Assignment 5: Audit Testing

1. For this assignment, the expected population exception rate (EPER) was specified as 1% or 2%, the tolerable exception rate (TER) was specified as 7% or 8%, and the acceptable risk of overreliance (ARO) was specified as 10% for all attributes in the audit of acquisitions transactions. What is the effect on sample size of lowering each variable, holding all else constant? In your own words, explain why the sample size should be increased or decreased (the intent here is to show you understand the concept of each rate and its relationship to the audit).

	If indicated rate is lowered, will the sample size increase or decrease?	Explain why
EPER	As it increases, planned sample sizes will increase.	This is the exception rate, or deviation rate the auditor excepts to find. EPER and sample size is directly related
TER	Sample Size increase.	TER is the highest exception rate the auditor will permit in the population, and willing to keep assessed control risk at level originally planned.  TER and same size is inversely related.
ARO	As decreases, planned sample sizes will increase.	Risk auditor is willing to take of replying on a control when the true population exception rate is greater than auditor's TER. ARO is the risk of incorrectly relying on control that is not operating reliably.  ARO and sample size are inversely related.

1. Read PCAOB AS 2201 paragraphs .62-.68. When an auditor identifies a control deficiency on a public company audit, the auditor should assess the severity of the control deficiency. What are the two factors that the severity of a control deficiency relies upon? Please elaborate on the criteria surrounding each of these factors.
2. Whether there is a reasonable possibility that the company controls will fail to prevent or detect a misstatement of an account balance or disclosure
3. The magnitude of the potential misstatement resulting from deficiency or deficiencies 

The severity of a deficiency doesn't depend on if a misstatement occurred, but if there is a reasonable possibility the company's controls fail or will fail to prevent a misstatement.

 

1. Continue reading the Auditing Standard (PCAOB AS 2201). What might be a mitigating factor to a deficiency identified?

The auditor should evaluate the effect of compensating controls when determining a control deficiency or combination of deficiencies is a material weakness, to have a mitigating effect, the compensating control should operate at a level of precision that would prevent and detect a misstatement that could be material.

 

1. Using the three factors noted in questions 2-3 above that are relied on to assess the severity of a deficiency, assess the severity of any control deficiencies identified in Assignments 4 and 5. You need to determine whether the control deficiencies should be classified as a control deficiency, significant deficiency, or material weakness. Then provide your rationale based on the three factors.

In assignment 5, in work papers 14-7, the CUER was greater than the planning TER in a few circumstances. In Proper approval of a purchase order, Existence, and for All documents have been stamped "paid" existence, the CUER was greater than the TER. This means we probably should not rely on internal controls moving forward and conduct our substantive testing.

Answer rating: 100% (QA)

Lets delve deeper into the control deficiencies identified in Assignments 4 and 5 and provide comprehensive details and solutions 1 Control Deficiencies Identified In work papers 147 of Assignment 5 i... View the full answer