Starr, CPA, is performing the financial statement audit of Brenda. Inc. In performing this audit, Starr has
Question:
Starr, CPA, is performing the financial statement audit of Brenda. Inc. In performing this audit, Starr has determined that she needs to perform tests of controls on the procedures used by Brenda to approve purchases made on account. Specifically, Brenda's internal control includes the following control procedures.
Once items purchased by Brenda are received. they are recorded in the Voucher Register. Starr feels that any cases where either of the controls arc not functioning raise serious concerns about Brenda's internal controls.
REQUIRED:
(1) What would Starr consider to be a deviation condition in this situation?
(2) How should Starr define the population? For each item selected from the population, which procedure(s) should Starr perform?
(3) Assume that Starr decided upon a risk of overreliance of 5% and a tolerable deviation rate of 4%. In addition, based on her previous experience. Starr expected a deviation rate in the population of 1.25%. What sample size should be selected by Starr?
(4) Ignoring your answer to Question 3 above, assume that Starr examined 200 items and found 8 deviations.
(a) What is the sample deviation rate?
(b) What is the upper precision limit?
(c) What does the upper precision limit tell Starr?
BRENDA, INC. SPECIFIC INTERNAL CONTROL PROCEDURES TO BE TESTED BY STARR, CPA (a) Departments requesting purchases should prepare a Purchase Requisition. (b) The requisitions should be approved by the Purchasing Agent through the preparation of a Purchase Order. Expected Deviation Rate 0.00% 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 5.00 6.00 7.00 8.00 9.00 10.00 12.50 15.00 17.50 SAMPLE SIZE TABLE FOR 5 PERCENT RISK OF ASSESSING CONTROL RISK TOO LOW Tolerable Deviation Rate 149 236 313 386 590 1,030 3% 99 157 157 208 257 303 392 562 846 1,466 4% 5% 74 59 117 93 117 93 117 93 156 93 156 124 192 124 227 153 294 181 390 208 513 234 722 286 1,098 361 1,936 458 624 877 1,348 49 78 78 78 78 78 103 103 127 127 150 173 195 238 280 341 421 1,580 7% 42 66 66 66 66 66 66 88 88 88 109 109 129 148 167 185 221 478 1,832 . 8% 36 58 58 58 58 58 58 77 77 77 77 95 95 112 112 129 146 240 532 . . 9% 32 51 51 51 51 51 51 51 68 68 68 68 84 84 84 100 100 158 266 585 * 10% 29 46 46 46 46 46 994556TORRE 61 61 61 61 61 76 76 89 116 179 298 649 15% 20% 19 30 30 30 30 30 30 30 30 30 30 30 30 30 40 40 40 40 50 68 85 110 150 576 NNNNNNNNNNNNNNNNAARRER 22 22 22 22 22 22 22 22 22 30 30 37 37 44 50 88 193 720 Sample size is too large to be cost effective for most audit applications. Source: American Institute of Certified Public Accountants, "Audit Sampling", Audit and Accounting Guide (New York: AICPA, 2008) Note: This table assumes a large population. Sample sizes greater than 2,000 not shown TABLE 1 Expected Deviation Rate 0.00% 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 5.00 6.00 7.00 8.00 9.00 10.00 12.50 15.00 17.50 SAMPLE SIZE TABLE FOR 10 PERCENT RISK OF ASSESSING CONTROL RISK TOO LOW Tolerable Deviation Rate 2% 114 194 194 265 398 708 1,463 3% 76 129 129 129 176 221 265 390 590 974 4% 57 96 96 96 96 132 132 166 198 262 353 471 730 1,258 5% 45 77 77 77 77 77 105 105 132 132 158 209 258 306 400 583 873 6% 38 64 64 64 64 64 64 88 88 88 110 132 132 153 194 235 274 1,019 7% 32 55 55 55 55 55 55 55 75 75 75 94 94 113 113 131 149 318 1,150 8% 28 48 48 48 48 48 48 48 48 65 65 65 65 82 82 98 98 25 42 42 42 42 42 42 42 42 42 58 58 58 58 73 73 73 160 115 349 182 385 1,300 9% ··· 1,437 10% 22 38 38 38 38 38 38 38 38 38 38 52 52 52 52 52 65 78 116 199 424 1,577 15% 15 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 34 43 52 60 77 100 368 20% 11 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 ---***AKCES 18 18 25 25 25 32 38 63 126 457 Sample size is too large to be cost effective for most audit applications. Source: American Institute of Certified Public Accountants, "Audit Sampling", Audit and Accounting Guide (New York: AICPA, 2008) Note: This table assumes a large population. Sample sizes greater than 2,000 not shown TABLE 2 Sample Size 20 25 30 35 40 Note: 45 50 55 60 65 70 75 80 90 100 SAMPLE EVALUATION TABLE FOR 5 PERCENT RISK OF ASSESSING CONTROL RISK TOO LOW Actual Number of Deviations Found 125 1 2 14.0 21.7 28.3 11.3 17.5 23.2 9.6 14.9 19.6 8.3 12.9 17.0 7.3 11.4 15.0 6.5 10.2 13.4 5.9 9.2 12.1 5.4 8.4 11.1 7.7 10.2 7.1 9.4 6.6 8.8 6.2 8.2 5.8 7.7 6.9 6.2 5.0 4.2 3.2 2.1 1.6 2.0 1.3 1.6 ∞ 9999653838 4.9 4.6 4.2 4.0 3.7 3 10 34.4 40.2 69.9 28.2 33.0 58.4 23.9 28.0 31.9 35.8 39.4 43.0 46.6 50.0 20.7 24.3 27.8 31.1 34.4 37.5 40.6 43.7 18.3 21.5 24.6 27.5 30.4 33.3 36.0 38.8 16.4 19.2 22.0 24.7 27.3 29.8 32.4 34.8 14.8 17.4 19.9 22.4 29.4 31.6 13.5 15.9 18.2 20.5 26.9 28.9 12.5 14.7 16.8 18.8 24.8 26.7 11.5 13.6 15.5 17.5 23.0 24.7 10.8 12.7 14.5 16.3 21.4 28.1 10.1 11.8 13.6 15.2 16.9 18.5 20.1 21.6 9.5 11.1 12.7 14.3 15.9 17.4 18.9 20.3 11.4 12.8 14.2 15.5 16.9 18.2 10.3 11.5 12.8 14.0 15.2 16.4 8.3 9.3 10.3 11.3 12.3 13.2 6.9 7.8 8.6 9.5 10.3 11.1 5.2 5.8 6.5 7.2 7.8 8.4 3.5 4.0 4.4 4.8 5.2 5.6 2.7 3.0 3.3 3.6 3.9 4.3 2.1 2.4 2.7 2.9 3.2 3.4 3.0 5.2 4.7 3.8 150 2.0 3.2 200 1.5 2.4 300 1.0 1.6 400 0.8 1.2 500 0.6 1.0 ULDR exceeds 20 percent. Source: American Institute of Certified Public Accountants, "Audit Sampling", Audit and Accounting Guide (New York: AICPA, 2008) This table presents ULDRs as percentages and assumes a large population. TABLE 3 2.4 8.4 7.6 6.1 5.1 3.9 2.6 9.9 9.0 7.2 6.0 4.6 3.1 2.3 1.9 45.6 37.6 7 8 55.9 60.7 46.3 50.4 50.8 42.0 24.7 27.1 22.6 24.8 20.8 22.8 19.3 21.2 18.0 19.7 9 65.4 54.4 Sample Size 9 61.6 50.8 7.4 12.4 16.8 21.0 24.9 28.8 39.7 43.2 6.4 10.7 14.5 18.2 21.6 24.9 28.2 31.4 34.5 37.6 5.6 9.4 12.8 16.0 19.0 22.0 24.9 27.7 30.5 33.2 5.0 8.4 11.4 14.3 17.0 19.7 22.3 24.8 27.3 29.8 4.6 7.6 10.3 12.9 15.4 17.8 20.2 22.5 24.7 27.0 4.2 6.9 9.4 11.8 14.1 16.3 18.4 20.5 22.6 24.6 3.8 6.4 8.7 10.8 12.9 15.0 16.9 18.9 20.8 22.7 3.5 5.9 8.0 10.0 12.0 13.9 15.7 17.5 19.3 21.0 3.3 5.5 7.5 11.1 12.9 14.6 16.3 18.0 19.6 3.1 5.1 7.0 10.4 12.1 13.7 15.2 16.8 18.3 2.9 4.8 6.6 9.8 11.3 12.8 14.3 15.8 17.2 2.6 4.3 5.9 8.7 10.1 11.5 12.8 14.1 15.4 2.3 3.9 5.3 7.9 9.1 10.3 11.5 12.7 13.9 1.9 3.1 4.3 6.3 7.3 8.3 9.3 10.2 11.2 1.6 2.6 3.6 5.3 6.1 7.0 7.8 8.6 1.2 2.0 2.7 4.0 4.6 5.3 5.9 6.5 300 0.8 1.3 1.8 2.7 3.1 3.5 3.9 4.3 400 0.6 1.0 1.4 2.0 2.4 2.7 3.0 3.3 500 0.5 0.8 1.1 1.6 1.9 2.1 2.4 2.6 ULDR exceeds 20 percent. SAMPLE EVALUATION TABLE FOR 10 PERCENT RISK OF ASSESSING CONTROL RISK TOO LOW Actual Number of Deviations Found 20 25 30 35 40 45 50 55 60 65 70 75 80 90 100 125 150 200 0 ON 10.9 8.8 20 1 2 18.1 24.5 14.7 20.0 3 30.5 24.9 4 5 6 36.1 41.5 46.8 29.5 34.0 9.3 8.7 8.2 7.3 6.6 5.3 4.4 3.4 2.3 1.7 1.4 7 51.9 38.4 42.6 32.5 36.2 8 56.8 46.8 9.4 7.1 4.7 3.6 2.9 10 66.2 54.8 46.7 40.6 35.9 32.2 29.2 26.7 24.6 22.8 21.2 19.8 18.7 16.7 15.0 12.1 10.1 7.6 5.1 3.9 3.1 Source: American Institute of Certified Public Accountants, "Audit Sampling", Audit and Accounting Guide (New York: AICPA, 2008) Note: This table presents ULDRs as percentages and assumes a large population. TABLE 4 BRENDA, INC. SPECIFIC INTERNAL CONTROL PROCEDURES TO BE TESTED BY STARR, CPA (a) Departments requesting purchases should prepare a Purchase Requisition. (b) The requisitions should be approved by the Purchasing Agent through the preparation of a Purchase Order. Expected Deviation Rate 0.00% 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 5.00 6.00 7.00 8.00 9.00 10.00 12.50 15.00 17.50 SAMPLE SIZE TABLE FOR 5 PERCENT RISK OF ASSESSING CONTROL RISK TOO LOW Tolerable Deviation Rate 149 236 313 386 590 1,030 3% 99 157 157 208 257 303 392 562 846 1,466 4% 5% 74 59 117 93 117 93 117 93 156 93 156 124 192 124 227 153 294 181 390 208 513 234 722 286 1,098 361 1,936 458 624 877 1,348 49 78 78 78 78 78 103 103 127 127 150 173 195 238 280 341 421 1,580 7% 42 66 66 66 66 66 66 88 88 88 109 109 129 148 167 185 221 478 1,832 . 8% 36 58 58 58 58 58 58 77 77 77 77 95 95 112 112 129 146 240 532 . . 9% 32 51 51 51 51 51 51 51 68 68 68 68 84 84 84 100 100 158 266 585 * 10% 29 46 46 46 46 46 994556TORRE 61 61 61 61 61 76 76 89 116 179 298 649 15% 20% 19 30 30 30 30 30 30 30 30 30 30 30 30 30 40 40 40 40 50 68 85 110 150 576 NNNNNNNNNNNNNNNNAARRER 22 22 22 22 22 22 22 22 22 30 30 37 37 44 50 88 193 720 Sample size is too large to be cost effective for most audit applications. Source: American Institute of Certified Public Accountants, "Audit Sampling", Audit and Accounting Guide (New York: AICPA, 2008) Note: This table assumes a large population. Sample sizes greater than 2,000 not shown TABLE 1 Expected Deviation Rate 0.00% 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 5.00 6.00 7.00 8.00 9.00 10.00 12.50 15.00 17.50 SAMPLE SIZE TABLE FOR 10 PERCENT RISK OF ASSESSING CONTROL RISK TOO LOW Tolerable Deviation Rate 2% 114 194 194 265 398 708 1,463 3% 76 129 129 129 176 221 265 390 590 974 4% 57 96 96 96 96 132 132 166 198 262 353 471 730 1,258 5% 45 77 77 77 77 77 105 105 132 132 158 209 258 306 400 583 873 6% 38 64 64 64 64 64 64 88 88 88 110 132 132 153 194 235 274 1,019 7% 32 55 55 55 55 55 55 55 75 75 75 94 94 113 113 131 149 318 1,150 8% 28 48 48 48 48 48 48 48 48 65 65 65 65 82 82 98 98 25 42 42 42 42 42 42 42 42 42 58 58 58 58 73 73 73 160 115 349 182 385 1,300 9% ··· 1,437 10% 22 38 38 38 38 38 38 38 38 38 38 52 52 52 52 52 65 78 116 199 424 1,577 15% 15 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 34 43 52 60 77 100 368 20% 11 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18 ---***AKCES 18 18 25 25 25 32 38 63 126 457 Sample size is too large to be cost effective for most audit applications. Source: American Institute of Certified Public Accountants, "Audit Sampling", Audit and Accounting Guide (New York: AICPA, 2008) Note: This table assumes a large population. Sample sizes greater than 2,000 not shown TABLE 2 Sample Size 20 25 30 35 40 Note: 45 50 55 60 65 70 75 80 90 100 SAMPLE EVALUATION TABLE FOR 5 PERCENT RISK OF ASSESSING CONTROL RISK TOO LOW Actual Number of Deviations Found 125 1 2 14.0 21.7 28.3 11.3 17.5 23.2 9.6 14.9 19.6 8.3 12.9 17.0 7.3 11.4 15.0 6.5 10.2 13.4 5.9 9.2 12.1 5.4 8.4 11.1 7.7 10.2 7.1 9.4 6.6 8.8 6.2 8.2 5.8 7.7 6.9 6.2 5.0 4.2 3.2 2.1 1.6 2.0 1.3 1.6 ∞ 9999653838 4.9 4.6 4.2 4.0 3.7 3 10 34.4 40.2 69.9 28.2 33.0 58.4 23.9 28.0 31.9 35.8 39.4 43.0 46.6 50.0 20.7 24.3 27.8 31.1 34.4 37.5 40.6 43.7 18.3 21.5 24.6 27.5 30.4 33.3 36.0 38.8 16.4 19.2 22.0 24.7 27.3 29.8 32.4 34.8 14.8 17.4 19.9 22.4 29.4 31.6 13.5 15.9 18.2 20.5 26.9 28.9 12.5 14.7 16.8 18.8 24.8 26.7 11.5 13.6 15.5 17.5 23.0 24.7 10.8 12.7 14.5 16.3 21.4 28.1 10.1 11.8 13.6 15.2 16.9 18.5 20.1 21.6 9.5 11.1 12.7 14.3 15.9 17.4 18.9 20.3 11.4 12.8 14.2 15.5 16.9 18.2 10.3 11.5 12.8 14.0 15.2 16.4 8.3 9.3 10.3 11.3 12.3 13.2 6.9 7.8 8.6 9.5 10.3 11.1 5.2 5.8 6.5 7.2 7.8 8.4 3.5 4.0 4.4 4.8 5.2 5.6 2.7 3.0 3.3 3.6 3.9 4.3 2.1 2.4 2.7 2.9 3.2 3.4 3.0 5.2 4.7 3.8 150 2.0 3.2 200 1.5 2.4 300 1.0 1.6 400 0.8 1.2 500 0.6 1.0 ULDR exceeds 20 percent. Source: American Institute of Certified Public Accountants, "Audit Sampling", Audit and Accounting Guide (New York: AICPA, 2008) This table presents ULDRs as percentages and assumes a large population. TABLE 3 2.4 8.4 7.6 6.1 5.1 3.9 2.6 9.9 9.0 7.2 6.0 4.6 3.1 2.3 1.9 45.6 37.6 7 8 55.9 60.7 46.3 50.4 50.8 42.0 24.7 27.1 22.6 24.8 20.8 22.8 19.3 21.2 18.0 19.7 9 65.4 54.4 Sample Size 9 61.6 50.8 7.4 12.4 16.8 21.0 24.9 28.8 39.7 43.2 6.4 10.7 14.5 18.2 21.6 24.9 28.2 31.4 34.5 37.6 5.6 9.4 12.8 16.0 19.0 22.0 24.9 27.7 30.5 33.2 5.0 8.4 11.4 14.3 17.0 19.7 22.3 24.8 27.3 29.8 4.6 7.6 10.3 12.9 15.4 17.8 20.2 22.5 24.7 27.0 4.2 6.9 9.4 11.8 14.1 16.3 18.4 20.5 22.6 24.6 3.8 6.4 8.7 10.8 12.9 15.0 16.9 18.9 20.8 22.7 3.5 5.9 8.0 10.0 12.0 13.9 15.7 17.5 19.3 21.0 3.3 5.5 7.5 11.1 12.9 14.6 16.3 18.0 19.6 3.1 5.1 7.0 10.4 12.1 13.7 15.2 16.8 18.3 2.9 4.8 6.6 9.8 11.3 12.8 14.3 15.8 17.2 2.6 4.3 5.9 8.7 10.1 11.5 12.8 14.1 15.4 2.3 3.9 5.3 7.9 9.1 10.3 11.5 12.7 13.9 1.9 3.1 4.3 6.3 7.3 8.3 9.3 10.2 11.2 1.6 2.6 3.6 5.3 6.1 7.0 7.8 8.6 1.2 2.0 2.7 4.0 4.6 5.3 5.9 6.5 300 0.8 1.3 1.8 2.7 3.1 3.5 3.9 4.3 400 0.6 1.0 1.4 2.0 2.4 2.7 3.0 3.3 500 0.5 0.8 1.1 1.6 1.9 2.1 2.4 2.6 ULDR exceeds 20 percent. SAMPLE EVALUATION TABLE FOR 10 PERCENT RISK OF ASSESSING CONTROL RISK TOO LOW Actual Number of Deviations Found 20 25 30 35 40 45 50 55 60 65 70 75 80 90 100 125 150 200 0 ON 10.9 8.8 20 1 2 18.1 24.5 14.7 20.0 3 30.5 24.9 4 5 6 36.1 41.5 46.8 29.5 34.0 9.3 8.7 8.2 7.3 6.6 5.3 4.4 3.4 2.3 1.7 1.4 7 51.9 38.4 42.6 32.5 36.2 8 56.8 46.8 9.4 7.1 4.7 3.6 2.9 10 66.2 54.8 46.7 40.6 35.9 32.2 29.2 26.7 24.6 22.8 21.2 19.8 18.7 16.7 15.0 12.1 10.1 7.6 5.1 3.9 3.1 Source: American Institute of Certified Public Accountants, "Audit Sampling", Audit and Accounting Guide (New York: AICPA, 2008) Note: This table presents ULDRs as percentages and assumes a large population. TABLE 4
Expert Answer:
1 A deviation would be the purchaser creating a purchase order without a requisition from any person ... View the full answer
Auditing A Practical Approach
ISBN: 978-1119566007
3rd Canadian edition
Authors: Robyn Moroney, Fiona Campbell, Jane Hamilton, Valerie Warren
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