For the audit of NHK Inc., the auditor determines the tolerable exception rate (TER) to be 6%,
Question:
For the audit of NHK Inc., the auditor determines the tolerable exception rate (TER) to be 6%, the Expected Population Deviation Rate (EPDR) to be 2%, Acceptable Risk of Overreliance (ARO) to be 5%. Materiality and performance materiality are $100,00 and $65,000 respectively. The client has a December 31, 2022 year end.
Test # 1:The client has the following control in place: Before processing payments received from vendors, the accounts payable clerk will match invoices with receiving documents and purchase orders.
To test this control, based on her judgment the auditor selects fifty invoices paid in December 2022 and compares details with the receiving documents and purchase orders. Of the fifty invoices selected, one of them does not have the original purchase order attached, but the invoice details match with the receiving documents. The auditor concludes that since the amounts matched, there is no misstatement identified and the population is acceptable. No further work is necessary.
a) Critique the auditor's sampling strategy and conclusion drawn.
b) What could go wrong if original purchase orders are missing in the voucher and which assertion is affected?
Test # 2: The client has the following control in place: Before sending out invoices to customers, the accounts receivable clerk will match details on customer's sales orders with the packing slip and shipping documents.
The auditor performs a test on this control and randomly selects from the sales for the year journal fifty invoices. The auditor traces the sales amounts from the sales journal to invoices, sales orders, packing slips, and shipping documents. There are two exceptions:
Exception 1- The shipping document and packing slip are missing for two sampled items but the sales order matches with the invoice.No further work is considered necessary.
Exception 2. For three other sampled items, the amount invoiced matches with the sales order but the packing slip shows in each of the 3 sampled items either 1 or 2 units ordered were not shipped. This discrepancy would have led to an overstatement of sales of a minor amount. No further work is considered necessary.
c) Evaluate the two exceptions and what additional procedures (if any) should the auditor perform as follow-ups?
Exception | ||
Evaluation- Is this an exception ? Indicate either "Yes" or "No" (1 mark each) | Follow-up procedure (1 mark each) | |
1 | ||
2 |
d) Assume that the auditor cannot satisfy themselves with the follow up procedures suggested above, what conclusion will the auditor make respect to the controls and what audit approach would they take for auditing sales and accounts receivable. Provide a rationale for your approach.