Problem
Jennifer Jones has been assigned to audit inventory for Consumer Home Electronics Warehouse. Consumer Home is a retailer of a variety of home electronics and appliances (including refrigerators and stoves, washers and dryers, televisions, computers, and cell phones). The company has 25 locations in larger cities in the midwestern United States. Jennifer plans to audit the existence of inventory.
The book value of inventory is $35 million, which is very material to the company's financial statements. A few items in inventory are very high in dollar value, but there is no individual item larger than tolerable misstatement. About 5% of the items in inventory have costs of over $1,000. About 45% of the individual items in inventory have costs between $500 and $1,000. The remainder of the inventory items have individual costs of less than $500. Tolerable misstatement is set at $1,600,000. Jennifer has determined that Consumer Home Electronics has excellent internal controls over inventory and tests of controls noted no deviations or exceptions.
Task
a) Identify the factors that influence sample size for a substantive procedure.
b) In the case of Consumer Home Electronics Warehouse, identify how each item might influence sample size (while holding the other items constant).