In performing tests of controls and substantive tests of transactions for the Oakland Hardware Company, Ben Frentz, a public accountant, is concerned with the internal verification of pricing, extensions, and footings of sales invoices, and the accuracy of the calculations. In testing sales using audit sampling, a separate attribute is used for the test of control (the presence of matching shipping documents) and the substantive test of transactions (the accuracy of calculation). Because internal controls are considered good, Frentz uses a 10-percent ARACR, a zero EPER, and a 5-percent TER for both attributes. Therefore, the initial sample size is 45 items, which Ben rounds up to 50.
In conducting the tests, the auditor finds three sample items for which there were no matching shipping documents, but in all cases the invoices are for services (such as product repairs or installation). No sales invoice tested in the sample has a financial misstatement. Complete the following requirements using either a non-statistical sampling or an attributes sampling approach.
REQUIRED
a. Estimate or determine the CUER for both attributes, assuming a population of 5,000 sales invoices.
b. Decide whether each control is acceptable.
c. Discuss the most desirable course of action that the auditor should follow in deciding the effect of the CUER exceeding the TER.
d. Explain how it is possible that the sample had three control deviations but no transactions involved monetary misstatements.
e. How would you analyze exceptions in this case?