Wilson and Jones are auditing the 31 December 20X1 inventory of Sparks Ltd, a distributor of electronic parts. They have already performed procedures to satisfy themselves that

(1) a computer print-out listing stock at year-end in ascending sequence by stock number and lot number is complete, (2) the quantities shown thereon are correct, (3) the extensions of quantity times price are accurate, (4) the listing is properly added, and (5) the total agrees with the general ledger closing stock account balance.

As the next step, Wilson and Jones decide to use a non-statistical sample to test the pricing of the stock. They plan to perform this test by checking prices to (1) suppliers’ invoices and (2) current price lists provided by suppliers. The closing stock consists of 3,000 stock items with a total recorded value of £1,900,000. A perpetual stock record is maintained for each stock item. Additionally, a stock tag showing the quantity on hand at year-end is on file for each item.

Wilson and Jones agree that a misstatement of £85,000 or more in the stock balance, when combined with misstatements in other accounts, might result in material misstatement of the financial statements.

Required

(a) To what component of audit risk does the stock pricing test relate?

(b) What factors should influence Wilson and Jones’ determination of sample size?

(c) What should the sampling unit be, and how should the sample items be selected?