# Question

Kendall Jackson, CPA, is examining the operating effectiveness of the internal control of Town Mo, a large conglomerate in the music industry. As part of the evaluation, Jackson determined a necessary sample size of 93 items (based on a tolerable rate of deviation of 5 percent, an expected population deviation rate of 0.5 percent, and a risk of overreliance of 5 percent). After properly selecting the 93 items, Jackson found no deviations from the prescribed control procedures.

Required:

a. Based on Jackson’s sample, determine the sample rate of deviation and upper limit rate of deviation. (Because the AICPA sample evaluation tables do not contain a row for a sample size of 93, round down and use a sample size of 90.)

b. Explain the difference between the upper limit rate of deviation and the sample rate of deviation observed in (a). How does this difference relate to the use of statistical sampling?

c. What would Jackson conclude with respect to the operating effectiveness of Town Mo’s internal control? d. If Jackson found three deviations in the sample, calculate the sample rate of deviation and use AICPA sample evaluation tables to determine and upper limit rate of deviation. What would Jackson conclude with respect to the operating effectiveness of Town Mo’s internal control in this case?

e. Using AICPA sample evaluation tables, determine the maximum number of deviations that Jackson could identify without reducing the reliance on Town Mo’s internal control.

f. Repeat (e) using a 10 percent risk of overreliance. What is the explanation for any differences between this number of deviations and that in (e)?

Required:

a. Based on Jackson’s sample, determine the sample rate of deviation and upper limit rate of deviation. (Because the AICPA sample evaluation tables do not contain a row for a sample size of 93, round down and use a sample size of 90.)

b. Explain the difference between the upper limit rate of deviation and the sample rate of deviation observed in (a). How does this difference relate to the use of statistical sampling?

c. What would Jackson conclude with respect to the operating effectiveness of Town Mo’s internal control? d. If Jackson found three deviations in the sample, calculate the sample rate of deviation and use AICPA sample evaluation tables to determine and upper limit rate of deviation. What would Jackson conclude with respect to the operating effectiveness of Town Mo’s internal control in this case?

e. Using AICPA sample evaluation tables, determine the maximum number of deviations that Jackson could identify without reducing the reliance on Town Mo’s internal control.

f. Repeat (e) using a 10 percent risk of overreliance. What is the explanation for any differences between this number of deviations and that in (e)?

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