Chapter 15

Audit Sampling for Tests of Controls and

Substantive Tests of Transactions
Review Questions
15-1 A representative sample is one in which the characteristics of interest for
the sample are approximately the same as for
the population (that is, the sample accurately represents the total population). If
the population contains significant misstatements, but the sample is practically
free of misstatements, the sample is nonrepresentative, which is likely to result in
an improper audit decision. The auditor can never know for sure whether he or
she has a representative sample because the entire population is ordinarily not
tested, but certain things, such as the use of random selection, can increase the
likelihood of a representative sample.
15-2 tatistical sampling is the use of mathematical measurement techni!ues
to calculate formal statistical results. The auditor therefore !uantifies sampling
risk when statistical sampling is used. In nonstatistical sampling, the auditor does
not !uantify sampling risk. Instead, conclusions are reached about populations
on a more "udgmental basis.
#or both statistical and nonstatistical methods, the three main parts are$
%. &lan the sample
'. elect the sample and perform the tests
(. )valuate the results
15- In replacement sampling, an element in the population can be included in
the sample more than once if the random number corresponding to that element
is selected more than once. In nonreplacement sampling, an element can be
included only once. If the random number corresponding to an element is
selected more than once, it is simply treated as a discard the second time.
Although both selection approaches are consistent with sound statistical theory,
auditors rarely use replacement sampling* it seems more intuitively satisfying to
auditors to include an item only once.
15-! A simple random sample is one in which every possible combination of
elements in the population has an e!ual chance of selection. Two methods of
simple random selection are use of a random number table, and use of the
computer to generate random numbers. Auditors most often use the computer to
generate random numbers because it saves time, reduces the likelihood of error,
and provides automatic documentation of the sample selected.
%+,%
15-5 In systematic sampling, the auditor calculates an interval and then
methodically selects the items for the sample based on the si-e of the interval.
The interval is set by dividing the population si-e by the number of sample items
desired.
To select (+ numbers from a population of %,.+/, the auditor divides (+
into %,.+/ and gets an interval of +/. 0e or she then selects a random number
between / and 12. Assume the auditor chooses %.. The first item is the number
%.. The next is 3., then %%., %3., and so on.
The advantage of systematic sampling is its ease of use. In most
populations a systematic sample can be drawn !uickly, the approach
automatically puts the numbers in se!uential order and documentation is easy.
A ma"or problem with the use of systematic sampling is the possibility of
bias. 4ecause of the way systematic samples are selected, once the first item in
the sample is selected, other items are chosen automatically. This causes no
problems if the characteristics of interest, such as control deviations, are
distributed randomly throughout the population* however, in many cases they are
not. If all items of a certain type are processed at certain times of the month or
with the use of certain document numbers, a systematically drawn sample has a
higher likelihood of failing to obtain a representative sample. This shortcoming is
sufficiently serious that some 5&A firms prohibit the use of systematic sampling.
15-" The purpose of using nonstatistical sampling for tests of controls and
substantive tests of transactions is to estimate the proportion of items in a
population containing a characteristic or attribute of interest. The auditor is
ordinarily interested in determining internal control deviations or monetary
misstatements for tests of controls and substantive tests of transactions.
15-# A block sample is the selection of several items in se!uence. 6nce the
first item in the block is selected, the remainder of the block is chosen
automatically. Thus, to select + blocks of '/ sales invoices, one would select one
invoice and the block would be that invoice plus the next %2 entries. This
procedure would be repeated 1 other times.
15$% The terms below are defined as follows$
T&R' (&)*+*T*,+
a. Acceptable risk of
assessing control risk
too low (A7A57)
The risk the auditor is willing to take of accepting a control as effective
or a rate of monetary misstatements as tolerable, when the true
population exception rate is greater than the tolerable exception rate.
b. 5omputed upper
exception rate
(58)7)
The highest estimated exception rate in the population at a given
A7A57.
c. )stimated population
exception rate
()&)7)
The exception rate the auditor expects to find in the population before
testing begins. It is necessary to plan the appropriate sample si-e.
d. ample exception
rate ()7)
The actual rate of exception discovered in the sample. It is calculated
by dividing the actual number of exceptions in the sample by the
sample si-e.
e. Tolerable exception
rate (T)7)
The exception rate the auditor will permit in the population and still be
willing to use the assessed control risk and9or the amount of monetary
misstatements in the transactions established during planning.
%+,'
15-- The sampling unit is the population item from which the auditor selects
sample items. The ma"or consideration in defining the sampling unit is making it
consistent with the ob"ectives of the audit tests. Thus, the definition of the
population and the planned audit procedures usually dictate the appropriate
sampling unit.
The sampling unit for verifying the existence of recorded sales would be
the entries in the sales "ournal since this is the document the auditor wishes to
validate. The sampling unit for testing the possibility of omitted sales is the
shipping document from which sales are recorded because the failure to bill a
shipment is the exception condition of interest to the auditor.
15-1. The tolerable exception rate (T)7) represents the exception rate that the
auditor will permit in the population and still be willing to use the assessed control
risk and9or the amount of monetary misstatements in the transactions established
during planning. T)7 is determined by choice of the auditor on the basis of his or
her professional "udgment.
The computed upper exception rate (58)7) is the highest estimated
exception rate in the population, at a given A7A57. #or nonstatistical sampling,
58)7 is determined by adding an estimate of sampling error to the )7 (sample
exception rate). #or statistical sampling, 58)7 is determined by using a
statistical sampling table after the auditor has completed the audit testing and
therefore knows the number of exceptions in the sample.
15-11 ampling error is an inherent part of sampling that results from testing less
than the entire population. ampling error simply means that the sample is not
perfectly representative of the entire population.
:onsampling error occurs when audit tests do not uncover errors that exist
in the sample. :onsampling error can result from$
%. The auditor;s failure to recogni-e exceptions, or
'. Inappropriate or ineffective audit procedures.
There are two ways to reduce sampling risk$
%. Increase sample si-e.
'. 8se an appropriate method of selecting sample items from the
population.
5areful design of audit procedures and proper supervision and review are
ways to reduce nonsampling risk.
15-12 An attribute is the definition of the characteristic being tested and the
exception conditions whenever audit sampling is used. The attributes of interest
are determined directly from the audit program.
15-1 An attribute is the characteristic being tested for in a population. An
exception occurs when the attribute being tested for is absent. The exception for
the audit procedure, the duplicate sales invoice has been initialed indicating the
performance of internal verification, is the lack of initials on duplicate sales
invoices.
%+,(
15-1! Tolerable exception rate is the result of an auditor;s "udgment. The suitable
T)7 is a !uestion of materiality and is therefore affected by both the definition
and the importance of the attribute in the audit plan.
The sample si-e for a T)7 of 3< would be smaller than that for a T)7 of
(<, all other factors being e!ual.
15-15 The appropriate A7A57 is a decision the auditor must make using
professional "udgment. The degree to which the auditor wishes to reduce
assessed control risk below the maximum is the ma"or factor determining the
auditor;s A7A57.
The auditor will choose a smaller sample si-e for an A7A57 of %/< than
would be used if the risk were +<, all other factors being e!ual.
15-1" The relationship between sample si-e and the four factors determining
sample si-e are as follows$
a. As the A7A57 increases, the re!uired sample si-e decreases.
b. As the population si-e increases, the re!uired sample si-e is
normally unchanged, or may increase slightly.
c. As the T)7 increases, the sample si-e decreases.
d. As the )&)7 increases, the re!uired sample si-e increases.
15-1# In this situation, the )7 is (<, the sample si-e is %// and the A7A57 is
+<. #rom the +< A7A57 table (Table 15--) then, the 58)7 is ..3<. This
means that the auditor can state with a +< risk of being wrong that the true
population exception rate does not exceed ..3<.
15-1% Analysis of exceptions is the investigation of individual exceptions to
determine the cause of the breakdown in internal control. uch analysis is
important because by discovering the nature and causes of individual exceptions,
the auditor can more effectively evaluate the effectiveness of internal control. The
analysis attempts to tell the =why= and =how= of the exceptions after the auditor
already knows how many and what types of exceptions have occurred.
15-1- >hen the 58)7 exceeds the T)7, the auditor may do one or more of the
following$
%. 7evise the T)7 or the A7A57. This alternative should be followed
only when the auditor has concluded that the original specifications
were too conservative, and when he or she is willing to accept the
risk associated with the higher specifications.
'. )xpand the sample si-e. This alternative should be followed when
the auditor expects the additional benefits to exceed the additional
costs, that is, the auditor believes that the sample tested was not
representative of the population.
(. 7evise assessed control risk upward. This is likely to increase
substantive procedures. 7evising assessed control risk may be
done if % or ' is not practical and additional substantive procedures
are possible.
%+,1
15-1- /continued0
1. >rite a letter to management. This action should be done in
con"unction with each of the three alternatives above. ?anagement
should always be informed when its internal controls are not
operating effectively. If a deficiency in internal control is considered
to be a significant deficiency in the design or operation of internal
control, professional standards re!uire the auditor to communicate
the significant deficiency to the audit committee or its e!uivalent in
writing. If the client is a publicly traded company, the auditor must
evaluate the deficiency to determine the impact on the auditor@s
report on internal control over financial reporting. If the deficiency is
deemed to be a material weakness, the auditor@s report on internal
control would contain an adverse opinion.
15-2. 7andom (probabilistic) selection is a part of statistical sampling, but it is
not, by itself, statistical measurement. To have statistical measurement, it is
necessary to mathematically generali-e from the sample to the population.
&robabilistic selection must be used if the sample is to be evaluated
statistically, although it is also acceptable to use probabilistic selection with a
nonstatistical evaluation. If nonprobabilistic selection is used, nonstatistical
evaluation must be used.
15-21 The decisions the auditor must make in using attributes sampling are$
>hat are the ob"ectives of the audit testA
Boes audit sampling applyA
>hat attributes are to be tested and what exception conditions are
identifiedA
>hat is the populationA
>hat is the sampling unitA
>hat should the T)7 beA
>hat should the A7A57 beA
>hat is the )&)7A
>hat generali-ations can be made from the sample to the
populationA
>hat are the causes of the individual exceptionsA
Is the population acceptableA
In making the above decisions, the following should be considered$
The individual situation.
Time and budget constraints.
The availability of additional substantive procedures.
The professional "udgment of the auditor.
'ultiple Choice Questions )rom C1A &2aminations
15-22 a. (%) b. (() c. (') d. (1)
%+,+
15-2 a. (%) b. (() c. (1)
15-2! a. (1) b. (') c. (()
(iscussion Questions and 1roblems
15-25
a.
SA'13*+4 5+*T
+5'6&R*+4 S7ST&'
),R T8& 1,153AT*,+
&9C&3 S&3&CT*,+
),R'53A
%. ales invoice
All invoices numbered ///% to
3'%%
C7A:B4)T>)):(%,3'%%)
'. 4ill of lading
All bills of lading numbered
'%2'3 through 'D+%% (if a
random number table is used,
the left,most digit E'F can be
dropped)
C7A:B4)T>)):('%2'3,
'D+%%)
(. 5ustomer
A pair of random numbers,
where the first random number
is the page number (%,%/), and
the second random number is
the line number on the page (%,
3/)
C7A:B4)T>)):(%,%/)
and
C7A:B4)T>)):(%,3/)
1. Gine numbers
on the sales
"ournal that
have a sales
invoice
recorded on
them
A pair of random numbers,
where the first random number
is the page number (%,%D+),
and the second random number
is the invoice as counted down
from the top of the page (%,.+)
C7A:B4)T>)):(%,%D+)
and
C7A:B4)T>)):(%,.+)
An example random sampling plan prepared in )xcel (&%+'+.xls) is available on
the 5ompanion >ebsite and on the Instructor@s 7esource 5B,76?, which is
available upon re!uest. The command for selecting the random number can be
entered directly onto the spreadsheet, or can be selected from the function menu
(math H trig) functions. It may be necessary to add the analysis tool pack to
access the 7A:B4)T>)): function. 6nce the formula is entered, it can be
copied down to select additional random numbers. >hen a pair of random
numbers is re!uired, the formula for the first random number can be entered in
the first column, and the formula for the second random number can be entered
in the second column.
%+,3
15-25 /continued0
a. #irst five numbers using systematic selection$
SA'13*+4
5+*T *+T&R:A3
RA+(,'
START*+4
1,*+T
)*RST 5
SA'13&
*T&'S
%. ales invoice
%'1
(3'%%9+/)
3. 3.
%2%
(%+
1(2
+3(
'. 4ill of lading
%('
I('D+%%,'%2'3) C
3+D+9+/J
''/%% ''/%%
''%1(
'''.+
''1/.
''+(2
(. 5ustomer
%%
(+.3 lines9+/)
&age %, line KD 1age 3ine
% D
% %2
% (/
% 1%
% +'
8sing systematic selection, the definition of the sampling unit for determining the
selection interval for population ( is the total number of lines in the population.
The length of the interval is rounded down to ensure that all line numbers
selected are within the defined population.
%+,.
15-2" a. To test whether shipments have been billed, a sample of
warehouse removal slips should be selected and examined to see if
they have the proper sales invoice attached. The sampling unit will
therefore be the warehouse removal slip.
b. Attributes sampling method$ Assuming the auditor is willing to
accept a T)7 of (< at a %/< A7A57, expecting no exceptions in
the sample, the appropriate sample si-e would be .3, determined
from Table 15-%.
Nonstatistical sampling method$ There is no one right answer to
this !uestion because the sample si-e is determined using
professional "udgment. Bue to the relatively small T)7 ((<), the
sample si-e should not be small. It will most likely be similar in si-e
to the sample chosen by the statistical method.
c. ystematic sample selection$
''D(2 C &opulation si-e of warehouse removal slips
((.+'%,%13D').
.3 C ample si-e using statistical sampling (students@
answers will vary if nonstatistical sampling was
used in part b.
(// C Interval (''D(29.3) if statistical sampling is used
(students@ answers will vary if nonstatistical
sampling was used in part b).
%1D'+ C 7andom starting point.
elect warehouse removal slip %1D'+ and every (//th warehouse
removal slip after (%+%'+, %+1'+, etc.)
5omputer generation of random numbers using )xcel (&%+'3.xls)$
C7A:B4)T>)):(%13D',(.+'%)
The command for selecting the random number can be entered
directly onto the spreadsheet, or can be selected from the function
menu (math H trig) functions. It may be necessary to add the
analysis tool pack to access the 7A:B4)T>)): function. 6nce
the formula is entered, it can be copied down to select additional
random numbers.
d. 6ther audit procedures that could be performed are$
%. Test extensions on attached sales invoices for clerical
accuracy. (Accuracy)
'. Test time delay between warehouse removal slip date and
billing date for timeliness of billing. (Timing)
(. Trace entries into perpetual inventory records to determine
that inventory is properly relieved for shipments. (&osting
and summari-ation)
%+,D
15-2" /continued0
e. The test performed in part c cannot be used to test the existence of
sales because the auditor already knows that inventory was
shipped for these sales. To test the existence of sales, the sales
invoice entry in the sales "ournal is the sampling unit. ince the
sales invoice numbers are not identical to the warehouse removal
slips it would be improper to use the same sample.
15-2# a. It would be appropriate to use attributes sampling for all audit
procedures except audit procedure %. &rocedure % is an analytical
procedure for which the auditor is doing a %//< review of the entire
cash receipts "ournal.
b. The appropriate sampling unit for audit procedures ',+ is a line
item, or the date the prelisting of cash receipts is prepared. The
primary emphasis in the test is the completeness ob"ective and
audit procedure ' indicates there is a prelisting of cash receipts. All
other procedures can be performed efficiently and effectively by
using the prelisting.
c. The attributes for testing are as follows$
A5(*T 1R,C&(5R& ATTR*65T&
'
(
1
+
5ash receipts in the prelisting are recorded in the cash
receipts "ournal.
5ustomer name, date, and amount are e!ual on the
prelisting and cash receipts "ournal.
5ash discounts were approved on the related remittance
advice.
5ash included in the prelisting has been included on the
deposit slip.
d. The sample si-es for each attribute are as follows$
A5(*T
1R,C&(5R&
T&ST ,)
C,+TR,3 ,R
S56STA+T*:&
T&ST ,)
TRA+S-
ACT*,+S
SA'13& S*;&
SA'13&
S*;&
ARACR T&R &1&R
'
(
1
+
T of T
T of T
T of 5
T of T
+<

+<
+<
+<
3<
3<
D<
3<
%<
%<
'<
%<
.D
.D
..
.D
%+,2
15-2% a. 4ecause the sample si-es under nonstatistical sampling are
determined using auditor "udgment, students@ answers to this
!uestion will vary. They will most likely be similar to the sample
si-es chosen using attributes sampling in part b. The important
point to remember is that the sample si-es chosen should reflect
the changes in the four factors (A7A57, T)7, )&)7, and
population si-e). The sample si-es should have fairly predictable
relationships, given the changes in the four factors. The following
reflects some of the relationships that should exist in student@s
sample si-e decisions$
SA'13& S*;& &913A+AT*,+
%. 2/ Liven
'. M 5olumn % Becrease in A7A57
(. M 5olumn ' Becrease in T)7
1. M 5olumn % Becrease in A7A57 (column 1 is the
same as column ', with a smaller
population si-e)
+. N 5olumn % Increase in T)7,)&)7
3. N 5olumn + Becrease in )&)7
.. M 5olumns ( H 1 Becrease in T)7,)&)7
b. 8sing the attributes sampling table in Table 15-%, the sample si-es
for columns %,. are$
%. DD
'. %'.
(. %D%
1. %'.
+. '+
3. %D
.. %12
c.
C8A+4& *+
)ACT,RS
&))&CT ,+
SA'13& S*;&
*335STRAT*,+ *+
1ART a or b
%

'


(

1
Increase in A7A57.
Increase in T)7.
Increase in )&)7.
Increase in population
si-e.
Becrease
Becrease
Increase
:o effect or slight
increase
5ompare columns 1 and %
5ompare columns ( and '
(population si-es are not
consistent, but this has little
effect on sample si-e)
5ompare columns 3 and +
5ompare columns 1 and '
%+,%/
15-2% /continued0
d. The difference in the sample si-e for columns ( and 3 result from
the larger A7A57 and larger T)7 in column 3. The extremely large
T)7 is the ma"or factor causing the difference.
e. The greatest effect on the sample size is the difference between
TER and EPER. #or columns ( and ., the differences between the
T)7 and )&)7 were (< and '< respectively. Those two also had
the highest sample si-e. >here the difference between T)7 and
)&)7 was great, such as columns + and 3, the re!uired sample
si-e was extremely small.
Population size had a relatively small effect on sample size.
The difference in population si-e in columns ' and 1 was 22,///
items, but the increase in sample si-e for the larger population was
marginal (actually the sample si-es were the same using the
attributes sampling table).
f. The sample si-e is referred to as the initial sample si-e because it
is based on an estimate of the )7. The actual sample must be
evaluated before it is possible to know whether the sample is
sufficiently large to achieve the ob"ectives of the test.
15-2- a.
S&R T&R-S&R
A33,<A+C& ),R SA'13*+4
&RR,R S5))*C*&+T=
%.
'.
(.
1.
+.
3.
..
D.
'<
'<
'<
'<
'<
%/<
/<
/<
(<
(<
(<
(<
(<
:A
+<
+<
Oes
&robablyP
:o (due to small sampling si-e)
&robablyP
:o (due to smaller sample si-e)P
:o ()7 exceeds T)7)
Oes
:o due to small sample si-e
P tudents@ answers as to whether the allowance for sampling error risk is
sufficient will vary, depending on their "udgment. 0owever, they should
recogni-e the effect that lower sample si-es have on the allowance for
sampling risk in situations (, + and D.
%+,%%
15-2- /continued0
b. 8sing the attributes sampling table in Table 15--, the 58)7s for
columns %,D are$
%. 1./<
'. 1.3<
(. 2.'<
1. 1.3<
+. 3.'<
3. %3.1<
.. (./<
D. %%.(<
c.
C8A+4& *+ )ACT,RS &))&CT ,+ C5&R
*335STRAT*,+S *+ 1ART
a or b
%
'
(
1
Becrease in A7A57
Becrease in population
si-e
Becrease in sample si-e
Becrease in the number of
exceptions in the sample
Increase
:o effect or minor
decrease
Increase



Becrease
5ompare columns % and '
5ompare columns 1 and '
5ompare columns ' and (
(both sample exception
rates are '<)
5ompare columns 3 and .
d. The factor that appears to have the greatest effect is the number of
exceptions found in the sample compared to sample si-e. #or
example, in columns + and 3, the increase from '< to %/< )7
dramatically increased the 58)7. &opulation si-e appears to have
the least effect. #or example, in columns ' and 1, the 58)7 was
the same using the attributes sampling table even though the
population in column 1 was %/ times larger.
e. The 58)7 represents the results of the actual sample whereas the
T)7 represents what the auditor will allow. They must be compared
to determine whether or not the population is acceptable.
%+,%'
15-. a. and b. The sample si-es and 58)7s are shown in the following table$
ACT5A3
SA'13& S*;&
*+*T*A3 SA'13&
S*;& )R,' TA63&
15-% S&R
C5&R )R,'
TA63& 15--
%
'
(
1
+
3
%//
%//
3/
%//
'/
3/
%'.
22
3+
2(
%D
3/
'./<
/./
%..
1./
+./
%(.(
3.'<
(./
3.1
2./
%D.%
M'/./
a. The auditor selected a sample si-e smaller than that determined
from the tables in populations % and (. The effect of selecting a
smaller sample si-e than the initial sample si-e re!uired from the
table is the increased likelihood of having the 58)7 exceed the
T)7. If a larger sample si-e is selected, the result may be a sample
si-e larger than needed to satisfy T)7. That results in excess audit
cost. 8ltimately, however, the comparison of 58)7 to T)7
determines whether the sample si-e was too large or too small.
b. The )7 and 58)7 are shown in columns 1 and + in the
preceding table.
c. The population results are unacceptable for populations %, 1, and 3.
In each of those cases, the 58)7 exceeds T)7.
The auditor;s options are to change T)7 or A7A57,
increase the sample si-e, or perform other substantive tests to
determine whether there are actually material misstatements in the
population. An increase in sample si-e may be worthwhile in
population % because the 58)7 exceeds T)7 by only a small
amount. Increasing sample si-e would not likely result in improved
results for either population 1 or 3 because the 58)7 exceeds T)7
by a large amount.
d. Analysis of exceptions is necessary even when the population is
acceptable because the auditor wants to determine the nature and
cause of all exceptions. If, for example, the auditor determines that
a misstatement was intentional, additional action would be re!uired
even if the 58)7 were less than T)7.
%+,%(
15-. /Continued0
e.
T&R' +AT5R& ,) T&R'
%. )stimated population exception rate
'. Tolerable exception rate
(. Acceptable risk of assessing control
risk too low
1. Actual sample si-e
+. Actual number of exceptions in the
sample
3. ample exception rate
.. 5omputed upper exception rate
:onstatistical estimate made
by auditor.
Audit decision.
Audit decision.
Audit decision (determined by other audit
decisions).
ample result.
ample result.
tatistical conclusion about the
population.
15-1 a. The following shows which are exceptions and why$
*+:,*C& +5'6&R &9C&1T*,+= T71& ,) &9C&1T*,+
+/'D
3.2%
3D%/
.(31
.3'+
D1(%
D+'D
D+33
D.D/
2%32
22.1
:o
:o
Oes
:o
Oes
Oes
Oes
Oes
Oes
Oes
Oes
)rror was detected and corrected by client.
ales invoice was voided.
&roof of shipment not presented.
5redit collection problem* should be noted
for review of allowance for doubtful
accounts.
Buplicate sales invoice not properly filed.
Invoices not recorded by proper date*
represents potential cutoff problem.
5ustomer orders not included in invoice
package to verify compliance with the
order.
)rror in pricing. :o internal verification.
Buplicate sales invoice not properly filed.
5redit not authori-ed.
Internal verification of price extensions and
postings of sales invoices was not
included.
%+,%1
15-1 /continued0
b. It is inappropriate to set a single acceptable tolerable exception rate
and estimated population exception rate for the combined
exceptions because each attribute has a different significance to
the auditor and should be considered separately in analy-ing the
results of the test.
c. The 58)7 assuming a +< A7A57 for each attribute and a sample
si-e of %+/ is as follows$
*+:,*C&
+5'6&R
(&SCR*1T*,+ ,)
ATTR*65T&
+5'6&R ,)
&9C&1T*,+S

S&R
3D%/ hipping document not
located
% .3.<
.3'+
D.D/
D+'D
Buplicate sales
invoice9customer order
not located
( './/<
D1(% Invoice date improper % .3.<
D+33 &rice extensions
postings incorrect
% .3.<
D+33
22.1
&rice extensions and
postings not internally
verified
' %.((<
2%32 5redit not authori-ed % .3.<
d.
*+:,*C&
+5'6&R T&R-S&R
SA'13*+4
&RR,R
S5))*C*&+T=
3D%/ +.((< Oes
.3'+
D.D/
D+'D
1./< &robablyP
D1(% +.((< Oes
D+33 +.((< Oes
D+33
22.1
1.3.< &robablyP
2%32 +.((< Oes
Ptudents@ answers will most likely vary for this attribute.
%+,%+
15-1 /continued0
e. #or each exception, the auditor should check with the controller to
determine an explanation for the cause. In addition, the appropriate
analysis for each type of exception is as follows$
*+:,*C&
+5'6&R &9C&1T*,+ A+A37S*S
3D%/ 5onfirm the account balances to the customers* examine the
reduction in the perpetual inventory records.
.3'+ Trace the amount to the sales "ournal and accounts receivable
master file* examine the shipping document and recompute the
sale amount.
D1(% Betermine who recorded the invoice and check several others
prepared by him or her to determine if the problem consistently
occurs.
D+'D )xamine the accounts receivable master file for subse!uent cash
receipt* examine sales invoices for other invoices to the same
customer to determine if customer orders were attached.
D+33 5heck the price on other invoices to the same customer. 5heck the
price on other invoices that have the same product.
D.D/ ee .3'+
2%32 5heck credit history of customer and evaluate collectibility of the
customer;s account.
22.1 7echeck actual price, extensions and postings* determine who the
clerk was and check several other invoices for proper indication of
performance.
15-2 a. Attributes sampling approach: The test of control attribute had a 3<
)7 and a 58)7 of %'.2<. The substantive test of transactions
attribute has )7 of /< and a 58)7 of 1.3<.
Nonstatistical sampling approach: As in the attributes sampling
approach, the )7s for the test of control and the substantive test
of transactions are 3< and /<, respectively. tudents@ estimates of
the 58)7s for the two tests will vary, but will probably be similar to
the 58)7s calculated under the attributes sampling approach.
b. Attributes sampling approach: T)7 is +<. 58)7s are %'.2< and
1.3<. Therefore, only the substantive test of transactions results
are satisfactory.
Nonstatistical sampling approach: 4ecause the )7 for the test of
control is greater than the T)7 of +<, the results are clearly not
acceptable. tudents@ estimates for 58)7 for the test of control
should be greater than the )7 of 3<. #or the substantive test of
transactions, the )7 is /<. It is unlikely that students will estimate
58)7 for this test greater than +<, so the results are acceptable
for the substantive test of transactions.
%+,%3
15-2 /continued0
c. If the 58)7 exceeds the T)7, the auditor may$
%. 7evise the T)7 if he or she thinks the original specifications
were too conservative.
'. )xpand the sample si-e if cost permits.
(. Alter the substantive procedures if possible.
1. >rite a letter to management in con"unction with each of the
above to inform management of a deficiency in their internal
controls. If the client is a publicly traded company, the auditor
must evaluate the deficiency to determine the impact on the
auditor@s report on internal control over financial reporting. If
the deficiency is deemed to be a material weakness, the
auditor@s report on internal control would contain an adverse
opinion.
In this case, the auditor has evidence that the test of control
procedures are not effective, but no exceptions in the sample
resulted because of the breakdown. An expansion of the attributes
test does not seem advisable and therefore, the auditor should
probably expand confirmation of accounts receivable tests. In
addition, he or she should write a letter to management to inform
them of the control breakdown. If the client is a publicly traded
company, the auditor must evaluate the deficiency to determine the
impact on the auditor@s report on internal control over financial
reporting.
d. In this case, we want to find out why some invoices are not
internally verified. &ossible reasons are incompetence,
carelessness, regular clerk on vacation, etc. It is desirable to isolate
the exceptions to certain clerks, time periods or types of invoices.
Case
15- a. Audit sampling could be conveniently used for procedures ( and 1
since each is to be performed on a sample of the population.
b. The most appropriate sampling unit for conducting most of the audit
sampling tests is the shipping document because most of the tests
are related to procedure 1. #ollowing the instructions of the audit
program, however, the auditor would use sales "ournal entries as
the sampling unit for step ( and shipping document numbers for
step 1. 8sing shipping document numbers, rather than the
documents themselves, allows the auditor to test the numerical
control over shipping documents, as well as to test for unrecorded
sales. The selection of numbers will lead to a sample of actual
shipping documents upon which tests will be performed.
c. Note: The sampling data sheet that follows assumes an attributes
sampling approach. The only difference between the sampling data
sheet for attributes sampling and for nonstatistical sampling is the
actual determination of sample si-e. #or nonstatistical sampling,
students@ answers will vary, but will most likely be comparable to the
sample si-es determined under attributes sampling.
%+,%.
15- /continued0
(&SCR*1T*,+ ,)
ATTR*65T&S &1&R T&R ARACR
*+*T*A3
SA'13&
S*;&>
A duplicate sales invoice exists
for the shipping document
selected.
hipping document agrees with
related duplicate sales invoice.
The duplicate sales invoice has
attached a copy of the shipping
document, shipping order, and
customer order.
The shipping order has proper
credit approval.
The duplicate sales invoice has
internal verification of
computations.
The duplicate sales invoice has
the same price and !uantity as
approved price list and shipping
document.
5ustomer name, amount and
date agrees between duplicate
sales invoice and sales "ournal
and subsidiary ledger.
%./
/./
%./
%./
%./
/./
/./
+./
1./
+./
+./
+./
1./
1./
%/
%/
%/
%/
%/
%/
%/
..
+.
..
..
..
+.
+.
P assumes the shipping document is the sampling unit.
%+,%D
Q *ntegrated Case Application
15$! a. and d.
1*++AC3& 'A+5)ACT5R*+4?1ART :
Client$ &innacle ?anufacturing
Audit Area@ Tests of 5ontrols and ubstantive Test of TransactionsR
Ac!uisitions.
(efine the ,bAective/s0$ )xamine vendors; invoices, receiving reports, purchase
orders, and other related documents to determine whether the system has
functioned as intended and as described in the audit program.
(efine the population preciselB /including stratificationC if anB0$ Souchers
from %9%9'//1 to %/9(%9'//1. #irst voucher number , 13%1. Gast voucher number
, (%3%'.
(efine the sampling unitC organiDation of population itemsC and random
selection procedures$ Soucher number, recorded se!uentially in the
ac!uisitions "ournal* random number function in electronic spreadsheet.
(escription of Attributes
1lanned Audit Actual Results
&1&R T&R ARACR
*nitial
Sample
SiDe
Sample
SiDe
+umber of
&2ceptions
S&R
Calculated
Sampling
&rror
/T&R-S&R0
%. )vidence of internal verification
of voucher package including
propriety of purchase, dates, unit
costs, prices, extensions,
footings, account classification,
recording in "ournal, and posting
and summari-ation. (3a, b)
/ 3< %/< (/ (/ % (.(< '..<
'. &rices on vendors; invoices
conform to approved price limits
established by management. (3c)
/ +< %/< 1/ 1/ / / +<
(. &rice times !uantity and other
calculations on the vendor;s
invoice are correct. (3d)
%< +< %/< +/ +/ / / +<
1. )vidence of proper account
classification on vendors;
invoices. (3e)
%< +< %/< +/ +/ / / +<
+. Bates on entries in purchases
"ournal agree with dates on
receiving reports. (3f)
%< +< %/< +/ +/ % '< (<
3, )vidence of internal verification
of each purchase voucher. (3g)
/ 3< %/< (/ (/ / /< 3<
7esults$ based on the results of the tests, all controls appear effective except for evidence of internal verification. ince
there was also an error on timing and an error in comparing the vendor;s invoice amount to the ac!uisitions "ournal that is
not included as an attribute, a larger than normal sample in year,end testing of accounts payable is appropriate.
:otes$
%. The planned audit variables are "udgmental. The results of the prior year from part III were used to decide
)&)7. Initial sample si-e and 58)7 are "udgments.
'. There was an error discovered where there was no attribute. This happens in practice too. The auditor should
not ignore the exception even though it is an unplanned discovery.
%+,%2
15-! /continued0
b.
Client@ &innacle ?anufacturing
Audit Area@ Tests of 5ontrols and ubstantive Test of TransactionsR5ash
Bisbursements
(efine the ,bAective/s0@ )xamine cancelled checks and other related
documents to determine whether the system has functioned as intended and as
described in the audit program.
(efine the population preciselB /including stratificationC if anB0@ 5ancelled
checks from %9%9'//1 to %/9(%9'//1. #irst check number , D('3. Gast check
number , (('3D.
(efine the sampling unitC organiDation of population itemsC and random
selection procedures@ 5heck number, recorded se!uentially in the cash
disbursements "ournal* random number function in electronic spreadsheet.
(escription of Attributes
1lanned Audit Actual Results
&1&R T&R ARACR
*nitial
Sample
SiDe
Sample
SiDe
+umber of
&2ceptions
S&R
Calculated
Sampling
&rror
/T&R-S&R0
%. &ayee, name, amount, and
date on cancelled check agrees
with related purchases "ournal
and cash disbursements entry.
(2a)
/ +< %/< 1/
'.)vidence of signature, proper
endorsement and cancellation of
each check. (2b)
/ +< %/< 1/
(.Bate on cancelled check agrees
with bank cancellation date.
(2c)
/ +< %/< 1/
1.5ash discounts are correct. (2d) / +< %/< 1/
%+,'/
15-! /continued0
c.
&opulation C voucher numbers 13%1 to (%3%'
ample si-e C +/
7andom election$
If random selection is performed using )xcel, the command to select numbers
randomly from the population is$
C7A:B4)T>)):(13%1, (%3%')
The command for selecting the random number can be entered directly onto the
spreadsheet, or can be selected from the function menu (math H trig) functions
under the EinsertF menu . It may be necessary to add the analysis tool pack to
access the 7A:B4)T>)): function. 6nce the formula is entered, it can be
copied down to select additional random numbers. The random numbers will vary
for each student, so they are not listed in this solution.
*nternet 1roblem Solution@ Sampling for 5S Census
15-1 There are numerous applications of sampling. The 8.. 5ensus 4ureau is
among the most famous users of sampling methodologies. 6ne of the many
reasons sampling is used by the 5ensus 4ureau is for population pro"ections.
Sisit the 8.. 5ensus 4ureau >eb site and read E?ethodology and Assumptions
for the &opulation &ro"ections of the 8nited tates$ %222,'%//F
Iwww.census.gov9population9www9documentation9twps//(D.htmlJ. Answer the
following !uestions$
%. The authors of the paper make assumptions about the 8.. population on
three dimensions. >hat are the three dimensionsA (0int$ The authors refer to
these dimensions as Ecomponents of change.F)
Answer@ The three dimensions are fertility, mortality, and migration.
'. >hat is the expected population of the 8.. in '/+/ given the new series (i.e.,
based on %22D data) based on the lowest seriesA The middle seriesA And the
highest seriesA
Answer@ Gowest , (%(,+13,///* ?iddle , 1/(,3D.,///* 0ighest , ++',.+.,///
%+,'%
15-1 /continued0
(. >hat do the lowest, middle, and highest series representA
Answer@ imilar to the use of sampling in an audit context, this paper
emphasi-es how key sampling "udgments affect sample results. The lowest,
middle, and highest series represent the effects of varying expectations
regarding fertility, mortality, and migration. The pro"ections do not include a
systematic measurement of uncertainty regarding these dimensions.
0owever, in the development of each of the component assumptions, high
and low variants were established based on a reasoned assessment of what
represented =extreme= values. Applying variant assumptions for each
component individually resulted in the range of population series that would
be identified with the maximum likely variance of that component. To produce
the lowest and highest series, the authors combined the extreme values of all
three ma"or components that favored, respectively, the lowest and highest
population growth. Therefore, the extreme pro"ections do not represent likely
scenarios in themselves, but purport to represent the extremes between
which most likely outcomes should fall. #ertility and international migration
imposed a greater uncertainty on the pro"ections than did mortality, because
childbearing and mobility, to a greater extent than death, are functions of
individual and collective decision,making that are difficult to forecast
accurately.
(+ote$ Internet problems address current issues using Internet sources. 4ecause
Internet sites are sub"ect to change, Internet problems and solutions are sub"ect to
change. 5urrent information on Internet problems is available at
www.prenhall.com9arens).
%+,''