Question

Kyle Berry is using mean- per- unit estimation in the audit of Leonard’s inventory balances. Leonard’s inventory is recorded at $ 240,000 and comprises 1,200 different items. Berry determined a sample size of 120 items and performed the appropriate substantive procedures and based on this sample, determined the following:
Average audited value (per item) $ 204 Standard deviation of audited values $ 22
A summary of some additional parameters estimated by Berry follow:
Tolerable misstatement $ 17,500 Expected misstatement $ 7,500 Risk of incorrect acceptance 5% Risk of incorrect rejection 10%
Average audited value (per item).... $ 204
Standard deviation of audited values.. $ 22

A summary of some additional parameters estimated by Berry follow:
Tolerable misstatement........ $ 17,500
Expected misstatement ........ $ 7,500
Risk of incorrect acceptance...... 5%
Risk of incorrect rejection....... 10%

Required:
a. What is Berry’s estimate of the audited value of Leonard’s inventory?
b. Calculate the precision and precision interval for Leonard’s inventory. Provide a brief description of the meaning of the precision interval.
c. What is Berry’s conclusion with respect to Leonard’s inventory balance?
d. Using a risk of incorrect acceptance of (1) 1 percent and (2) 10 percent, calculate the precision and the precision interval for Leonard’s inventory.
e. Based on your answers to (b) and (d), explain how the risk of incorrect acceptance affects the precision interval and conclusions about the fairness of the account balance.



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  • CreatedOctober 27, 2014
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