BILTRITE PRACTICE CASE

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
expense or factory equipment additions. Given the problems noted during
control testing (as described in Module II), Derick believes that significant mis-
statements 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 some-
times fail to distinguish among the charges and simply indicate “factory equip-
ment” as the debit if the invoice amount is large. Inasmuch as this type 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 to factory equipment during 2009—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 is the objective of performing this test? What is the sampling unit?
What is the population?
2. Using the spreadsheet program and downloaded data, retrieve the file
labeled “MUS.” Locate the following documentation in the file:
• WP 11.3A—Monetary unit sampling plan;
• WP 11.3B—Monetary unit sampling plan—projected misstatement; and
• WP 11.3C—Monetary unit sampling plan—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: 5%
Anticipated misstatement: $100,000
Tolerable misstatement: $640,000
3. What factors did he consider in setting these parameters? Print the document.
4. Scroll to WP 11.3B, “Monetary Unit Sampling Plan—Projected
Misstatement.” This document summarizes all invoices containing posting
errors and calculates the projected misstatement. Note the equations that
have been incorporated into the document template.
a. What factor determines whether a “tainting percentage” appears in column 4?
b. Print the document. (Compress print size or otherwise accommodate
a wide document.)
5. Scroll to WP 11.3C, “Monetary Unit Sampling Plan—Computed Preci-
sion and Upper Misstatement Limit.” Complete the “Incremental
801
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802 C ha p te r 1 4 Au di t of L on ge r-Term Li ab i li tie s, E qu ity, A cq ui si ti o ns

Allowance for Sampling Risk” schedule by ranking the projected misstate-

ments 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 mis-
statements discovered while examining the sample. Is this adjustment ade-
quate 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 reim-
burses 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 reimburse-
ments 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 per-
centage 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 iden-
tify the following adjustments. (If you weren’t assigned the respective mod-
ules, 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).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.