Question

3

Probleml940 LU ), JUJ In the audit of Potomac Mills, the auditors wish to test the costs assigned to manufactured goods. During the year, the company has produced 2.400 production lots with a total recorded cost of $6.5 million. The auditors select a sample of 200 production lots with an aggregate book value of $620,000 and vouch the assigned costs to the supporting documentation. Their audit discloses misstatements in the cost of 52 of the 200 production lots, after adjustment for these misstatements, the audited value of the sample is $582,800 Required: a. Compute the estimate of the total cost of production lots manufactured during the year using each of the following sampling plans (Do not compute the allowance for sampling risk or the risk of incorrect acceptance of the estimates.) (Do not round your intermediate calculations. Enter your answers in dollars and not in millions of dollars.) (1) Mean per-unit estimation (2) Ratio estimation (3) Difference estimation

Answer 1

1 Mean per unit estimation =$5,82,800 / 200 = $2,914 per lot Estimated total Audited Value = 2,400 lots * $2,914 =$69,93,600 2 Ratio Estimation Estimated Ration of Audited Value to Book Value = $5,82,800 / $6,20,000 = 94% Estimated total Audited Value = $6,500,000 * 94% = $6,110,000 3 Difference Estimation Estimated average difference in the audit value and the book value= ($5,82,800 - $6,20,000) / 200 = -$186 per lot Estimated total difference = $186 * 2,400 lots = $446,400 Estimated total audited value = $6,500,000 - $446,400 = $6,053,600