ExpertHard1 markMultiple Choice
CPA · Question 74 · Area III: Performing Procedures
An auditor is performing an audit of a nonissuer. The auditor uses a classical variables sampling plan (mean-per-unit) to estimate the value of inventory. The recorded book value is $2,000,000. The point estimate of the population is $1,800,000. The precision (allowance for sampling risk) is $150,000. The tolerable misstatement is $250,000. What is the auditor's conclusion?
An auditor is performing an audit of a nonissuer. The auditor uses a classical variables sampling plan (mean-per-unit) to estimate the value of inventory. The recorded book value is $2,000,000. The point estimate of the population is $1,800,000. The precision (allowance for sampling risk) is $150,000. The tolerable misstatement is $250,000. What is the auditor's conclusion?
Answer options:
A.
Accept the book value as fairly stated.
B.
Reject the book value because it falls outside the acceptable range.
C.
Accept the book value because the difference ($200,000) is less than tolerable misstatement ($250,000).
D.
Increase the sample size.
How to approach this question
Variables Sampling Logic: Calculate the Range (Point Estimate +/- Precision). Is the Book Value inside the Range? Yes = Accept. No = Reject.
Full Answer
B.Reject the book value because it falls outside the acceptable range.✓ Correct
B
The auditor constructs a confidence interval: Point Estimate ($1.8M) +/- Precision ($150k) = $1.65M to $1.95M. Since the recorded book value ($2.0M) falls outside this range, the auditor cannot accept the book value as fairly stated.
Common mistakes
Comparing the Point Estimate difference (200k) to Tolerable Misstatement (250k) directly. This is dangerous because it ignores the precision interval.
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