Lam, a PA, is auditing the financial statements of his client, Harvesters Ltd., a company that sells and distributes agricultural equipment across Canada. Lam has performed a preliminary evaluation of the company’s internal control over sales transactions, and has concluded that the quality of system design is very good. The system was developed for the client and installed by a well-respected consulting firm, and the system relies heavily on automated information systems. Lam decides that performing tests of control using computer-assisted audit techniques would likely be cost-effective. In addition, after completing his assessment of control risk over revenue transactions, Lam plans to use monetary-unit sampling to verify the client’s recorded accounts receivable at year end.
In planning the engagement, Lam has assessed materiality to be $175,000.
REQUIRED
a. Explain the basic principles of sample selection for monetary unit (dollar unit) sampling.
b. Also discuss how computer-assisted audit techniques could be used to assist in sample selection, assuming that the population of year-end accounts receivable is available to Lam as a data file compatible with his software.
c. Assume that the client’s recorded accounts receivable total $2,000,000 at year end and that Lam examines a valid random sample of 50 dollar units, and finds two errors as follows: