BILTRI BIL TRITE TE PRA PRACTI CTICE CE CAS CASE E
Module IV may be completed after either Chapter 10 or Chapter 14. Check with your instructor.
Module IV: MUS Sampling —Factory Equipment Additions Richard Derick has asked you to develop a sampling plan to determine the extent of misstatements in classifying expenditures as repairs and maintenance expens exp ensee or fac factor tory y equ equipm ipment ent add additi itions ons.. Giv Given en the pro probl blems ems not noted ed dur during ing control testing (as described in Module II), Derick believes that significant misstatements may have occurred. The same vendor ’s invoice frequently contains charges for parts and supplies as well as equipment, and the Biltrite employees preparing the vouchers sometimes fail to distinguish among the charges and simply indicate “factory equipment” as th thee de debi bitt if th thee in invo voic icee am amoun ountt is la larg rge. e. In Inas asmu much ch as th this is ty type pe of misstatement would cause an overstatement in the factory equipment account, Derick instructs you to use MUS sampling to determine the extent to which such misstatements have occurred during 2009. Of the total debits — $89,860,000 $89,860,000 to factory equipment during 2009 — major major additions in the amount of $77,260,000 have been made to replace worn-out equipment. Derick has decided to audit the major additions in their entirety and sample the remainder.
Requirements 1. What What is the obj object ective ive of per perfor formin ming g thi thiss tes test? t? What is the samplin sampling g unit unit?? What is the population? 2. Usi Using ng the spr spread eadshe sheet et pro progra gram m and dow downlo nloade aded d dat data, a, ret retrie rieve ve the fil filee labeled “MUS.” Locate the following documentation in the file: • • •
WP 11.3A — Monetary Monetary unit sampling plan; WP 11.3B — Monetary Monetary unit sampling plan — projected projected misstatement; and WP 11.3C — Monetary Monetary unit sampling plan — computed computed precision and upper misstatement limit.
Scroll to WP 11.3A, “Monetary Unit Sampling Plan.” Calculate sample size and sampling interval assuming Derick has set the following parameters: Risk of incorrect acceptance: Anticipated misstatement: Tolerable misstatement:
5% $100,000 $640,000
3. What factors factors did he consider in setting these parameters? parameters? Print Print the document. 4. Scr Scrol olll to WP 11.3B, “Mo Mone neta tary ry Un Unit it Sa Samp mpli ling ng Pl Plan an — Projected Projected Misstatement.” This document summarizes all invoices containing posting errors and calcu calculates lates the projec projected ted misstatement misstatement.. Note the equat equations ions that have been incorporated into the document template. a. What factor determines whether a “tainting percenta percentage ge” appears in column 4? b. Print the document. (Compress print size or otherwise accommodate a wide document.) 5. Scroll Scroll to WP 11.3C, 11.3C, “Monetary Unit Sampling Plan — Computed Computed Precision and Upper Misstatement Limit. ” Complete the “Incremental 801 Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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Chapter 14
Audit of Longer-Term Liabilities, Equity, Acquisitions
Allowance for Sampling Risk” schedule by ranking the projected misstatements as appropriate. (Hint : If you forgot how to do this, refer to Chapter 8.) 6. Print the document. 7. Explain the meaning of the following amounts: a. Basic precision; b. Incremental allowance for sampling error; c. Allowance for sampling risk; and d. Upper misstatement limit. 8. Evaluate the sampling results. Do they support Derick’s concerns regarding possible material misstatement? Note the audit adjustment based on misstatements discovered while examining the sample. Is this adjustment adequate to bring the population into acceptable bounds? If not, what alternate actions might you choose to pursue, based on the sampling results?
Module XII: Estimated Liability for Product Warranty All Biltrite products are sold under a one-year warranty covering all parts and labor. Repairs are performed locally, either by the dealer who sold the bicycle or by local entities licensed as official Biltrite bicycle repair shops. Biltrite reimburses the dealers and shops for labor and parts. Reimbursement is based on work orders submitted by the repairing agency. The customer signs the work orders, and the serial number of the product repaired also appears on each work order. Defective parts or products replaced must be returned with the accompanying work order. The parts and products are received and logged in on color-coded receiving reports designed for returns. At the end of each month, the following standard journal entry is posted as an adjustment to estimated product warranty. 8330 Product Warranty Expense 2070 Estimated Product Warranty Liability For 2009, the company applied 0.5% to cost of goods sold in determining the amount of the monthly adjustment. Debits to account 2070 are for reimbursements and for product and parts replacements. Defective parts and products are “zero valued” and placed in the rework department. Derick has asked you to analyze product warranty and determine the appropriate balance in the liability account. He has already provided you with a partially completed document and a client-prepared analysis of returns over the past four years. You have completed the document and are now ready to evaluate the adequacy of the balance.
Requirements 1. Using the spreadsheet program and downloaded data, retrieve the file labeled “Warranty.” Examine the document carefully and comment on its adequacy and completeness. (Note that the 12/31/08 audited balances appear to be unreasonable because you have not yet selected an appropriate provision percentage based on the “data from client-prepared analysis of warranty claims.”) 2. Scroll to the bottom of WP 20 and enter audit adjustments already made in previous modules that affect cost of goods sold for 2009. You should identify the following adjustments. (If you weren’t assigned the respective modules, ask your instructor for details regarding amounts and accounts.) AJE No. 1 (Module IV correction of repairs expense capitalized as factory equipment); and • AJE No. 3 (2009 purchase recorded in 2010, detected in completing Module VI). •
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
