You have made a review and preliminary evaluation of the Morgan Company's system of internal conirol, and based on this, you have designed a tentative audit program. Your next step is to perform compliance tests in order to confirm or challenge your evaluation.

A major area of compliance testing is cash diskursements. Monthly, the company processes an average of 360 vouchers, paying 600 invoices. Each voucher contains a copy of the check along with supporting documentation, such as vendor's invoices, purchase orders, and receiving reports.

You intend to examine a sample of vouchers using attribute estimation statistical sampling to evaluate compliance with several control procedures in which you are interested. The attributes for testing the controls are set forth in your audit program as follows:

1. Approval of account distribution.

2. Invoice and purchase order agreement.

3. Purchase order approval.

4. Purchase order and requisition agreement.

5. Invoice and receiving report agreement.

6. Discounts taken.

7. Invoice canceled by dated approval.

8. Approval of check request.

From experience, you expect a noncompliance rate of about 2 percent for attributes \(1,2,5\), and 6 , and complete compliance with all others.

After consideration of a number of related audit steps, you decide you can tolerate an upper precision limit for noncompliance of 6 percent for controls 1 through 6 and 3 percent for controls 7 and 8 . A high level of reliability, 95 percent, is elected because compliance tests, as part of your review and evaluation of internal control, serve as the foundation for the greater part of the audit yet to come.

Required:

a. What is the sampling unit and the population size?

b. Determine the appropriate sample size for each attribute.

c. Assume that on examining each sample item, given the sample sizes determined in part (b), you find that there were seven occurrences of inappropriate account distributions, one occurrence of a purchase order lacking approval, and two occurrences of invoices being paid after the discount date resulting in lost discounts.

1. Determine the achieved upper precision limit for each attribute.

2. State what impact these findings would have on the execution of the remainder of your audit program.