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In auditing receivables, Schmidt, CPA, will use statistical sampling to evaluate whether there was proper authorization for shipping the goods and to determine whether the resulting receivables are fairly stated. Schmidt has determined the following.

Accounts receivable balance = $500,000

Number of customer balances included = 212

Parameters for test of controls

Risk of assessing control risk too low = 1%

Tolerable deviation rate = 6%

Expected deviation rate = 2%

Allowance for sampling risk 3%

Sample size = 75 customer invoices

Audit procedure: inspect invoice for proper authorization (credit check, available goods, etc.)

Parameters for substantive tests

Acceptable level of risk = 5%

Assessed level of inherent and control risk: Low

Tolerable misstatement = $2,000

Sample size = 50 (outstanding) customer invoices

Audit procedure: Send confirmations for each invoice

In evaluating the invoices for proper authorization, Schmidt determines a sample deviation rate of 2.5%. What conclusion will Schmidt draw?

1. No choices are correct

2This will not affect the evaluation of internal control

3Controls are not operating effectively

4Controls are operating effectively