The CPA firm of Abernethy and Chapman has decided to observe the physical inventory at only two of Lakeside's six stores. Given the materiality of the inventory balance, was this decision appropriate?
Added by Katherine G.
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Materiality is the magnitude of an omission or misstatement that would influence the economic decisions of users taken on the basis of the financial statements. Show more…
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What factors should be considered when determining the sample size for tests of details — in this instance, the accounts receivable balance? What factors should be considered when determining the sampling method (e.g., random, monetary unit sample)? You are the experienced assistant auditor for Fuel Pro (the "Company"), whose audit is subject to the standards of the AICPA. The company develops, manufactures, and distributes fitness beverages. Your engagement team has identified risks of material misstatement related to the existence, valuation and allocation, and rights and obligations assertions of accounts receivable, specifically the risks of material misstatement that the client has recorded in sales and accounts receivable for sales and shipments that are not valid or are recorded at the incorrect amount. Your field senior has assigned you to test the accounts receivable balance by sampling and confirming balances with individual customers, which is a common audit test to address these risks of material misstatement. As part of your risk assessment procedures, you obtained an understanding of the Company's accounting policy, processes, and controls regarding the accounts receivable balance by performing procedures (including inquiries of management and process owners) and walkthroughs of the processes related to accounts receivable. As a result of these procedures, you understand that the accounts receivables balance is relatively homogeneous and consists of a high volume of low-dollar value transactions. You decide to use data analytics to obtain fact-based evidence and to corroborate your understanding of the accounts receivables balance. Based on your analysis, you identified one statistical outlier of $2 million, while the remaining balance aggregated to $20 million, which is made up of approximately 2,500 homogeneous transactions. Upon further inquiries about the $2 million transaction, you determined that it is a related-party transaction. Based on your analysis of the accounts receivable balance, you define the customer balance as the sampling unit. You determine that any balances greater than performance materiality should be selected for testing and therefore select the $2 million related-party transaction. You then determine that you would statistically sample the remaining population. The other relevant factors are as follows: - Performance materiality is $1 million. - Clearly trivial threshold is $70,000. - The population size, excluding the $2 million selected balance, is $20 million (no other items are above performance materiality). - The level of risk is determined to be "higher." - You are not relying on the operating effectiveness of internal controls. The client provided the accounts receivable population to you in electronic format. - Through the use of data analytics, you noted that the population had similar, positive value characters.
Sri K.
For unrecorded liabilities, your staff tested invoices received in the first two weeks of January (the primary population). Your staff identified 11 key items, covering 50% of the value of all invoices in the primary population. Your staff came to you and asked for guidance on factors that influence the size of the representative samples for tests of details when using judgmental sampling. Which one of the following conditions would lead to a larger representative sample size? There are no other individually large invoice amounts in the remaining population and the remaining population is 10X of TE There are no other individually large invoice amounts in the remaining population, and we have minimal CRA related to the completeness assertion of liability account After testing those 11 key items, the items in the remaining population do not reveal specific risk characteristics. We didn’t identify any control deficiencies addressing the cut-off risk and no prior year misstatements identified from testing for unrecorded liabilities.
Aparna S.
McMullen and Mulligan, CPAs, were conducting the audit of Cusick Machine Tool Company for the year ended December 31. Jim Sigmund, senior-in-charge of the audit, plans to use MUS to audit Cusick’s inventory account. The balance at December 31 was $9,000,000. Required: a. Based on the following information, compute the required MUS sample size and sampling interval using Table 8-5: (Use the tables, not IDEA, to solve for these problems. Round your interval answer to the nearest whole number.) Tolerable misstatement = $360,000 Expected misstatement = $90,000 Risk of incorrect acceptance = 5% b. Nancy Van Pelt, staff accountant, used the sample items selected in part (a) and performed the audit procedures listed in the inventory audit program. She notes the following misstatements: (Use the tables, not IDEA, to solve for these problems. Round tainting factor to two decimal places. Do not round other intermediate calculations. Round your final answer to the nearest dollar amount.) Misstatement Number Book Value Audit Value 1 $ 10,000 $ 7,500 2 9,000 6,000 3 60,000 0 4 800 640 Using this information and Table 9-3, calculate the upper misstatement limit. What conclusion should Van Pelt make concerning the inventory? c. Assume that, in addition to the four misstatements identified in part (b), Van Pelt had identified the following two understatements: (Use the tables, not IDEA, to solve for these problems. Negative amounts should be indicated with minus sign. Round your intermediate calculations to 3 decimal places. Round the final answer to nearest dollar amount.) Misstatement Number Book Value Audit Value 5 $ 6,000 $ 6,500 6 750 800 Calculate the net projected population misstatement.
Anand J.
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