Audit Sampling Case Memo

Memorandum

Date: May 7th, 2012

To: John Smith, Audit Partner

From: Audit Team “C”

Subject: Audit Sampling Case Memo

John,

After performing an evaluation for accuracy of final inventory compilation of Mt. Hood Furniture, we have made the following conclusions. Assume that the conclusions made were after testing of the inventory that was accurately valued and transcribed. The objective of performing this test it to obtain evidence, that quantities are accurately recorded for the final accumulation and valuation of the inventory. This would ensure that the inventory is correctly priced and accumulated (Boynton, 2006).

The sample size is based on the following audit judgments:

1. Tolerable misstatement has been assessed to be $325,000

2. Risk of incorrect acceptance has been assessed at 37%

3. Anticipated misstatement has been assessed at $100,000

After determining the sample size of the audit, the following formula was used to determine the sample size: n= BV*RF / [TM-(AM*EF)]

The BV was determined to be $6,753,764. Based on the figure 13.5 found in the text, the Risk of Incorrect Acceptance at 37% means the Reliability Factor is 1.00. The TM was defined as $325,000 and the AM was defined at $100,000. Based on the figure 13.6 from the text, the Risk of Acceptance is shown at 37% leads to an Expansion Factor of 1.15. Putting all of the information into the formula

(n = $6,753,764*1.00/[$325,000-($100,000*1.15)] = 32) the sample size can be determined at 32.

Our next step in the audit process was to create a scenario that is consistent for setting the risk of Incorrect Acceptance at 37%. In setting the risk of Incorrect Acceptance, the auditor determines whether to accept a high or a low risk of incorrect acceptance of the PPS sample. According to the text “Higher reliability and expansion factors result in a larger sample size”. The scenario in our case is that the auditor accepts a high risk of incorrect acceptance at a rate of 37% by concluding that the inherent risk is at the maximum, control risk is low, other audit risk procedures should take place which combine to each other to provide him assurance for the book value is not materially misstated when tested. In making such determination, the auditor should have used the audit risk model, the experience, and our professional judgment. In our case, the risk of incorrect acceptance is 37% and the reliability factor is 1.00. The risk exposure is rather high in this instance. A low Risk Factor