Doug Stevens, CPA is interested in testing the fairness of the ending inventory balance at an audit client. Doug has relatively little experience using statistical sampling methods and, does not like to turn anything over to random chance. Doug used a judgmental sample of selecting items for testing. He selected 26 items with a total book value of $720,000. In his sample he found a combined $80,000 in overstatement errors. The book value of inventory on the client’s record is $1,090,000. Overall materiality for the engagement is $500,000. Doug’s policy is to use 50% or less of overall materiality as tolerable misstatement for any one account.
a) What is your opinion of the method of selecting his sample?
b) Evaluate the results. Does he have sufficient evidence to conclude the balance is fairly stated?
c) Provide recommendations to Doug about how to select and evaluate a sample for testing inventory.