Part 2. Determine sample size based on the following judgments. This can be done using IDEA or it can be done manually. (Round sample size to the nearest whole number.) a. Tolerable misstatement is assessed at $325,000. b. The risk of incorrect acceptance is assessed at 37%. C. Expected misstatement is assessed at $100,000. Whether the auditor uses nonstatistical sampling or statistical sampling, the same basic factors are considered in determining sample size. Once the auditor has made professional judgments about these factors, the following formula is used to determine sample size in PPS sampling. (BV x RF) no (TM-EM XEF) where BV = book value of population tested RF = reliability factor for the specified risk of incorrect acceptance assuming zero overstatements (see Reliability Factors for Overstatements table below) TM = tolerable misstatement EM = expected misstatement (see Expansion Factors for Anticipated Misstatements table below) EF = expansion factor for anticipated misstatement 37% 1.00 2.14 3.25 Document your determination of sample size. RELIABILITY FACTORS FOR OVERSTATEMENTS Number of Risk of Incorrect Acceptance Overstatements 1% 5% 10% 4.61 3.00 2.31 6.64 4.75 3.89 8.41 6.30 5:33 10.057.76 6.69 11.61 9.16 8.00 13.11 10.52 9.28 14.57 11.85 10.54 16.00 13.15 11.78 17.41 14-44 13.00 18.79 15.71 14.21 20.15 16.97 15.41 4-34 13% 2.00 3.56 4.94 6.25 7.53 8.77 10.00 11.21 12.41 13.59 14.77 15% 1.90 3-38 4.72 6.02 7.27 8.50 9.71 10.90 12.08 13.25 14.42 20% 1.16 3.00 4.28 5.52 6.73 7.91 9.08 10.24 11.38 12.52 13.66 25% 1.39 2.70 3.93 5.11 6.28 7.43 8.56 9.69 10.81 11.92 13.02 30% 1.21 2.44 3.62 4.77 5.90 7.01 8.12 .21 10.31 11.39 1 2.47 9 5.43 6.49 7.56 8.63 9.68 10.74 11.79 EXPANSION FACTORS FOR EXPECTED MISSTATEMENTS Risk of Incorrect Acceptance 1% 5% 10% 15% 20% 25% 30% 37% Expansion factor 1.90 1.60 1.50 1.40 1.30 1.25 1.20 1.15 Part 4. Select a sample and apply audit procedures. Select the PPS sample using the sample size determined in Part 2 above. Choose your own random start based on the size of the sampling interval (each student should have a different random start). Determine the book value and audited value for each item in your unique sample. Document your sample, the book values and the audited values. Part 5. Compute the upper misstatement limit (UML) for the sample you selected. Follow the procedures outlined in the chapter. You can use the Reliability Factors for Overstatements table to determine the factors to use for the "Upper Misstatement Limit." Document your calculation of UML. Part 6. Evaluate your results both quantitatively and qualitatively. Develop both a statistical conclusion and an audit conclusion based on your sample. Document your conclusions about your inventory tests. Part 2. Determine sample size based on the following judgments. This can be done using IDEA or it can be done manually. (Round sample size to the nearest whole number.) a. Tolerable misstatement is assessed at $325,000. b. The risk of incorrect acceptance is assessed at 37%. C. Expected misstatement is assessed at $100,000. Whether the auditor uses nonstatistical sampling or statistical sampling, the same basic factors are considered in determining sample size. Once the auditor has made professional judgments about these factors, the following formula is used to determine sample size in PPS sampling. (BV x RF) no (TM-EM XEF) where BV = book value of population tested RF = reliability factor for the specified risk of incorrect acceptance assuming zero overstatements (see Reliability Factors for Overstatements table below) TM = tolerable misstatement EM = expected misstatement (see Expansion Factors for Anticipated Misstatements table below) EF = expansion factor for anticipated misstatement 37% 1.00 2.14 3.25 Document your determination of sample size. RELIABILITY FACTORS FOR OVERSTATEMENTS Number of Risk of Incorrect Acceptance Overstatements 1% 5% 10% 4.61 3.00 2.31 6.64 4.75 3.89 8.41 6.30 5:33 10.057.76 6.69 11.61 9.16 8.00 13.11 10.52 9.28 14.57 11.85 10.54 16.00 13.15 11.78 17.41 14-44 13.00 18.79 15.71 14.21 20.15 16.97 15.41 4-34 13% 2.00 3.56 4.94 6.25 7.53 8.77 10.00 11.21 12.41 13.59 14.77 15% 1.90 3-38 4.72 6.02 7.27 8.50 9.71 10.90 12.08 13.25 14.42 20% 1.16 3.00 4.28 5.52 6.73 7.91 9.08 10.24 11.38 12.52 13.66 25% 1.39 2.70 3.93 5.11 6.28 7.43 8.56 9.69 10.81 11.92 13.02 30% 1.21 2.44 3.62 4.77 5.90 7.01 8.12 .21 10.31 11.39 1 2.47 9 5.43 6.49 7.56 8.63 9.68 10.74 11.79 EXPANSION FACTORS FOR EXPECTED MISSTATEMENTS Risk of Incorrect Acceptance 1% 5% 10% 15% 20% 25% 30% 37% Expansion factor 1.90 1.60 1.50 1.40 1.30 1.25 1.20 1.15 Part 4. Select a sample and apply audit procedures. Select the PPS sample using the sample size determined in Part 2 above. Choose your own random start based on the size of the sampling interval (each student should have a different random start). Determine the book value and audited value for each item in your unique sample. Document your sample, the book values and the audited values. Part 5. Compute the upper misstatement limit (UML) for the sample you selected. Follow the procedures outlined in the chapter. You can use the Reliability Factors for Overstatements table to determine the factors to use for the "Upper Misstatement Limit." Document your calculation of UML. Part 6. Evaluate your results both quantitatively and qualitatively. Develop both a statistical conclusion and an audit conclusion based on your sample. Document your conclusions about your inventory tests