Assume that you are using attributes sampling to test the controls over revenue recognition of the Packet Corporation, a public company. You are going to use the results as part of the evidence on which to base your opinion on internal controls and to determine what substantive auditing procedures you should performed on revenue and accounts receivable. You have decided to test the following controls and have set the risk of overreliance at 5%, the tolerable deviation rate at 5%, and the expected deviation rate at 1%. A sample size of 100 is used. The results of your testing are as indicated here.

Control Results

1. All sales over $10,000 must be approved

by the sales manager by initialing the

customer's order.

1. There were only twenty-five sales over

$10,000 in the sample. So, the auditor

randomly collects an additional seventy-five

sales transactions that were over $10,000. All

were approved by the sales manager.

2. Credit must be approved by the credit

department prior to shipment and noted on

the customer's order.

2. Three sales were recorded without

evidence of credit approval. The sales

manager said she had approved the sales. No

customer order could be found for two of the

other sampled items. Therefore, there were

no credit approvals for these two items as

well.

3. Sales are recorded only when a shipping

document is forwarded to the billing

department.

3. No shipping document could be found for

three of the sampled items.

4. The date of recording the sale must

correspond to the date on the shipping

document.

4. Four sales were recorded prior to the date

of shipment. Your follow-up indicates that a

temporary employee worked for the last two

months of the fiscal year and was unaware of

this requirement.

5. All prices are obtained from the current

price list that is periodically updated by the

sales manager.

5. All prices agreed with the appropriate

price list.

6. The shipping department is not to ship

products without first receiving an approved

customer's order.

6. No customer order could be found for two

sample items as indicated in Control 2.

7. The billing department compares the

quantity billed with the customer's order.

7. Four billed quantities were for more than

the customer order. Three of these took

place near year-end. In addition, there was

no customer order for the two items

indicated in Control 2

Determine the upper limit of deviation for each of the controls (Control 1 through Control 7) - show the solutions. 2. Indicate the potential misstatements that could result from the control deviations (through Control 2 through Control 7) 3. Determine what substantive audit procedures should be performed in response to each of the identified control deviation identified in the question 2. 4. What impact do these results have on the type of opinion to be given on the effectiveness of the client's internal controls? What opinion would you issue on the client's internal controls over revenue recognition?