Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 369

Evaluating Results: Classical Variables Sampling. Kyle Berry is using mean-per-unit estimation in the audit of Leonard's inventory balances. Leonard's inventory is recorded at $240,000 and comprises 1,200 different items. Berry determined a sample size of 120 items and performed the appropriate substantive procedures and based on this sample, determined the following:

A summary of some additional parameters estimated by Berry follow:

Required:
a. What is Berry's estimate of the audited value of Leonard's inventory?
b. Calculate the precision and precision interval for Leonard's inventory. Provide a brief description of the meaning of the precision interval.
c. What is Berry's conclusion with respect to Leonard's inventory balance?
d. Using a risk of incorrect acceptance of (1) 1 percent and (2) 10 percent, calculate the precision and the precision interval for Leonard's inventory.
e. Based on your answers to (b) and (d), explain how the risk of incorrect acceptance affects the precision interval and conclusions about the fairness of the account balance.