(solution) Case 17-34 (objective 17-3) You are doing the audit of Peckinpah

(solution) Case 17-34 (objective 17-3) You are doing the audit of Peckinpah

Case 17-34 (objective 17-3) You are doing the audit of Peckinpah Tire and Parts, a wholesale auto parts company.  You have decided to use monetary unit sampling (MUS) for the audit of accounts receivable and inventory.  The following are the recorded balances:

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          Accounts Receivable    $12,000,000

           Inventory                        $23,000,000

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You have already made the following judgments:

            Performance materially        $800,000

            Acceptable audit risk                         5%

            Inherent risk:

                  Accounts receivable                    80%

                  Inventory                                      100%

             Assessed control risk:

                   Accounts receivable                    50%

                   Inventory                                       80%

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         Analytical procedures have been planned for inventory, but not for accounts receivable.  The analytical procedures for inventory are expected to have a 60% chance of detecting a material misstatement should one exist.  Performance materiality will be used as the measure of tolerable misstatement for each test and for the combined sample.

       You  have concluded that it will be difficult to alter sample size for accounts receivable confirmation once confirmations are sent and replies are received.  However, inventory tests can be reopened without great difficulty.

      After discussions with the client, you believe that the accounts are in about the same condition this year as they were last year.  Last year no misstatements were found in the confirmation of accounts receivable.  Inventory tests revealed an overstatement amount of about 1%. 

       For requirement a. through c., make any assumptions necessary in deciding the factors affecting sample size.  If no table is available for the ARIA choses, estimate sample size judgmentally.

REQUIRED:

   a.  Plan the sample size for the confirmation of accounts receivable using MUS.

   b.   Plan the sample size for the test of pricing of inventories using MUS.

   c.   Plan the combined sample size for both the confirmation of accounts receivable and the price tests of inventory using MUS.

    d.  (Instructor’s option) Using an electronic spreadsheet, generate a list of random dollars in generation order and in ascending order for the

          sample of accounts receivable items determined in part a.