Problem

(Objective 17-5) In auditing the valuation of inventory, the auditor, Claire Butler, decided to use
difference estimation. She decided to select an unrestricted random sample of 80 inventory items
from a population of 1,840 that had a book value of $175,820. Butler decided in advance that she
was willing to accept a maximum misstatement in the population of $6,000 at an ARIA of 5 percent.
There were eight misstatements in the sample, which were as follows:

Audit Value Book Value Sample Misstatements

$ 812.50 $ 740.50 $(72.00)

12.50 78.20 65.70

10.00 51.10 41.10

25.40 61.50 36.10

600.10 651.90 51.80

.12 0 (.12)

51.06 81.06 30.00

83.1 1 104.22 21.11

Total $1,594.79 $1,768.48 $173.69

a. Calculate the point estimate, the computed precision interval, the confidence interval, and the
confidence limits for the population. Label each calculation. Use a computer for this purpose
(instructor’s option).

b. Should Butler accept the book value of the population? Explain.

c. What options are available to her at this point?

Objective 17-5

Use difference estimation in tests of details of balances.

Step-by-step solution

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 1. Step 1 of 5

a)

Determination of point estimate:

Comment

2. Step 2 of 5

Determination of computed precision interval:

Before computing precision interval, standard deviation needs to be determined as follows:

Comment

3. Step 3 of 5

Computed precision interval:

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 Confidence interval can now be determined as

Confidence limits can be computed as follows:

Comment

4. Step 4 of 5

b)

B should not accept the population book value because the possible misstatement ($8,713.33) is
higher than her maximum acceptable level of misstatement ($6,000).

Comment

5. Step 5 of 5

c)

The options with auditor are as follows:

• Increase in the sample size

• Adjustment in the account balance

• Performance of expanded audit related tests in particular areas

• Make a request to the client for correcting the population

Comment

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