NOTE: The requirements are in maroon font to ensure you addr…
NOTE: The requirements are in maroon font to ensure you address each one. Background: It is now 20X2, and you are auditing the $3,000,000 inventory balance of ABC Manufacturing as of 12/31/X1. The company operates a large warehouse with thousands of inventory items. Based on your risk assessment, you stratify the inventory into two parts: Low-risk inventory, totaling $2,500,000, and High-risk inventory, totaling $500,000. For the high-risk inventory, you use block sampling to test all items within the $500,000 high-risk inventory block. This block includes inventory boxes in the warehouse containing high-value items and historically problematic items. You apply the steps of planning, performance, and evaluation to test the high-risk inventory for the same assertions. Part 1: Planning Required: Describe the reasoning for selecting high-value items and historically problematic items for block testing. (5 points) Part 2: Performance During your inventory testing, all items’ audited values in the block matched their book values except for the following: Item 101: Book value $12,000; audit value $10,000 (damaged condition). Item 205: Book value $5,000; audit value $4,000 (damaged condition). Item 309: Book value $20,000; audit value $0 (item missing from inventory). Required: 1. For each item, document how these findings relate to the existence assertion and valuation and allocation assertion (i.e., condition and recorded value of items). (5 points) 2. Calculate the total identified misstatement for the block testing, indicating whether it’s under- or overstatement of inventory and suggest a journal entry to correct this misstatement. (5 points) Part 3: Evaluation Assume that you have also tested a representative sample from the low-risk inventory of $2,500,000 and identified a $20,000 projected misstatement, with sampling risk allowance of $10,000. The tolerable misstatement for the audit of the entire $3,000,000 inventory balance is $50,000. Required: Based on the identified misstatements from Part 2 and the upper limit of the projected misstatement from low-risk inventory testing (which includes sampling risk), determine whether the total inventory balance is fairly stated. Show your work. (10 points)
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