Avation is a public company and, therefore, the auditor is required to test controls and issue an opinion on the effectiveness of the client's controls as well as the fairness of the financial statements. Avation manufactures specialty clocks used for such things as sales promotions and achievement awards. The auditor is planning to use attribute estimation sampling to test the controls over recording the purchases of raw materials.

The procedures manual describes the following steps that should be taken to order and receive raw material and process invoices for payment:

(1) The purchasing department prepares a prenumbered purchase order based on an authorized purchase requisition from the inventory control department and sends a signed copy of the purchase order to the accounts payable department. (2) A receiving clerk prepares and initials a prenumbered receiving report noting the quantity received and forwards a copy to accounts payable. (3) When the vendor's invoice is received by accounts payable, a clerk compares the quantities and prices with the purchase order and receiving report, noting this was done by placing a check mark next to each item. (4) Any invoice with a discrepancy in quantity and/or price is sent to the purchasing department for follow-up where the disposition is noted on the invoice and returned to accounts payable. The clerk also checks the clerical accuracy of the invoice, writes the stock number of each item on the invoice, and initials the invoice indicating that these steps have been taken. (5) The accounts payable supervisor reviews each invoice and approves it for payment by initialing the invoice. The information, including the payment due date, is then entered into the computer system.

Required

a. Identify the controls to be tested. Your decisions should be based on the controls which, if not working, could lead to more than a remote possibility of material misstatement in the financial statements. Explain the rationale for your choices.

b. Write an audit program to test these controls noting the assertion(s) tested, from what population the sample should be selected, and what would constitute a control failure.

c. Determine the appropriate sampling risk and tolerable failure rate for each of the controls identified in part (a) and the appropriate sample size(s). Explain your rationale.