (AM*EEF) n IA = I * Sum (R j R i-1- 1)*(d i /x i ) for all x i < (BV/n) i=1 where we order the d i as follows: (d 3 /x 3 ) < (d 2 /x 2 ) < d 1 /x 1 Upper Misstatement Limit Calculation...
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L12 Notes_Part_7 - $ XBar = $60,000 TM = $50,000 UML...

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