Question :

You have been assigned the task of testing the accuracy of the final inventory compilation for Mt. Hood Furniture. You may consider that you have individually observed the inventory and that you are satisfied that the inventory was accurately counted. Thus, you need to test that quantities were precisely transcribed to the final accumulation and valuation of inventory and that the inventory is properly priced and accumulated. The table starting on page 617 presents the audited values associated with Mt. Hood's pricing and accumulation of all items in inventory. The book values will be provided to you by your professor. You may suppose that you have performed the tests to evaluate the proper pricing for raw materials, work in process, and finished goods. The student should understand that the auditor will usually obtain this information only for the items included in the sample.

Required

1. Check the audit objectives that are accomplished by this test.

2. Evaluate sample size based on the subsequent 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. Prepare a scenario that is consistent with setting the risk of incorrect acceptance at 37 %.

4. Choose a PPS sample of the above inventory population using the sample size determined in above.

5. Describe the tests that you would perform to test the correctness of pricing of raw materials, work in progress, and finished goods.