Binu is performing tests of controls in the purchases cycle of Oakland Hardware Company. Based on the audit firm guidelines, a sample size of 50 purchases is selected from the cash disbursements file. The following summarizes Binu?s results of one of his tests:

REQUIRED

a. If the controls that Binu was testing were not effective, what would be the potential misstatement?

b. Complete Table 2 to evaluate Binu?s results. Because internal controls were considered effective, Binu used a 10 percent ARO (Acceptable Risk of Overeliance) a zero EPER (Estimated Population Error Rate), and a 5 percent TER (Tolerable Exception Rate) for the attribute. Binu used the information in Table 1 (for a population of 5000 invoices) to evaluate his results results:

Transcribed Image Text:

Control (Attribute) Results and Explanation 1 Upon receipt of goods, the receiver inspects the goods for quality and quantity. The receiving document is initialled by the receiver once the inspection is complete. All purchases except for two had an associated receiving document that was initialled by the receiver. The two exceptions related to the telephone and electrical bill. 2 Upon the arrival of a supplier invoice, the invoice is matched to the receiving document and the purchase order. Three purchases did not have a purchase order attached. Further investigation revealed the following: One of the purchases related to the monthly telephone bill and one was for the monthly electrical bill. These did not have receiving documents. The third exception related to an inventory purchase. Upon discussion with the purchasing manager, the pur- chase order must have been misfiled. The purchasing manager investigated the matter but could not locate the purchase order. The manager noted that the order was valid and related to a raw material purchase. Table 1 Sample Size of 50 Number of Exceptions Found 2 3 Computed Upper Exception Rate (CUER) 4.5 7.6 10.3 12.9 Table 2 Number of Exceptions Sample Error Rate Can the Control Be Relied Attribute CUER Upon? (Answer Yes or No) Existence of receiver approval All invoices are attached to the receiving document and purchase order.