Question: Upper Limit on Misstatements Calculations: Monetary Unit Sampling. Clyde Billy is conducting the audit of Hoops Inc. and is examining Hoops's inventory balances. Billy plans to select a sample of inventory items for examination and will verify quantities and perform price tests to ascertain that the items are properly recorded according to generally accepted accounting principles. Billy determined a sampling interval of $100,000 and, using systematic random selection techniques, has identified the following misstatements:

Item No.       Recorded Balance          Audited Balance

10-865            $ 12,600                       $ 8,400

20-954             110,000                        95,000

30-781               55,000                       44,000

40-269               80,000                       60,000

Required: a. Using a 5 percent risk of incorrect acceptance, calculate the upper limit on misstatements.

b. Provide a brief description of the meaning of the upper limit on misstatement using the information calculated in (a).

c. Reperform (a) using a risk of incorrect acceptance of 10 percent.

d. What relationship do you observe between the acceptable level of the risk of incorrect acceptance and the upper limit on misstatements? Provide a brief explanation about what causes this relationship. e. Based on the levels of the upper limit on misstatements determined in this example, what are the advantages and disadvantages of establishing lower and higher acceptable levels of the risk of incorrect acceptance?