Question

Only b and c. Thank you!

AP10.8 (LO 8) Evaluating a PPS sample Assume the following misstatements were found in a PPS sample: Sample Item Book Value Audit Value $ 650 540 1,900 2,200 2,800 $ 585 0 0 1,650 2,660 Required a. Calculate the projected misstatement assuming: • The sampling interval was $1,800. The sampling interval was $ 2,000. b. If a risk of incorrect acceptance of 15% is specified in the sample design, the sampling interval is $2,000, and five misstatements are found as enumerated above, calculate: • Basic precision. • The incremental allowance for sampling risk. The upper misstatement limit. c. If tolerable misstatement were $50,000 and expected misstatement were $10,000, what conclusion would you reach based on your results in (b) above?

Answer 1

Projected misstatement, when sampling interval is $1,800, is $4570.

Projected misstatement, when sampling interval is $2,000, is $4,890

Basic precision = $17,000

Incremental allowance for sampling risk = $1628

Upper limit on misstatement = $23,518

Please see the explanation below.

Explanation IS IN THE IMAGE

. SAMPLING INTERVAL = $2000 Audit value Misstatement Taints Sample interval Book value Projected misstatement 650 65 585 200 2000 540 540 2000 2000 1900 1900 2000 2000 1650 2200 550 550 2800 2660 140 140 PROJECTED MISSTATEMENT = 4890 Projected misstatement, when sampling interval is $2,000, is $4,890. Taints = audit value/book value Projected misstatement = Taint value*Sample interval Taint value is calculated for those whose book value is less than the sampling interval.

• Basic precision

Sampling interval = $2,000

By using PPS sampling table, where risk of incorrect acceptance is 15% and number of misstatements is five, the reliability factor is 8.5.

Basic precision = Reliability factor * Sampling interval = 8.5 * $2,000 = $17,000.

. Incremental allowance for sampling risk Firstly, ranking the misstatement from highest to lowest for those sample which are less than the sampling interval of 2000. According to rank, Book value Audit value Reliability factor increment increment - 1 projected misstatement increment allowance 2800 2660 1.9 0.9 1650 1.9 2200 1900 3.38 0.48 2000 585 4.72 200 650 0.34 540 0.3 6.02 2000 600 Incremental allowance for sampling risk = $1628 The above reliability factor is according to 15% risk of incorrect acceptance, for number of misstatement, as given in table from source above.

• Upper limit on misstatement = projected misstatement + basic precision + incremental allowance for sampling risk = $4890 +$17000+$1628 = $23,518

C.If tolerable misstatement is $50,000, then the PPS audit sampling should be accepted as upper limit limit on misstatement is $23,528 which is less than tolerable misstatement