Frazier Holyfield, a new staff accountant, is evaluating important controls over the revenue cycle and, more specifically, assessing the operating effectiveness of the control that all shipments made to customers by Top Rank Inc. have been properly invoiced.

Comment on the following actions that Holyfield performed. You should evaluate each action independently of any other actions.
a. Holyfield decided to inspect documentary evidence that all shipments made by Top Rank have been invoiced by matching shipping documents with invoices. Accordingly, she has identified the population from which she intends to sample as all sales invoices. Top Rank has a computerized list of invoiced sales that she can use to select the appropriate sample.
b. Because Holyfield plans to place a high degree of reliance on this particular control, she assesses the risk of overreliance at 5 percent. In previous years, a 10 percent level was used, but consultation with the engagement manager (Mike Evander) and partner (Donna Arum) indicate that a higher degree of reliance is planned in the current audit.
c. Holyfield assessed the expected population deviation rate at 1 percent. Although the rate of deviation from prior audits has approximated 2 percent, Top Rank has made several improvements in its processing of sales invoices; as a result, she believes that a lower expected population deviation rate is appropriate.
d. Based on the risk of overreliance (5 percent), the expected population deviation rate (1 percent), and the tolerable rate of deviation (4 percent), Holyfield uses sampling tables to calculate a sample size of 156. She then increases the sample size to 175 because the population of sales invoices is extremely large (more than 30,000 sales invoices are processed per year).
e. Based on her tests of controls, Holyfield determined a sample rate of deviation of 2 percent. Using this rate of deviation, along with the appropriate risk of overreliance, she determined an allowance for sampling risk of 2.5 percent. Because the sum of these two (4.5 percent) is less than the risk of overreliance, Holyfield concluded that the control is operating effectively and decided to rely on this control as planned to reduce the scope of her substantive procedures.

  • CreatedOctober 27, 2014
  • Files Included
Post your question