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The objective of this audit is to test the accuracy of the final inventory accumulation. We have already looked at the inventory and have accepted that it has been accurately counted. Looking at it further, we will administer tests to verify two things. The first is that the inventory quantity is accurately provided in the final accumulation and valuation of inventory. The second is that the stock is correctly priced and accumulated. We will be using the Probability Proportionate Sampling (PPS) approach to support our investigation. This test will allow us to conclude in a dollar amount allocated to inventory rather than the deviation rate from controls.
To determine the sample size we must use the following formula: n = (BVxRF)/ (tm – (AMxEF)). Based on the information given to us the BV (book value of population tested) is $6,753,764. The RF (reliability factor for the specified risk of incorrect acceptance) is 1 because we have specified that there is a 37% risk of incorrect acceptance so the reliability factor is equal to 1. The TM (tolerable misstatement) is $325,000. The AM (anticipated misstatement) is $100,000. And finally, the EF (expansion factor for anticipated misstatement) is 1.15. This brings us to a sample size of 32.16 or rounded to 32.
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