Question

13-36 (Mt. Hood Furniture—PPS sampling problem) You have been assigned the task of testing
the accuracy of the final inventory compilation for Mt. Hood Furniture. You may assume
that you have separately observed the inventory and that you are satisfied that the inventory
was accurately counted. However, you need to test that quantities were accurately
transcribed to the final accumulation and valuation of inventory and that the inventory is
correctly priced and accumulated. The table beginning on page 617 presents the audited
values associated with Mt. Hood’s pricing and accumulation of all items in inventory.Required
1. Identify the audit objectives that are accomplished by this test.
2. Determine sample size based on the following audit judgments.
a. Tolerable misstatement is assessed at $325,000.
b. The risk of incorrect acceptance is assessed at 37 percent.
c. Anticipated misstatement is assessed at $100,000.
3. Develop a scenario that is consistent with setting the risk of incorrect acceptance at 37
percent.
4. Select a PPS sample of the above inventory population using the sample size determined
in (2) above.
5. Explain the tests that you would perform to test the correctness of pricing of raw materials,
work in progress, and finished goods. (The student may wish to consult Chapter 16.)
6. Determine the amount of projected population misstatement based on your sample.
7. Considering your quantitative and qualitative results, develop a statistical conclusion
and an audit conclusion based on your sample.