Smith and Smith are Certified Public Accountants who are in love with statistical analysis for audit sampling because of its objectivity and precision. They made an estimation of expected population deviation of their client’s accounts receivable to be 2.1% . However, they seem to have a rough idea that the sample is representative of the population and that its deviation approximates that of the population deviation.

They decided to set their sample deviation parameters at + 3 or – 3%

Required:

1. What will be the sample risk deviation tolerable at the lowest limit level for your audit? The total Accounts Receivable is $500,000.00. This is the assertion by management.

2. What will be the sample risk deviation that is tolerable at the highest level?

3. Audit risk = Inherent risk X Control Risk X Detective Risk . Complete the Boxes provided below and select the case which the auditor will perform the greatest amount of substantive audit work.

Case 1              Case 2              Case 3              Case 4

Inherent Risk                                        40%                  50%                  80%                  100%

Control Risk                                           100%                100%                70%                  100%

Audit Risk                                             5%                    5%                    1%                    1%

Detection Risk                                       -----                  ----                    -----                  -----

Which case should the auditor do the greatest amount of substantive work. Show computation and fill the blank spaces.

Answer rating: 100% (QA)

a The sample risk deviation tolerable at the lowest limit level for ... View the full answer